Bogle's comment on rebalancing

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rsundaraz
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Bogle's comment on rebalancing

Post by rsundaraz »

I've read Bogle's "Little book of common sense investing" and "Common Sense on Mutual funds". There is one idea about asset allocation that I don't completely follow. In the little book, when talking about asset allocation, he talks about 4 key decisions (Pg.230). One of them is to either keep a fixed ratio for asset allocation by rebalancing or to let it run based on market performance. In the mutual funds book, he also talks about the same thing in asset allocation chapter (Pg.88). He calls this the policy of benign neglect as it leads to higher investment returns with more stock exposure.

Here are my questions
1. How would I implement such a strategy? I'm close to 40 and let's say I have 80/20 in stock/bonds today and I invest it that way. I understand I wouldn't rebalance and it becomes 90/10 in 10 years
2. Now I'm 50, and if I decide my allocation to be 70/30, would I just keep investing new money in 70/30 allocation and not worry about existing funds allocation which has become 90/10
3. Then I do not follow how it works in retirement as I wouldn't have new funds to invest and should I just let my portfolio drift to whatever ratio and then use income/sell stocks as needed
4. If I wanted a higher risk portfolio leading to higher returns, wouldn't I just pick a higher ratio of stocks for my asset allocation than following this method?
5. I remember one of Bogle's interview where he mentioned that he pretty much doesn't sell anything to rebalance. Is this a way to keep it simple?
6. Isn't rebalancing like a free lunch where we sell "potentially" overvalued assets and buy "undervalued" assets

I'm really curious about this as Bogle considered this 'letting it ride' option as an important decision to include in his 4 key decisions in asset allocation and also talks about in the mutual funds book in a similar manner. I've always thought rebalancing to be the prudent thing to do but this really piqued my interest. Would appreciate any thoughts on this.
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David Jay
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Re: Bogle's comment on rebalancing

Post by David Jay »

rsundaraz wrote: Thu Apr 22, 2021 2:40 pm 6. Isn't rebalancing like a free lunch where we sell "potentially" overvalued assets and buy "undervalued" assets
I do not assume that there is a rebalancing “bonus” (although it does lead to fortuitous purchases after a substantial market drop), I see it as a way to maintain the risk level of my portfolio.

If I wanted a higher stock allocation, why wait for asset growth to get me there?
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rsundaraz
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Re: Bogle's comment on rebalancing

Post by rsundaraz »

Thanks. I was wondering the same thing too. If you look at my #4, I had a similar comment. That’s why was wondering why someone like Bogle considered this as a sound option to consider.
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Re: Bogle's comment on rebalancing

Post by 2pedals »

Everybody is different and has different goals, find a plan that works for you. My wife and I are in early retirement with a significant pension. The pension covers most of essential expenses. After we start taking SS all essential expenses and then some will be covered. We started retirement with a 40% stock allocation that happened to be a dollar amount in "safe" fixed assets the should be more than enough to get us past 70 years old. We are now about 60% stocks and it doesn't feel that much different since we still have more "safe" assets than needed. I set a goal to limit stocks to 65% before age 65. At this point I don't even know if we will want to limit our stock allocation to 65% since most of this money is probably for donations and legacy reasons. We shall see what happens and how much of the "safe" assets get used up. DW is going to get some kitchen improvements soon. :annoyed
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Re: Bogle's comment on rebalancing

Post by mikejuss »

I'm not sure I follow your question. If your desire, at the start, is to have an asset allocation of 80/20, simply direct all new purchases toward that goal, buying more stocks or more bonds at a ratio needed to keep your allocation at 80/20. It's not complicated.
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Re: Bogle's comment on rebalancing

Post by Astones »

rsundaraz wrote: Thu Apr 22, 2021 2:40 pm
6. Isn't rebalancing like a free lunch where we sell "potentially" overvalued assets and buy "undervalued" assets
If there weren't transaction costs, yes, rebalancing would be great for doing just that. However, since taxes and transaction costs are rather significant, I believe that the less you touch the better.
I personally rebalance in the moment in which I add more money, but I can do it because I'm far from retirement.
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Re: Bogle's comment on rebalancing

Post by UpperNwGuy »

rsundaraz wrote: Thu Apr 22, 2021 3:03 pm Thanks. I was wondering the same thing too. If you look at my #4, I had a similar comment. That’s why was wondering why someone like Bogle considered this as a sound option to consider.
I'm guessing Bogle considered the capital gains to be "house money."
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Re: Bogle's comment on rebalancing

Post by rsundaraz »

Thanks for all your comments. I must not have explained my question properly as with all due respect I feel the answers are not directly addressing my question. UpperNwGuy''s answer is the one I consider close as may be Bogle thought that any capital gains as house money and not subject to the allocation rules.

