Rebalancing every day

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frugal
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Rebalancing every day

Post by frugal » Wed Dec 05, 2012 3:11 pm

Hello,

what would be the result of a PP that is rebalanced very often every night or every week, considering that commissions are near to ZERO

?

Good or bad? Better or worst return?


Thank you and regards!
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Pointedstick
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Re: Rebalancing every day

Post by Pointedstick » Wed Dec 05, 2012 3:14 pm

"Near to 0" ? 0. Commissions would have to be well and truly all free for this to make any sense. And I hope you're also assuming that taxes are zero for the purpose of this example. :)

I imagine it would perform worse because it would get rid of the slight momentum effect of waiting until the rebalance bands. It would also require a lot more time to manage, or a complicated automated trading system.
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frugal
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Re: Rebalancing every day

Post by frugal » Wed Dec 05, 2012 3:18 pm

Hi,

what is for the PP the MINIMUM time between each Rebalance?


Tks!
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Pointedstick
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Re: Rebalancing every day

Post by Pointedstick » Wed Dec 05, 2012 3:28 pm

As long as it takes to hit the 15/35 rebalance bands. :)

It's a bit of a personal thing, though. Some people prefer to rebalance yearly; some people prefer to rebalance at 20/30 bands; just do what makes you the most comfortable. The differences in the return between these approaches will probably be fairly small.
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Peak2Trough
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Re: Rebalancing every day

Post by Peak2Trough » Wed Dec 05, 2012 3:29 pm

Here are the results from Jan 1, 1972 to yesterday's close.  This assumes you can buy fractional shares of everything, and there are no transaction costs.

Rebalance Daily

Image

Rebalance 35/15 Bands

Image

Rebalance 30/20

Image

Rebalance Annually

Image
Last edited by Peak2Trough on Wed Dec 05, 2012 3:31 pm, edited 1 time in total.
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melveyr
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Re: Rebalancing every day

Post by melveyr » Wed Dec 05, 2012 5:31 pm

Also keep in mind the bid/ask spread for ETFs. That is a hidden commission paid to your market maker.

An interesting quirk of the 15/35 bands is that it benefits from intermediate-term momentum but long-run reversion to the mean. Historically that has added a benefit. Who knows if it will going forward. I mainly like it because it is simple and cheap, if I ride some advantageous momentum then that is just a cherry on top  8)
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Re: Rebalancing every day

Post by clacy » Wed Dec 05, 2012 5:48 pm

TennPaGa wrote: I did a rebalance back-test study about a year ago.

http://gyroscopicinvesting.com/forum/ht ... 933#p16933

I also did a back-test study examining sensitivity to initial allocation (with 15/35 rebalancing bands) assuming one entered the PP in 2005:

http://gyroscopicinvesting.com/forum/ht ... 2#msg37112

My summary: the effect of rebalancing details and initial allocation is not necessarily small when compounded over a number of years.  However, I don't know that there is any way to predict what is the best rebalancing strategy and initial allocation going forward, so I would agree with PS's advice that you do what helps you sleep at night.
Bingo.  Only time will tell what the optimal rebalance strategy would have been in retrospect.  If you rebalance more frequently, you'll lose some of the momentum effect.  You'll likely reduce your volatility slightly, but you'll probably lower your performance slightly as well.
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Re: Rebalancing every day

Post by Thomas Hoog » Thu Dec 06, 2012 5:40 am

Nice
that solves certain uncertainties. I will stick to the 10 %.
Thanks
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Re: Rebalancing every day

Post by k9 » Thu Dec 06, 2012 7:20 am

We have special, low-tax contracts in France that let you rebalance for free as often as you wish (no fee, no tax) : you only have a yearly fee and taxes when you close the contract. I was wondering if using this kind of contract was interesting for a PP as it eased rebalancing (regular rebalancing is very tax-inefficient if you don't uses these contracts). It looks like that would be almost useless. Thanks for the confirmation.
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Re: Rebalancing every day

Post by frugal » Fri Dec 07, 2012 3:27 am

Thomas Hoog wrote: Nice
that solves certain uncertainties. I will stick to the 10 %.
Thanks
+1

just don't know which % of total savings to put on PP  :-\
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