! Portfolio Rebalancing: Diversification, Risk Control and Withdrawals
Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.


Roger from KY posted over 5 years ago:

Just curious, how would $100,000 invested in Vanguard Wellington (or some other balanced fund)have compared. Eliminate all the trading and let the fund do the rebalancing

George from VA posted over 5 years ago:

According to data on Schwab web site, Wellington returned 8.4% per year from its inception. If one just assumed it got an average of 8.4% per year for the 24 years that would be $692,951.

Not as much as obtained from the article's analysis, but a whole lot simpler. Avoids transaction hassle, research time, worry, tax complications, etc. Very suitable for a surviving spouse, or other person who wanted a simple plan. After all, if one is not an investing enthusiast, how valuable is the time one doesn't have to spend each month handling research, bookkeeping, transactions, and tax preparation. And an inexperienced person would probably panic and sell in a downturn and sustain unrecoverable losses.

A big source of worry for elderly investors is how will the surviving spouse be able to manage if he/she was not an investing enthusiast before. Paying some advisor 1 or 1.5 percent per year is one answer, but severely cuts into the "assumed 4%" one could take out of the assets each year.

Like in a basketball game, one is always trying to score the most points before the buzzer sounds. Except that in life, one never knows when his personal "Buzzer" will sound and the surviving spouse must make do with the points scored to date.

Joseph from VA posted over 5 years ago:

I posted a comment a few minutes ago but I don't think it went through because by login had timed out. I will try again.

I ran the mumbers using the AAII portfolio and Vanguard's website for Wellington from end of 1996 to end of 2011 (15Yrs).

On $100,000 Wellington gained $143,490 or total return of 43.5% & 6.1% annualized.

On $236,068 AAII portfolio gained $68,644 or total return of 29.1% & 1.72% annualized.

I think I am going to put some more of my wife's IRA funds into Wellington when interest rate start to rise. For now I have most of it in Wellesley.

Wellington has 65% stocks & 33% bond funds & 2% short term reserves.
Wellesley has about 34% stocks & 65% bonds.

Good thinking Roger.

Joe C.

Charles from NY posted over 5 years ago:

Could someone explain more how the 4th re-balancing strategy works? If I have 400 shares of GE, how does that determine how many shares of stock XYZ I should buy??

Charles from IL posted over 5 years ago:

Comparisons with Wellington are not apples to apples, because Wellington primarily invests in U.S., large-cap stocks (in addition to its bond holdings). This said, holding a balanced fund that adheres to an targeted allocation is an alternative to portfolio rebalancing. Look at the fund's allocation target, however, and make sure that it makes sense for your personal situation, however. And if you hold more than one fund, you may still have to rebalance. -Charles Rotblut, AAII

Charles from IL posted over 5 years ago:

Charles-Say you invested $10,000 in 10 stocks. After a year, your position in eight of them is now $11,000 (a 10% gain). The ninth one jumps in price and your position in it is now worth $15,000. The 10th one falls in value and your position is now worth $9,000. You sell stocks nine and 10, freeing up $24,000 in cash in a portfolio now worth $112,000 (Your average position would now be $11,200 per stock ($112,000 / 10). To rebalance, you could either invest $11,200 in each of the two new stocks you purchase. (You could also increase the amount to $12,000 if you would rather not keep any cash in portfolio.) The logic being that you prevent any single stock from occupying too large a position in your portfolio. -Charles Rotblut, AAII

Roy from OH posted over 5 years ago:

On tables 2 and up I could not read the results on the bottom of the tables

Joseph from VA posted over 5 years ago:

I ran the analysis again using the same time frame as AAII (24yrs) from 1997 thru 2011. Wellington produced a total return of 763.8% & annualized return of 9.9%. Ending value of $863,831 or $157,706 more than AAII indexing & rebalancing analysis. As Roger from Kentucky astutely observed that is a lot simpler and a lot less head aches plus expense for my spouse. I might add that year to year up & down swings are a lot less. So when my "Buzzer" sounds(and at 76 it won't be as long as in the past) I think my spouse would be better off or at least no worse than indexing & rebalancing. This may not be apples to apples comparison but I think it is a valid dollar to dollar return comparison.
Not to worry Charles I am not canceling my subscriptions. I still like your ultra small cap portfolio and appreciate your analysis. I would not have the time & resources for that. I am also trying your dividend investing.

Thanks Charles for all you provide us. Keep up the good work.

Joe C.