My key question is that Bogle is considering portfolio drift as a valid method of asset allocation which implies not sticking to a fixed ratio of stocks/bonds. Let's say I decided as part of his 4 key decision that I would let it drift and never rebalance. I was curious how you would implement it and my points were about the challenges around that. If some XYZ had said that, I would have just ignored it, But since Bogle considers this as a key question for asset allocation, was more curious.

Thanks
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Re: Bogle's comment on rebalancing

Post by secondopinion »

UpperNwGuy wrote: Thu Apr 22, 2021 3:34 pm
rsundaraz wrote: Thu Apr 22, 2021 3:03 pm Thanks. I was wondering the same thing too. If you look at my #4, I had a similar comment. That’s why was wondering why someone like Bogle considered this as a sound option to consider.
I'm guessing Bogle considered the capital gains to be "house money."
Let me step in before it is dismissed as faulty logic. Some people have risk tolerances (akin to a frown or a frown flatting out) where they have to build up their risk before they can take it. For younger investors, this is not uncommon and effectively happens with the recommendations of emergency funds be built before investing. Also, those with high net worths might seek even more massive net worths and can soundly leave their wealth in a continuously lop-siding portfolio because they have enough regardless. Why not before? Because they do not have enough "safe money" or "baseline wealth" before. In portfolio terms, it is not concave like rebalancing; it is not convex since selling on drops is not occurring.

It is perfectly valid to those who have really high tolerances but need some stuffing first before they can take the risk responsibly. I am of this line of thought, but I think a cap of maximum risk is in order.
Last edited by secondopinion on Thu Apr 22, 2021 5:17 pm, edited 1 time in total.
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Re: Bogle's comment on rebalancing

Post by mikejuss »

rsundaraz wrote: Thu Apr 22, 2021 5:08 pm Thanks for all your comments. I must not have explained my question properly as with all due respect I feel the answers are not directly addressing my question. UpperNwGuy''s answer is the one I consider close as may be Bogle thought that any capital gains as house money and not subject to the allocation rules.

My key question is that Bogle is considering portfolio drift as a valid method of asset allocation which implies not sticking to a fixed ratio of stocks/bonds. Let's say I decided as part of his 4 key decision that I would let it drift and never rebalance. I was curious how you would implement it and my points were about the challenges around that. If some XYZ had said that, I would have just ignored it, But since Bogle considers this as a key question for asset allocation, was more curious.

Thanks
The easy answer is don't let your portfolio drift. I doubt Jack Bogle would disagree with this approach. Don't overthink it.
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Re: Bogle's comment on rebalancing

Post by secondopinion »

mikejuss wrote: Thu Apr 22, 2021 5:17 pm
rsundaraz wrote: Thu Apr 22, 2021 5:08 pm Thanks for all your comments. I must not have explained my question properly as with all due respect I feel the answers are not directly addressing my question. UpperNwGuy''s answer is the one I consider close as may be Bogle thought that any capital gains as house money and not subject to the allocation rules.

My key question is that Bogle is considering portfolio drift as a valid method of asset allocation which implies not sticking to a fixed ratio of stocks/bonds. Let's say I decided as part of his 4 key decision that I would let it drift and never rebalance. I was curious how you would implement it and my points were about the challenges around that. If some XYZ had said that, I would have just ignored it, But since Bogle considers this as a key question for asset allocation, was more curious.

Thanks
The easy answer is don't let your portfolio drift. I doubt Jack Bogle would disagree with this approach. Don't overthink it.
The rebalancing method is perfectly valid; drifting is valid; staying your strategy is the point.
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
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Re: Bogle's comment on rebalancing

Post by stan1 »

There was a time when rebalancing was expensive. A telegram had to be sent to the broker or long distance was expensive and billed by the minute. There were fees, loads, and commissions. There were no spreadsheets or even computers so you would have had to copy your statement data onto a blank sheet of paper and if you were lucky use an adding machine to calculate proper allocations. Or you did the math yourself. Tax deferred accounts did not exist so any sale involved capital gains/losses. This is the way it was for most of Mr. Bogle's life and there was a lot of transactional friction.

Nowadays we have websites where one can rebalance in just a few minutes, maybe even with one click, at no cost in a tax deferred account. There's basically no transactional friction other than logging into your account through a password manager and typing a PIN from your mobile device into the Vanguard website. There even are some brokerage websites that will auto-rebalance new contributions for you.
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Re: Bogle's comment on rebalancing

Post by mikejuss »

secondopinion wrote: Thu Apr 22, 2021 5:19 pmThe rebalancing method is perfectly valid; drifting is valid; staying your strategy is the point.
I agree that drifting can be valid, but it makes for extra decisions that I, personally, don't want to make. It also calls into question one's thinking on asset allocation. If, in fact, one has a tolerance for equity creep, why not just buy that percentage of equities from the get-go?
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Re: Bogle's comment on rebalancing

