Do you rebalance (please vote in poll)

[chang]

Just a pulse check on rebalancing. As a rule, I don't. I let winners ride. But if I have new money to add, I am more likely to add to underperformers on weakness, expecting reversion to the mean.

The reason I ask the question is somewhat specific. A couple of years ago I bought "Windsor 1.5" in my Vanguard IRA -- equal parts of Windsor I and Windsor II. At the time I liked Windsor better, but I decided to buy them both as an experiment. I should have followed my instincts, because Windsor has done significantly better. Nevertheless, I've held them both without any changes.

I am just wondering whether I should consider rebalancing between them annually. (At the moment, I'm leaning toward "not".) Hence the question, to see what the community brain thinks. TIA.

[win1177]

Jul 9, 2023 13:08:57 GMT chang said:

Just a pulse check on rebalancing. As a rule, I don't. I let winners ride. But if I have new money to add, I am more likely to add to underperformers on weakness, expecting reversion to the mean.

The reason I ask the question is somewhat specific. A couple of years ago I bought "Windsor 1.5" in my Vanguard IRA -- equal parts of Windsor I and Windsor II. At the time I liked Windsor better, but I decided to buy them both as an experiment. I should have followed my instincts, because Windsor has done significantly better. Nevertheless, I've held them both without any changes.

I am just wondering whether I should consider rebalancing between them annually. (At the moment, I'm leaning toward "not".) Hence the question, to see what the community brain thinks. TIA.

Chang,
I have slowly moved away from strict rebalancing. Even though I am retired, we still have more coming in from investments, etc. than outflow (good problem to have!). Therefore, I am still (slowly) collecting more money that I need to reinvest. I will steer that new money to areas that are below my target allocations, and right now that has been going towards bonds/ fixed income. We have a mix of individual stocks and broad market indexes, and I will stop investing in a stock and start gradually lowering my allocation once it gets above about 5-6% of allocation. But I’m not as strict about that as I used to be, as capital gains will “whack” us pretty hard. So will lighten when a stock surges towards an all time high, but I’m less strict about it now. For example, AAPL is 6.5%, MSFT is 6%, XOM is 5.5%, but I have only sold a “little” of each over past year as capital gains are rough on their appreciation.

Don’t worry as much about diversified mutual funds (like Windsor I and II), but will lighten if they have LONG periods underperformance or other changes (manager, expense changes, direction changes, etc.). Gradually turning into a “set and monitor” investor, active trading just isn’t as worth the hassles now.

Win

[acksurf]

I rebalance but not in a Boglehead sort of way. I am mindful of sector weightings, value, growth, foreign, etc so try not to get to out of whack.

[hondo]

I use balanced or allocation funds, therefore the managers do the rebalancing for me.

[roi2020]

I rebalance annually if my allocation to US stocks/foreign stocks/bonds breaches thresholds.
This is done as a risk-control measure.

[Chahta]

I have not had a chance to rebalance for several years. I actually was 5% under equities for much of last year but the rise in rates and the stock rally this year balanced out. I was over in equities in 2021 but didn't rebalance since it was 5% or so. It must be a coincidence I am sitting at 50/50 now with markets doing their own thing.

[yakers]

Every year I check my AA and may adjust a bit with RMDs/QCDs and gifts, doesn't seem to have changed more than 5% over the 14 years I have been retired.

[racqueteer]

Hmmm... I don't formally rebalance; nor do I "let my winners ride"! I try to read the current conditions and set up for the most probable outcomes (often being wrong in the process). I err in favor of protecting the downside.

[retiredat48]

Here is a post I made around yr 2015:  
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I don't "rebalance"...but do make tactical asset reallocations.

I don't rebalance because it does not add to "alpha." That is, it does not add to performance.

Who says it does not add to performance?



Well, several academic type studies.  Here is a link to one such study:



www.crestmontresearch.com/

 Crestmont shows rebalancing actually subtracts a little when done in bull markets, but adds when rebalancing is done in bear markets.

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Second, none other than Jack Bogle himself, who has done studies on this matter, considers rebalancing to have marginal value at best. Here is an excerpt...



Jack Bogle on limited value of rebalancing!:(sidebar note: Bogleheads worship at the altar of rebalancing)



"Jack (John) Bogle, founder of Vanguard, answers questions on his blog from readers of his book, The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. Here's what he has to say about rebalancing:



We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind. Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually. That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary.



We also did an earlier study of all 25-year periods beginning in 1826 (!), using a 50/50 US stock/bond portfolio, and found that annual rebalancing won in 52% of the 179 periods. Also, it seems to me, noise. Interestingly, failing to rebalance never cost more than about 50 basis points, but when that failure added return, the gains were often in the 200-300 basis point range; i.e., doing nothing has lost small but it has won big. (I’m asking my good right arm, Kevin, to send the detailed data to you.)



My personal conclusion. Rebalancing is a personal choice, not a choice that statistics can validate. There’s certainly nothing the matter with doing it (although I don’t do it myself), but also no reason to slavishly worry about small changes in the equity ratio. Maybe, for example, if your 50% equity position grew to, say, 55% or 60%.



In candor, I should add that I see no circumstance under which rebalancing through an adviser charging 1% could possibly add value."



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My own take...I do not do classic rebalancing. Rebalancing is primarily a risk management tool. Meaning, if you desire a 70/30 stock/bond portfolio, then one may have a portfolio get away from this desired allocation. Yes, you can rebalance it back.

However, the easier way is to use new money to rebalance. Most investors accumulate money over time. You can add this money to the desired space. If you are retired, take annual distributions from Mutual Funds that will result in some rebalancing. Lastly, I do not rebalance, or even make large reallocations, from top performing funds in rising markets...prefer to capture the momentum bonuses.


Good day.


R48

[mnfish]

Interesting article by Rekenthaler on Mstar - www.morningstar.com/stocks/have-older-investors-become-too-aggressive

"In practice, though, two thirds of Vanguard’s older do-it-yourself 401(k) investors have most of their assets in stocks."
"Many investors, including yours truly, rebalance their portfolios irregularly. (”Irregularly” being my euphemism for “almost never.”)
"Not all investor groups have behaved similarly. For example, Fortune 1000 pension plans have slashed their exposure to U.S. stocks in recent years. For those worried that equities might be overbought, that is an encouraging offset."