George from PA posted over 5 years ago:

I absolutely agree with both Diversification as well as re-balancing.

What I cannot buy (for knowledgeable, active investors who are paying attention) is re-balancing blindly via a pre-set formula.

For example, assume you set your formula during the Clonton era (or the Bush). Today the world is very different: During the past 30 years we have been in an era of rising bond prices that is highly unlikely to continue over the next decade.

By ignoring market conditions you would be buying into a value trap (in bonds).

Another item that I object to is the assumption that investors have no control over their emotions and tend to buy high and sell low.

While I cannot say that I always do it right, I HATE to either buy high or sell low. I would no more buy a stock with a P/E of 20 than I would buy a cantelope for $20 -- regardless of how good the cantelope or promising the stock may be...

Sure, I screw it up now and again. But my goal is to get it right more often than I get it wrong.

Lou from South Carolina posted over 5 years ago:

From a risk control point of view, an 80% stock and 20% bond allocation is optimal (using historical returns) because it minimizes risk (see http://www.aaii.com/journal/article/the-real-world-lessons-from-investment-theory). From a rebalancing point of view, a 50%/50% allocation is optimal because it maximizes buying low and selling high, thereby increasing return. This is an interesting trade-off.

Charles from IL posted over 5 years ago:

We ran the numbers on Wellington and have a correction to Joseph's numbers. An $100,000 investment made in Wellington (VWELX) at the very end of 1997 and held through Dec 31, 2011 would be worth $963,849. This is equates to an annualized gain of 9.9% and is $157,723 more than the 5% rebalanced portfolio would have earned, assuming no withdrawals. -Charles Rotblut, AAII

Philip from CO posted over 5 years ago:

I like the idea of rebalance checks in May and November to take advantage of historical trends, but I can't help thinking that an over-balancing strategy for bonds in May and equities in November might produce even stronger returns.

Richard from FL posted over 5 years ago:

During the financial meltdown in 2008 & 2009, the AAii magazine article in the January, 2009 issue ([pages 5 thru 10) stated to stay the course. I followed this advise and did "nothing" and now my portfolio is up over 100% from the 2009 lows thanks to the advice from AAii in 2009!

Richard from FL posted over 5 years ago:

Fairly strict Bogelian asset allocation with infrequent rebalancing has done extremely well by me over the years. That said, we've seen a Money Market Fund "break the buck", and we're told to expect zero short-term interest rates over the next couple years. It appears to this investor that we've lost the "risk-free asset", and replaced it with essentially return-free risk. Without the anchor of the risk-free asset, does classical asset allocation lose its mooring? And finally, is there really such a thing as "tactical" asset allocation? Isn't that just a fancy term for doing what you think is right, when you think it is right to do so?

John from NY posted over 5 years ago:

Mr. Ratliff's pensive article on portfolio rebalancing of one’s adopted asset allocation approach can be augmented by the following four thoughts:
1. As someone ages they should be revising their asset allocation approach and risk tolerance, meaning that any such rebalancing should target the age-based revised asset allocation.
2. Sales of securities can in part be avoided by dynamic rebalancing – using the cash thrown off from distributions and sales based on the asset specific price movements.
3. Sales for rebalancing purposes should be carefully considered as to the tax implications.
4. No matter how good you are at rebalancing, it will not overtake the most valuable financial management exercise – determining your asset allocation approach.

John Hodge from ak posted over 5 years ago:

Am I missing something? Comparing table 5 from this march 2012 article with table 3 from the similar April 2011 article: The 2012 table eliminates the VEIEX and uses a 5% rebalancing threshold.
This causes a 0.6% lower annualized return and a 0.2% increase in std dev. So why do it?

Charles Rotblut from IL posted over 5 years ago:

John, I excluded VEIEX from the 2012 article because the allocation percentage to the fund was too small to sustain annual withdrawals. Eventually, the withdrawals would have caused the balance in that fund to turn negative. -Charles

Zach Tripp from NH posted over 5 years ago:

I did a similar analysis, it can be found here: http://tinyurl.com/9jbwnsr

I am tracking my daughter's 529 plan that I have a 5% re-balance threshold. Have not had a chance to re-balance yet. http://followmy529.com

Richard Abbott from FL posted over 5 years ago:

I also followed the magazine article in the AAII January 2009 edition. I DID NOTHING and my porfolio is up 120% from the lows of 2009. Thanks to the advise in the AAII magazine to "STAY THE COURSE".

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