Post by Da5id »

Astones wrote: Thu Apr 22, 2021 3:30 pm
rsundaraz wrote: Thu Apr 22, 2021 2:40 pm
6. Isn't rebalancing like a free lunch where we sell "potentially" overvalued assets and buy "undervalued" assets
If there weren't transaction costs, yes, rebalancing would be great for doing just that. However, since taxes and transaction costs are rather significant, I believe that the less you touch the better.
I personally rebalance in the moment in which I add more money, but I can do it because I'm far from retirement.
Note that many of us can rebalance in IRAs without transaction costs or taxes. Rebalancing in IRAs is pretty painless, and working towards rebalancing in taxable by changing contributions, or directing dividends away from asset classes that are over desired levels also helps.

But as said above it is not clear that rebalancing gets you a "free lunch". It just keeps your risk level/volatility at about where you choose it to be. I'd expect that in most time periods not rebalancing will result in more equities and higher return.
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Re: Bogle's comment on rebalancing

Post by secondopinion »

mikejuss wrote: Thu Apr 22, 2021 5:23 pm
secondopinion wrote: Thu Apr 22, 2021 5:19 pmThe rebalancing method is perfectly valid; drifting is valid; staying your strategy is the point.
I agree that drifting can be valid, but it makes for extra decisions that I, personally, don't want to make. It also calls into question one's thinking on asset allocation. If, in fact, one has a tolerance for equity creep, why not just buy that percentage of equities from the get-go?
Two words: risk capacity. I can tolerate risk but right now my capacity is limited due to money needed otherwise in the future; liquidity and stability of a set dollar amount must be reasonably available, and the appropriate investments for such needs must be selected. Just setting percentages does not figure for this use case. I could go 100% stocks; but why do this if my portfolio could be chopped by 20+% if I need the money over a few years at any time (not instantly as to need cash-like investments and not guaranteed as to permit some risk; just not in stocks since it is not wise per the use case).
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Re: Bogle's comment on rebalancing

Post by secondopinion »

Da5id wrote: Thu Apr 22, 2021 5:27 pm But as said above it is not clear that rebalancing gets you a "free lunch". It just keeps your risk level/volatility at about where you choose it to be. I'd expect that in most time periods not rebalancing will result in more equities and higher return.
Constant-level risk management, not returns, is why one rebalances; capacity-based risk management, not returns, is why one allows for drift rather than doing the maximum initially.
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
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Re: Bogle's comment on rebalancing

Post by mikejuss »

secondopinion wrote: Thu Apr 22, 2021 5:27 pm
mikejuss wrote: Thu Apr 22, 2021 5:23 pm
secondopinion wrote: Thu Apr 22, 2021 5:19 pmThe rebalancing method is perfectly valid; drifting is valid; staying your strategy is the point.
I agree that drifting can be valid, but it makes for extra decisions that I, personally, don't want to make. It also calls into question one's thinking on asset allocation. If, in fact, one has a tolerance for equity creep, why not just buy that percentage of equities from the get-go?
Two words: risk capacity. I can tolerate risk but right now my capacity is limited due to money needed otherwise in the future; liquidity and stability of a set dollar amount must be reasonably available, and the appropriate investments for such needs must be selected. Just setting percentages does not figure for this use case. I could go 100% stocks; but why do this if my portfolio could be chopped by 20+% if I need the money over a few years at any time (not instantly as to need cash-like investments and not guaranteed as to permit a some risk; just not stocks).
Not sure what this has to do with drift, but to each his own.
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Re: Bogle's comment on rebalancing

Post by Astones »

Da5id wrote: Thu Apr 22, 2021 5:27 pm
But as said above it is not clear that rebalancing gets you a "free lunch". It just keeps your risk level/volatility at about where you choose it to be. I'd expect that in most time periods not rebalancing will result in more equities and higher return.
Well, I wouldn't call it a free lunch, but it's clear that in the process of rebalancing you have odds on your side of moving money in the opposite direction with respect to speculative fluctuations, which is a good thing. Then sometimes this will not be the case, but on the long run it should end up being convenient. I don't know if we have data in support of my claim. That would be interesting to check.
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Re: Bogle's comment on rebalancing

