Rebalancing based on technical triggers
Posted: Thu Jun 09, 2011 10:15 am
In the same vein as Clive's "midway rebalancing" (for example, see this post), rebalancing based on a more complex technical trigger might be better. The dilemma is whether you should continue to let the winner run (or loser fall) or rebalance which takes the "excess" profits off the table and distributes them to the other asset classes (or shores up the falling asset to its nominal 25%). The following is a more complicated rebalancing discipline than one based simply on percentages, but seems like it might be beneficial (note that this would not apply to accumulation or withdrawal based rebalancing - only rebalancing based on relative price movements between assets):
1) if all assets are within 15-35% bands do nothing
2) if any asset exceeds the 35% band, rebalance when that asset next hits your increasing asset technical trigger
3) if any asset drops below the 15% band, rebalance when that asset next hits your decreasing asset technical trigger
The increasing/decreasing technical triggers could be based on moving averages, i.e. an Ivy-style trigger (month end price relative to moving average of last 10 month end prices) or 200/30 day MA (30 day MA crosses 200 day MA), or some sort of relative strength indicator, or a stop loss (or "bounce up") percentage, or whatever technical trigger or even combination of triggers that makes you happy. The point is to defer the rebalance until a strong directional trend exhausts itself. The downside here is of course that your technical trigger might miss a sharp correction, and avoiding this problem seems to fundamentally require constant vigilance (until the rebalance is executed) - i.e. this is not a particularly low effort approach.
1) if all assets are within 15-35% bands do nothing
2) if any asset exceeds the 35% band, rebalance when that asset next hits your increasing asset technical trigger
3) if any asset drops below the 15% band, rebalance when that asset next hits your decreasing asset technical trigger
The increasing/decreasing technical triggers could be based on moving averages, i.e. an Ivy-style trigger (month end price relative to moving average of last 10 month end prices) or 200/30 day MA (30 day MA crosses 200 day MA), or some sort of relative strength indicator, or a stop loss (or "bounce up") percentage, or whatever technical trigger or even combination of triggers that makes you happy. The point is to defer the rebalance until a strong directional trend exhausts itself. The downside here is of course that your technical trigger might miss a sharp correction, and avoiding this problem seems to fundamentally require constant vigilance (until the rebalance is executed) - i.e. this is not a particularly low effort approach.