slightly confused about rebalancing

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vnatale
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Re: slightly confused about rebalancing

Post by vnatale » Thu Sep 09, 2021 10:47 am

moda0306 wrote:
Mon Oct 10, 2011 12:10 pm

I really think using the past rebalance comparisons to give any kind of false precision on rebalance bands is a bit much.

The longer an asset tends to trend, year by year, to do the same thing as it did in prior years, the more you will benefit from wider bands.

If you end up with a relatively long period of all three assets swinging wildly in opposition to their prior-year behavior, a 30/20 band setup will work better.

Lastly, assuming the correlations hold up, if you are at 34/16 of two of the assets, you are in a position where one is over twice as heavily weighed as the other.  This could really hammer you if the higher asset retreats strongly, and with only 16% of a diversifier to help soften the blow.

This isn't to say I don't believe in wider bands.  In fact, I think I'd stick with 35/15 bands.  I just like to fully understand the reason wider bands have succeeded, and the risks I'm running by assuming it will behave that way in the future.

The thing I like about 35/15 bands, is that they are a very good way, over a lifetime, of simultaneously capturing momentum (waiting longer to sell a booming asset), and using some of that gain to buy other assets low, which allows the portfolio to become more than a sum of its parts.

In fact, I actually thing, especially for a taxable account rebalance, doing partial rebalances back to 20/30 from 35/15 is appropriate.  It keeps them in the "risk zone" you want them in, further rewards your best assets by on paring them back so much, and is more tax-efficient.


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Re: slightly confused about rebalancing

Post by ppnewbie » Thu Dec 09, 2021 10:57 pm

Just going to go in here without reading the whole thread. Listened to the Harry Browne radio show a while ago and it was surprising to hear how non quantitative his approach to rebalancing was.

He said rebalance when one of the assets gets too big. Basically imagine a 50 percent drawdown in then asset class and assess how heavily it would impact your overall portfolio.

I’ll throw up the link to the show if I can find it.
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Re: slightly confused about rebalancing

Post by Vil » Fri Dec 10, 2021 4:00 am

For PP rebalancing, I think the theme has been discussed to nauseating extremes :) Though I cannot really recall of the Golden Butterfly rebalancing being discussed somewhere (nor in Tyler's site), any idea ?

PS. He (Tyler) recently published a new article on his site, apparently he is going through some personal stress and health issues. Hope he is doing all fine.
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Re: slightly confused about rebalancing

Post by ppnewbie » Fri Dec 10, 2021 9:48 am

You are right about Tyler. I think he hurt his leg or knee on an electric scooter. I am going to reach out and wish him well.
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Re: slightly confused about rebalancing

Post by seajay » Sat Dec 11, 2021 2:54 am

christina wrote:
Sat Oct 08, 2011 9:15 am
I'm a little bit confused about when you're supposed to rebalance.
are you supposed to monitor your portfolio constantly, and rebalance immediately when one investment goes beyond one of the bands?
or are you supposed to pick a date, once a year, to look at your portfolio, and then rebalance at the bands? (I think Harry b. recommends this.)
or are you supposed to use your judgment about when to rebalance, as I belive craigr uses? (I believe I would not be able to do this successfully. I think I would prefer a more mechanical approach.)

what about rebalancing quarterly? I heard that returns might be better with more frequent rebalancing, but I'm not sure. I will likely be holding my portfolio as a set of ETFs that are freely tradable, so trading costs are not an issue for me.

Thanks!
Rebalancing is generally considered as being a risk-reduction practice, where otherwise a target asset allocation might have drifted considerably into being a entirely different asset allocation.

For retirees no rebalancing other than taking income from the most-up asset might suffice. Asset drift tends to be less of a issue with time, as typically higher volatility relative to already secured good gains is less of a risk (if you see a 33% portfolio drop after having achieved a 50% gain you've only just given back 'other peoples money').

Not rebalancing, letting winners run, often leads to higher rewards than rebalancing.

You can use PV to inspect historic differences, click the Allocation Drift, change the start dates and change whether rebalanced or not ...etc.

I'm inclined to opine that for younger/saving drip feeding into stocks is more inclined to accumulate the larger retirement pot. When transitioning from accumulation into drawdown early years sequence of returns risk is the greater risk period and as such shifting into a PP is a reasonable means to lower that risk. But then just leave that as-is, no rebalancing, which will tend to see higher rewards as that generally shifts more weight into stocks over time, excepting if a high early years sequence of returns risk does come to light, in which case shifting cash/bonds/gold into stocks is reasonable, but very discretionary. All-stock even in retirement years can be fine provided the stock wasn't purchased at too high a price. All-stock is suggested as having a 4% historic SWR i.e. worst case, if the stock were purchased at a 33% discount then that sees the SWR rise to 6%.
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