Post by secondopinion »

mikejuss wrote: Thu Apr 22, 2021 5:37 pm
secondopinion wrote: Thu Apr 22, 2021 5:27 pm
mikejuss wrote: Thu Apr 22, 2021 5:23 pm
secondopinion wrote: Thu Apr 22, 2021 5:19 pmThe rebalancing method is perfectly valid; drifting is valid; staying your strategy is the point.
I agree that drifting can be valid, but it makes for extra decisions that I, personally, don't want to make. It also calls into question one's thinking on asset allocation. If, in fact, one has a tolerance for equity creep, why not just buy that percentage of equities from the get-go?
Two words: risk capacity. I can tolerate risk but right now my capacity is limited due to money needed otherwise in the future; liquidity and stability of a set dollar amount must be reasonably available, and the appropriate investments for such needs must be selected. Just setting percentages does not figure for this use case. I could go 100% stocks; but why do this if my portfolio could be chopped by 20+% if I need the money over a few years at any time (not instantly as to need cash-like investments and not guaranteed as to permit a some risk; just not stocks).
Not sure what this has to do with drift, but to each his own.
When one has a minimum dollar amount, they end up with "drifting". Do the numbers; it "drifts" up to the desired allocation. In the extreme 100% stock case, then a full drift happens (given risk-less bonds).
Last edited by secondopinion on Thu Apr 22, 2021 5:47 pm, edited 1 time in total.
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Re: Bogle's comment on rebalancing

Post by secondopinion »

Astones wrote: Thu Apr 22, 2021 5:40 pm
Da5id wrote: Thu Apr 22, 2021 5:27 pm
But as said above it is not clear that rebalancing gets you a "free lunch". It just keeps your risk level/volatility at about where you choose it to be. I'd expect that in most time periods not rebalancing will result in more equities and higher return.
Well, I wouldn't call it a free lunch, but it's clear that in the process of rebalancing you have odds on your side of moving money in the opposite direction with respect to speculative fluctuations, which is a good thing. Then sometimes this will not be the case, but on the long run it should end up being convenient. I don't know if we have data in support of my claim. That would be interesting to check.
It is not a free lunch. If it is profitable, then it is because the risk is higher at the point of rebalancing. Downward markets are often more volatile (and risky) than upward markets; so, the profitability (if any) is often due to the risk taken.
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
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Re: Bogle's comment on rebalancing

Post by Da5id »

Astones wrote: Thu Apr 22, 2021 5:40 pm
Da5id wrote: Thu Apr 22, 2021 5:27 pm
But as said above it is not clear that rebalancing gets you a "free lunch". It just keeps your risk level/volatility at about where you choose it to be. I'd expect that in most time periods not rebalancing will result in more equities and higher return.
Well, I wouldn't call it a free lunch, but it's clear that in the process of rebalancing you have odds on your side of moving money in the opposite direction with respect to speculative fluctuations, which is a good thing. Then sometimes this will not be the case, but on the long run it should end up being convenient. I don't know if we have data in support of my claim. That would be interesting to check.
Hmm, I seem to remember people looking for and not finding much of a "rebalancing premium". Perhaps rebalancing during a bull market fights against momentum?

That said, I do rebalance. Just not looking for a premium out of it. I bought stocks in March 2020 when I went 5% below my target. And those stock were indeed "cheap".
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Re: Bogle's comment on rebalancing

Post by watchnerd »

Astones wrote: Thu Apr 22, 2021 3:30 pm
rsundaraz wrote: Thu Apr 22, 2021 2:40 pm
6. Isn't rebalancing like a free lunch where we sell "potentially" overvalued assets and buy "undervalued" assets
If there weren't transaction costs, yes, rebalancing would be great for doing just that. However, since taxes and transaction costs are rather significant, I believe that the less you touch the better.
I personally rebalance in the moment in which I add more money, but I can do it because I'm far from retirement.
Sometimes you're selling one high valuation thing to buy another high valuation thing.

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Re: Bogle's comment on rebalancing

Post by watchnerd »

Da5id wrote: Thu Apr 22, 2021 5:47 pm
Hmm, I seem to remember people looking for and not finding much of a "rebalancing premium". Perhaps rebalancing during a bull market fights against momentum?
Correct.

Pure valuation based timing models tend to miss out on momentum effects.
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Re: Bogle's comment on rebalancing

Post by cacophony »

mikejuss wrote: Thu Apr 22, 2021 5:23 pm
secondopinion wrote: Thu Apr 22, 2021 5:19 pmThe rebalancing method is perfectly valid; drifting is valid; staying your strategy is the point.
I agree that drifting can be valid, but it makes for extra decisions that I, personally, don't want to make. It also calls into question one's thinking on asset allocation. If, in fact, one has a tolerance for equity creep, why not just buy that percentage of equities from the get-go?
An asset allocation decision is really about risk tolerance: How much risk are you comfortable taking? Will you stay the course during a big correction?

This might be illogical, but consider the two scenarios:

A). Somebody invests $100k in the market 20 years ago. It has now now grown to $1MM. The market has a big correction and that amount drops to $500k.

B). Somebody lump sums $1MM into the market today. The market has a big correction and that amount drops to $500k.

