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    Using Rebalancing as a Portfolio Strategy

    Comments posted to “Why We Don’t Rebalance,” by Jason Hsu, in the April 2013 AAII Journal:

    I find the consequences of taxes to be a major disincentive to rebalancing, particularly when the effect of rebalancing on portfol

    —Mark Henwood from California

    Higher tax impacts from selling appreciated equities are further “aggravated” by the progressive nature of those increases: bracket creep and the AMT [alternative minimum tax], which is still unresponsive to inflation. As in any strategy, blind compliance to reallocation must be moderated by specific, real-world details, and some personal financial timing is indicated. Tools that take into account all these effects would be welcomed aids to compare various tactics possible at any point.

    —Jeff Ransom from New Jersey

    Charles Rotblut at AAII made clear that rebalancing will reduce risk (variability) and that without rebalancing stocks will overwhelm bonds [“Portfolio Rebalancing: Observations From 25 Years of Data,” April 2013 AAII Journal]. However, if variability is not a problem, and the trend is to stocks, then why on earth would anyone rebalance? If I get 10% variability and 12% growth, is this not better than 1% variability and 11% growth?

    —Paul Hopler from Virginia

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    The Variability of Withdrawal Rates

    Comment posted to “A Key to a Lasting Retirement Portfolio,” by John Sweeney, in the April 2013 AAII Journal:

    I agree that your withdrawal rate is one of those variables that can be controlled, but there are others, such as the guarantee you might get from a dividend payer that could increase its dividend for 30+ years. Also, the proportion of your income that comes from other guaranteed sources, such as pensions or Social Security, leaves you a much easier chance of adjusting your other income from your savings.

    —Dave Gilmer from Washington

    Any management fee paid to a financial planner or stockbroker should be considered. Thus, if I want my portfolio to last based on a 4% withdrawal rate and I pay a 1% management fee, my actual withdrawal rate should be no more than 3% (inflation adjusted).

    —Michael Poizner from California

    Measuring the Liquidity of Stocks

    Comments posted to “The Liquidity Style: Finding Bargains by Seeking Less Popular Stocks,” an interview with Roger Ibbotson, in the April 2013 AAII Journal:

    Your discussion is interesting, but I am not certain what types of companies you are referring to. Can you provide some examples of what might be considered large-cap liquid stocks versus less liquid or illiquid, and do the same for mid

    —Jonathan Kahn from Indiana

    Where does one find tables on liquidity or turnover

    —Frederick Joffe from Kentucky

    Charles Rotblut responds:

    American Beacon publishes a list of the stocks held within the two Zebra Funds funds that Roger Ibbotson’s firm sub-advises. These are low-liquidity stocks. The lists can be viewed at www.americanbeaconfunds.com/holdings.aspx.

    If you wanted to run the data yourself, Roger uses a simple measure of liquidity: number of shares traded divided by the total number of shares outstanding. You simply need information on the number of shares outstanding for all stocks (or at least a large number, such as stocks with a current analyst earnings estimate) and monthly or quarterly data on volume. This data is available in Stock Investor Pro, AAII’s fundamental research and screening database, as well as other screening programs.

    Once you have the data, calculate the liquidity for each stock and then rank the data by quartiles. Based on average three-month volume data as of April 19, 2013, I calculated stocks ranking in the lowest quartile for liquidity as having turnover scores of 60 or less.


    jpera from ca posted over 3 years ago:

    The april journal is not downloadable on and it is evidently not posted. can you please post?

    Charles Rotblut from IL posted over 3 years ago:

    Hi Jpera,

    You can download a .pdf of the April AAII Journal at: http://www.aaii.com/files/completejournal/AAIIJournal_April2013_2623.pdf

    If you want to view the issue online, you can access it at:

    -Charles Rotblut

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