The power of the Rebalance

Radiantsoul

Interesting post.

I think in order for rebalancing to generate an expected positive return you would need a couple of assumptions to hold. Firstly you would need the assets to have somewhat similiar growth profiles. If you had a two fund bond/stocks portfolio rebalancing would over time involve reducing your share holding and so sacrificing some return for lower volatility.

Second you need prices to demonstrate mean reversion. If prices don't revert to a "right" price level then rebalancing will not so much be buying low and selling high as simply resetting the risk profile to the individuals appropriate level.

InvestInPoker

Voting open on this being potm


https://forums.moneysavingexpert.com/discussion/5216212

gadgetmind

All very timely as I'm about to rebalance a half dozen different pots, including our ISA, which are just about to get their annual top up.

Emotions parked, as usual, and let the spreadsheet work out where the money goes!

verybigchris

What do you do when you're under-exposed to a market you believe is over-priced?

Do you hold your nose and increase your exposure, even though you're expecting a loss? Or do you try to kid yourself that "adjusting your target portfolio" is different to "timing the market"?!

System

just saw this thread for the first time, excellent post bowlhead.

I use a less scientific method of rebalance. I hold 5 funds (4 active and 1 passive) and each has 20% weighting. I am 100% equity as hold a lot of cash elsewhere and am investing for 30 year timeframe (the joys of offset mortgage!).

I now check my account every 6 months and if a fund has drifted 5% above or below allocation I will add to or take profit from. Its not a pure rebalance on geography and to more extent the performance of the fund I grant you. Indeed after checking on trustnet I only have around 13% in Europe, so many would argue I am underweight. If I get very worried about the performance of the fund I will sell but it won't be a knee jerk reaction, I will check Morningstar, trustnet etc.

I used to be one of those people who checked prices every day and traded finds like shares. This method changed my mindset and if a fund is down on my 6 monthly check I now see it as an opportunity to buy at a lower price. Not a perfect method I admit but helped me no end.

My daughter has a junior Isa but because of the small amounts involved I put all in VLS 100%, which of course rebalances for me.

gadgetmind

verybigchris wrote: »

What do you do when you're under-exposed to a market you believe is over-priced?
!

Well, it suggests that something odd has happened since your last rebalance! How did you get below target allocation despite the price going up to that level?

verybigchris

gadgetmind wrote: »

Well, it suggests that something odd has happened since your last rebalance! How did you get below target allocation despite the price going up to that level?

I keep my portfolio balanced by making regular top-ups; when I have spare cash, I'll put it in whatever sector/market is below target.

That's worked well so far, but over recent months it's meant putting money almost anywhere except the USA. The recent US growth isn't enough to catch these top-ups in other markets, so come April's payday it should be America's turn, but every single measure I look at seems to imply that's a really bad idea.

TBH it's within the margin of error and my targets are pretty arbitrary anyway, but it just feels like every decision is the wrong one right now. There's never a crash when you want one!!

masonic

verybigchris wrote: »

What do you do when you're under-exposed to a market you believe is over-priced?

Do you hold your nose and increase your exposure, even though you're expecting a loss? Or do you try to kid yourself that "adjusting your target portfolio" is different to "timing the market"?!

Asset allocations can be a function of valuation metrics. It removes the emotion from the decision and allows for a mechanical rebalance, but might still be hard for some to swallow.

gadgetmind

verybigchris wrote: »

That's worked well so far, but over recent months it's meant putting money almost anywhere except the USA.

Which is fine.

The recent US growth isn't enough to catch these top-ups in other markets, so come April's payday it should be America's turn, but every single measure I look at seems to imply that's a really bad idea.

Well, make tactical decisions if you find them easier to live with, as long as you understand that they are no more likely to be right as they are wrong.

k6chris

Amazing insight, I had never considered the logic behind the rebalance before! Thanks Bowlhead!