For a lot of people A) is more tolerable than B), and thus they are more likely to stay the course. Being lazy about rebalancing and allowing an equity percentage to increase above an initial allocation is similar to A). The extra risk you've taken on is solely directed at the paper gains as opposed to the initial principal.
Last edited by cacophony on Thu Apr 22, 2021 5:54 pm, edited 1 time in total.
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Re: Bogle's comment on rebalancing

Post by txhill »

Are there any rigorous studies done / resources on rebalancing? I'd love to read a good one. I've always thought it kind of a silly concept and just something that financial advisors try to sell as something useful (I foolishly sat through a couple of financial advisor pitches when I was just starting out). But it's so rigorously followed by many here that I am curious what it really accomplishes for the investor. I'm genuinely curious to understand how it helps with portfolio performance.
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Re: Bogle's comment on rebalancing

Post by Astones »

secondopinion wrote: Thu Apr 22, 2021 5:42 pm It is not a free lunch. If it is profitable, then it is because the risk is higher at the point of rebalancing. Downward markets are often more volatile (and risky) than upward markets; so, the profitability (if any) is often due to the risk taken.
I agree, it's not a free lunch.
Practically, my point is essentially that if you have two assets that end up having an identical 10 years average return, the portfolio in which you rebalanced must have done significantly better than the one in which you didn't.
We can frame it as risk management but I believe there's something more than that, I believe you are indirectly taking advantage of the speculative fluctuations.
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Re: Bogle's comment on rebalancing

Post by secondopinion »

Da5id wrote: Thu Apr 22, 2021 5:47 pm
Astones wrote: Thu Apr 22, 2021 5:40 pm
Da5id wrote: Thu Apr 22, 2021 5:27 pm
But as said above it is not clear that rebalancing gets you a "free lunch". It just keeps your risk level/volatility at about where you choose it to be. I'd expect that in most time periods not rebalancing will result in more equities and higher return.
Well, I wouldn't call it a free lunch, but it's clear that in the process of rebalancing you have odds on your side of moving money in the opposite direction with respect to speculative fluctuations, which is a good thing. Then sometimes this will not be the case, but on the long run it should end up being convenient. I don't know if we have data in support of my claim. That would be interesting to check.
Hmm, I seem to remember people looking for and not finding much of a "rebalancing premium". Perhaps rebalancing during a bull market fights against momentum?

That said, I do rebalance. Just not looking for a premium out of it. I bought stocks in March 2020 when I went 5% below my target. And those stock were indeed "cheap".
Rebalancing fights momentum, it misses out on positive momentum, it thrives on mean reversion, and suffers on negative momentum. The essence of concavity in portfolio construction. Drifting gains on the momentum cases comparatively to rebalancing but loses on mean reversion.

Take your pick.
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Re: Bogle's comment on rebalancing

Post by secondopinion »

txhill wrote: Thu Apr 22, 2021 5:50 pm Are there any rigorous studies done / resources on rebalancing? I'd love to read a good one. I've always thought it kind of a silly concept and just something that financial advisors try to sell as something useful (I foolishly sat through a couple of financial advisor pitches when I was just starting out). But it's so rigorously followed by many here that I am curious what it really accomplishes for the investor. I'm genuinely curious to understand how it helps with portfolio performance.
It controls risk; that is it. Obtaining more portfolio performance is not the point; by controlling the risk, you hopefully control the distribution of possible returns as well.

I have dismissed the notion of rebalancing for return performance at this point.
Last edited by secondopinion on Thu Apr 22, 2021 5:58 pm, edited 1 time in total.
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Re: Bogle's comment on rebalancing

Post by KlangFool »

OP,

Are you lucky? X = retirement expense.

A) If your portfolio is 25X and your AA is 90/10, the market drops 50% right before you retire. You lose 45% of your portfolio, can you retire? It is down to 13.5X.

B) If your portfolio is 50X and your AA is 90/10, the market drops 50% right before you retire. You lose 45% of your portfolio, can you retire? It is down to 26.5X. You can retire.

C) Are you lucky enough that

1) You would not be forced to retire in a recession. Unemployment, housing market crash, and stock market crash at the same time.

2) Your portfolio would grown to 50X before you are retired in a market crash

D) Do you want to take that kind of RISK for an average annual return of less than 1% per year?

https://investor.vanguard.com/investing ... allocation

Average annual return of 100/0 is 10.3%

Average annual return of 70/30 is 9.4%

E) Are you lucky?

KlangFool
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Re: Bogle's comment on rebalancing

Post by Astones »

secondopinion wrote: Thu Apr 22, 2021 5:53 pm
Rebalancing fights momentum.
This is also true. It's a rather interesting statistical problem.

I'd be curious to know whether the valuation premium is killed by the lack of momentum premium or the opposite happens.

If I had to make a bet, I'd say valuation beats momentum, but this is really just a data-free personal speculation.
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Re: Bogle's comment on rebalancing

Post by secondopinion »

Astones wrote: Thu Apr 22, 2021 5:58 pm
secondopinion wrote: Thu Apr 22, 2021 5:53 pm
Rebalancing fights momentum.
This is also true. It's a rather interesting statistical problem.

I'd be curious to know whether the valuation premium is killed by the lack of momentum premium or the opposite happens.

If I had to make a bet, I'd say valuation beats momentum, but this is really just a data-free personal speculation.
Valuation supports rebalancing (buy low, sell high), growth supports anti-rebalancing (buying more when it goes up, sell when it drops). Momentum does neither since it lets it go where it wants to. Hence, drifting is the best for momentum since the portfolio is now subject to it.
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Re: Bogle's comment on rebalancing

Post by Astones »

secondopinion wrote: Thu Apr 22, 2021 6:03 pm Momentum does neither since it lets it go where it wants to. Hence, drifting is the best for momentum since the portfolio is now subject to it.
I don't understand these two sentences.
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Re: Bogle's comment on rebalancing

Post by mikejuss »

secondopinion wrote: Thu Apr 22, 2021 5:53 pmRebalancing fights momentum, it misses out on positive momentum, it thrives on mean reversion, and suffers on negative momentum. The essence of concavity in portfolio construction. Drifting gains on the momentum cases comparatively to rebalancing but loses on mean reversion.
Well-put.
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Re: Bogle's comment on rebalancing

Post by KlangFool »

secondopinion wrote: Thu Apr 22, 2021 6:03 pm
Astones wrote: Thu Apr 22, 2021 5:58 pm
secondopinion wrote: Thu Apr 22, 2021 5:53 pm
Rebalancing fights momentum.
This is also true. It's a rather interesting statistical problem.

I'd be curious to know whether the valuation premium is killed by the lack of momentum premium or the opposite happens.

If I had to make a bet, I'd say valuation beats momentum, but this is really just a data-free personal speculation.
Valuation supports rebalancing (buy low, sell high), growth supports anti-rebalancing (buying more when it goes up, sell when it drops). Momentum does neither since it lets it go where it wants to. Hence, drifting is the best for momentum since the portfolio is now subject to it.
+1,000. Very good explanation.

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Re: Bogle's comment on rebalancing

Post by Ocean77 »

The general rule is:

1. Rebalancing between assets with a different expected return (i.e. stocks and bonds) will generally lower your long term return, since over time you will shift more funds from the higher returning asset to the lower returning one, than the other way around. But you may still want to do it to maintain your risk level

2. Rebalancing between assets with a similar expected return (i.e. US and international stocks) will generally increase your long term return. As you will be shifting funds from a popular (more expensive) asset to an unpopular (cheaper) one. While both have the same expected return at any point.
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Re: Bogle's comment on rebalancing

Post by secondopinion »

KlangFool wrote: Thu Apr 22, 2021 5:57 pm OP,

Are you lucky? X = retirement expense.

A) If your portfolio is 25X and your AA is 90/10, the market drops 50% right before you retire. You lose 45% of your portfolio, can you retire? It is down to 13.5X.

B) If your portfolio is 50X and your AA is 90/10, the market drops 50% right before you retire. You lose 45% of your portfolio, can you retire? It is down to 26.5X. You can retire.

C) Are you lucky enough that

1) You would not be forced to retire in a recession. Unemployment, housing market crash, and stock market crash at the same time.

2) Your portfolio would grown to 50X before you are retired in a market crash

D) Do you want to take that kind of RISK for an average annual return of less than 1% per year?

https://investor.vanguard.com/investing ... allocation

Average annual return of 100/0 is 10.3%

Average annual return of 70/30 is 9.4%

E) Are you lucky?

KlangFool
A) Right. If they have 25X only at this point, they are not in the capacity to be drifting at all like this if this is the expected amount and they are in or close to retirement. They should be reducing any drifting (if they used it) over time.

B) Right. If they would have 26.5X after such a drop, they are probably drifting too much. If, for example, 50/50 is a sound base for retirement given 25X, then 50X drifted would be at 75/25 (all the excess is in stocks). A 50% drop results in 31.25X versus 37.5X for constant mix. After drop, the drifting portfolio would end up being 18.75X in stocks and 12.5X bonds. Rebalancing the base and keeping the rest of the stocks, and that ends up with 70/30 (21.875X stocks, 9.375X bonds); note the portfolio is still and will remain capable to drift at this amount given the 50/50 split was sound to do in the first place. The constant 50/50 (25X stocks, 25X bonds) becomes 50/50 (18.75X stocks, 18.75X bonds). In either case, the portfolio should outlive the investor regardless, but the former has the potential to still give better returns.

A bit of loss, granted; but one can afford it since the plan has accounted for it. And unless one's spending is proportional to the portfolio size, having more money allows for more risk to be taken (for possibly more returns).

C) Drifting too aggressively is not wise when the typical base is not large enough. End of story. I recommend drifting only when you are ahead of schedule for the desired retirement age (and only be riskier with the excess, not the base). Earlier retirement requires adjustments to the drift (if any is advisable).

D) Stocks are a 20+ year thing to being with. The bond indexes are, strangely, about corporate bonds. And is this "average return" geometric or arithmetic? I suspect the numbers when bonds vary so greatly in composition as to make the number speculative in general to base anything off of them.

E) No. But I am not counting on luck, either.

When one does drifting, they must have a base; otherwise, retiring too early and market dips are likely to cause a lot of grief. And drifting is more meant for those who are exceeding their savings rate for retirement considerably, plan to retire on schedule, and do not expect to "live it up" in retirement proportionately to the portfolio. Any changes here require the base to be adjusted and less drifting to exist. Otherwise, it is sound. Agreeable to all, no.
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Re: Bogle's comment on rebalancing

Post by secondopinion »

Astones wrote: Thu Apr 22, 2021 6:12 pm
secondopinion wrote: Thu Apr 22, 2021 6:03 pm Momentum does neither since it lets it go where it wants to. Hence, drifting is the best for momentum since the portfolio is now subject to it.
I don't understand these two sentences.
Momentum is about letting investments moving where they want to move. Growth seeks for those growing; value seeks for those undervalued because they are not growing as much. Drifting just lets it move as it will.
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Re: Bogle's comment on rebalancing

Post by Hydromod »

The weird one is negatively correlated funds (stocks and long term treasuries). There is a rebalancing bonus, typically selling high and buying low, but they have different returns. It could go either way, depending on which is the stronger effect.
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Re: Bogle's comment on rebalancing

Post by watchnerd »

secondopinion wrote: Thu Apr 22, 2021 7:15 pm Momentum is about letting investments moving where they want to move. Growth seeks for those growing; value seeks for those undervalued because they are not growing as much. Drifting just lets it move as it will.
Short answer:

No, not really.

"Momentum" is an academically identified factor in regression analysis is not just about drifting.
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Re: Bogle's comment on rebalancing

Post by mikejuss »

secondopinion wrote: Thu Apr 22, 2021 7:02 pmAnd drifting is more meant for those who are exceeding their savings rate for retirement considerably, plan to retire on schedule, and do not expect to "live it up" in retirement proportionately to the portfolio. Any changes here require the base to be adjusted and less drifting to exist. Otherwise, it is sound. Agreeable to all, no.
All well-explained. Your description only strengthens my sense that drifting is generally not wise. OP, don't drift.
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Re: Bogle's comment on rebalancing

Post by Astones »

watchnerd wrote: Thu Apr 22, 2021 7:18 pm Short answer:
No, not really.
"Momentum" is an academically identified factor in regression analysis is not just about drifting.
I think that Swedroe said in an interview that he gives more importance to the value factor than to the momentum factor, then if we want to trust his judgement I guess that rebalancing is probably the right way to go.
Rebalancing should be about betting on the reversion to the mean, as opposed to betting on the momentum factor. And intuitively I find the idea convincing.
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Re: Bogle's comment on rebalancing

Post by watchnerd »

Astones wrote: Thu Apr 22, 2021 8:36 pm
watchnerd wrote: Thu Apr 22, 2021 7:18 pm Short answer:
No, not really.
"Momentum" is an academically identified factor in regression analysis is not just about drifting.
I think that Swedroe said in an interview that he gives more importance to the value factor than to the momentum factor, then if we want to trust his judgement I guess that rebalancing is probably the right way to go.
Rebalancing should be about betting on the reversion to the mean, as opposed to betting on the momentum factor. And intuitively I find the idea convincing.
I've read Swedroe's book on factor investing.

I'm not convinced factor tilting is exploitable as a long term strategy, as opposed to short term trading.

That being said, VFMO has wiped VTI over the last year, although value did even better.

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Re: Bogle's comment on rebalancing

Post by Astones »

watchnerd wrote: Thu Apr 22, 2021 8:49 pm
That being said, VFMO has wiped VTI over the last year, although value did even better.
Good, my value ETFs are VBR and VTV.
They are going well in this period, but it might not last long. I'm more optimistic about exploiting value tilting, so my hope was that several ETFs would end up being a winning strategy in virtue of the fact that with rebalancing I tend to add money more to the undervalued. but hey, I could be very wrong and maybe I'm just making things more complicated without gaining anything, that's also possible I dunno.
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Re: Bogle's comment on rebalancing

Post by secondopinion »

watchnerd wrote: Thu Apr 22, 2021 7:18 pm
secondopinion wrote: Thu Apr 22, 2021 7:15 pm Momentum is about letting investments moving where they want to move. Growth seeks for those growing; value seeks for those undervalued because they are not growing as much. Drifting just lets it move as it will.
Short answer:

No, not really.

"Momentum" is an academically identified factor in regression analysis is not just about drifting.
Right. But we are looking at how the portfolio behaves, not the stock factor.
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Re: Bogle's comment on rebalancing

Post by dziuniek »

There's also the bond floor concept -> keep what you absolutely need in bonds and invest the rest - sort of thing.
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Re: Bogle's comment on rebalancing

Post by Marseille07 »

rsundaraz wrote: Thu Apr 22, 2021 2:40 pm 1. How would I implement such a strategy? I'm close to 40 and let's say I have 80/20 in stock/bonds today and I invest it that way. I understand I wouldn't rebalance and it becomes 90/10 in 10 years
Don't let it drift, keep nudging. If 80/20 is marching toward 90/10, all of your new monies should buy bonds.
Last edited by Marseille07 on Thu Apr 22, 2021 10:02 pm, edited 1 time in total.
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Re: Bogle's comment on rebalancing

Post by secondopinion »

mikejuss wrote: Thu Apr 22, 2021 7:20 pm
secondopinion wrote: Thu Apr 22, 2021 7:02 pmAnd drifting is more meant for those who are exceeding their savings rate for retirement considerably, plan to retire on schedule, and do not expect to "live it up" in retirement proportionately to the portfolio. Any changes here require the base to be adjusted and less drifting to exist. Otherwise, it is sound. Agreeable to all, no.
All well-explained. Your description only strengthens my sense that drifting is generally not wise. OP, don't drift.
I see drifting being advisable only if you have already met your goals so far and can take the risk with the rest (increasing risk as net worth grows). It is opposite for those who want to reduce risk as their net worth grows. "Quit once you have won the game" and "drifting" are polar opposites.

You have to be in the right situation and have the right tolerance to use drifting. Some here are already at 100% stocks; so drifting is not going to apply. I doubt I will ever be 100% stocks; but I definitely want to dial up the risk when the capacity is there to take a shortfall. It is not the "house winnings" fallacy, it is realism that the principal is needed more than the "won money" in the differential sense. When I do not need the money now or close in the future, I can invest it without having to worry about it.
Last edited by secondopinion on Thu Apr 22, 2021 10:14 pm, edited 2 times in total.
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Re: Bogle's comment on rebalancing

Post by KlangFool »

Marseille07 wrote: Thu Apr 22, 2021 9:52 pm
rsundaraz wrote: Thu Apr 22, 2021 2:40 pm 1. How would I implement such a strategy? I'm close to 40 and let's say I have 80/20 in stock/bonds today and I invest it that way. I understand I wouldn't rebalance and it becomes 90/10 in 10 years
Don't let it drift, keep nudging. If 80/20 is marching toward 90/10, all of your new monies should buy bonds.
Marseille07,

When the portfolio is big enough as compared to the annual saving, just contributing to the under-allocated asset classes will no longer work. The portfolio will drift to 90+% without rebalancing.

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Re: Bogle's comment on rebalancing

Post by secondopinion »

dziuniek wrote: Thu Apr 22, 2021 9:49 pm There's also the bond floor concept -> keep what you absolutely need in bonds and invest the rest - sort of thing.
Bond floor is similar, but assumes that 100% bonds are an appropriate base; also, it does not say what the appropriate floor is in any given time or how to go about building the portfolio (because time ordering matters). The base in general must support a very high chance of meeting needs; this often still means some stocks for retirees as most people in retirement need more than bonds to fund 20+ years of needs soundly (as to fight inflation and produce returns when some of the other bonds fail to do so in a real sense). And if 100% stocks is not acceptable for a risk tolerance, then some of the extra investments are going to be bonds.

The key point of "drifting" is really "base portfolio" + "extra portfolio" where the "extra portfolio" is arbitrary in size and the "base portfolio" is more or less fixed.
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Re: Bogle's comment on rebalancing

Post by Marseille07 »

KlangFool wrote: Thu Apr 22, 2021 10:11 pm
Marseille07 wrote: Thu Apr 22, 2021 9:52 pm
rsundaraz wrote: Thu Apr 22, 2021 2:40 pm 1. How would I implement such a strategy? I'm close to 40 and let's say I have 80/20 in stock/bonds today and I invest it that way. I understand I wouldn't rebalance and it becomes 90/10 in 10 years
Don't let it drift, keep nudging. If 80/20 is marching toward 90/10, all of your new monies should buy bonds.
Marseille07,

When the portfolio is big enough as compared to the annual saving, just contributing to the under-allocated asset classes will no longer work. The portfolio will drift to 90+% without rebalancing.

KlangFool
OK, in that case annual rebalancing is in order in my opinion. Basically my point is that if someone is 40 yo today doing 80/20, they should not find their portfolio at 90/10 ten years later.
Last edited by Marseille07 on Thu Apr 22, 2021 11:04 pm, edited 1 time in total.
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