Rebalancing Vs doing nothing

Thrugelmir

BrockStoker wrote: »

Also, does anyone here find it hard to rebalance/take profits from a particular fund if that fund is doing very well? I guess that is an argument for removing emotion from the whole process?

Human nature dictates that it's harder for the vast majority of investors to sell a poor performing asset. On the basis that the price/value has to bounce back at some point. Whereas it's more likely that a good performer will continue to do so for longer. On the grounds that the reason behind the movement is driven by the demand for the underlying stocks.

bowlhead99

gadgetmind wrote: »

It's certainly multi-asset and doesn't seem to have any real crazies.

Yes, I was pleasantly surprised!

There's a whole bunch of stuff in the middle - such as the regional equities - which looks like it could be ripped out and replaced with more of the generalist global one (or by beefing up the multi asset funds and weighting more to higher equity over capital preservation).

But the funds are in there because they add a bit more of an income slant (eg Woodford, Matthews Asia Dividend). Providing more natural income than a generalist or a tracker without having to sell stuff to get cash, is useful while she defers state pension. Though pulling any income at all out of an ISA wrapper feels a bit silly when she has a decent chunk of cash on long term deposit, and should be revisited when she gets it back... but I try not to be too bossy!

If I make a proper effort to simplify it later this year I'll dump the Lifestrategy because it's only 10% of the whole thing anyway and really it just feels like "padding". But actually that's exactly why it was bought, as something cheap and cheerful to fill some space in the allowance a couple of years back, and it's not really harming anybody by sitting there doing its thing. If I make a concerted effort to cut the number of holdings down by a few, my gut instinct is to dump it and add more RIT which is a keeper, despite the extra fees- it just feels more like a "real" multi-asset fund than Vanguard's fixed-ratio-fund-of-tracker-funds malarkey

gadgetmind

bowlhead99 wrote: »

Providing more natural income than a generalist or a tracker without having to sell stuff to get cash, is useful while she defers state pension.

The rule of thumb is that higher dividends/income o lower growth (capital and income) and vice versa, so I just don't buy the "hold the bit of the market that generates yield and ignore the rest" argument.

I intend to hold what makes the most sense, draw in cash, and rebalance based on the lack of cash due to Waitrose and Oddbins.

Though pulling any income at all out of an ISA wrapper feels a bit silly when she has a decent chunk of cash on long term deposit, and should be revisited when she gets it back... but I try not to be too bossy!

I intend to drawdown the pensions at the "ream" level before SP kicks in, use unwrapped to fund Oddbins and ISAs, and ISAs will be the last to be touched.

my gut instinct is to dump it and add more RIT which is a keeper, despite the extra fees- it just feels more like a "real" multi-asset fund than Vanguard's fixed-ratio-fund-of-tracker-funds malarkey

I hold RIT in two portfolios, and it's a big old wodge of diversity, so is fine balanced against 80/90% of normality. But it is *not* your global equity/bond allocation so don't pretend that it is.

BananaRepublic

I suspect there can be a feeling that you have to do something to add value, whereas sitting back and doing nothing can be more profitable. Timing the market is said to be a bad approach.

Rebalancing could mean moving assets from a low volatility successful sector with years more growth ahead, and into a low performing sector. Equally it could mean moving out of a sector that has given its best. I am sure active fund managers do a degree of rebalancing for you, deciding that a given area has seen most of its growth for the time being, and moving into underpriced areas.

The do nothing approach suits me, but as I approach retirement I might move some assets into less volatile investments.

EdGasket

Rebalancing appears to be the opposite of that other motto 'run your winners and cut your losses'. One thing is for sure, either strategy makes money for the middlemen.

bowlhead99

gadgetmind wrote: »

The rule of thumb is that higher dividends/income o lower growth (capital and income) and vice versa, so I just don't buy the "hold the bit of the market that generates yield and ignore the rest" argument.

I intend to hold what makes the most sense, draw in cash, and rebalance based on the lack of cash due to Waitrose and Oddbins.

I'm the same in that in principle I don't care whether money I take out was a result of income or gain. The goal is simply to make sure that what you *don't* take out to spend on Oddbins essentials... and instead leave behind as your residual portfolio at a point in time, is a decent mix.

But I'm not drawing monthly on my own pot, as I'm in 'accumulation' part of my life and the drawings are more ad-hoc rather than funding a day to day lifestyle. Mum's pot is a little different and at the moment she does want to take money out each quarter, so it's much simpler to have a bit more 'natural' income arriving in the cash account and rebalance the rest of it every so often, than be set up for a lower amount of natural income and need to constantly be selling stuff.

I hold RIT in two portfolios, and it's a big old wodge of diversity, so is fine balanced against 80/90% of normality. But it is *not* your global equity/bond allocation so don't pretend that it is.

No, I wouldn't have it as a whole portfolio. It's conviction-driven but does have public and private equities from most regions, a currencies strategy, and real assets, absolute return and credit holdings within its non-equities piece; while government bonds are low which is fine by me at present.

You do have to be happy that they know what they're doing in terms of gearing levels and their call on the mix of long-only and long/short strategies in the hedge arena.

If I was trying to create a simple all-purpose ISA (with no conscientious objection to active fund managers and no particular need to draw income), I'd be happy leaving Mum alone with something like 15% RIT, 15% PNL, 10% strategic bond, 10% real estate, 40% general developed equities,10% general emerging equities. Six funds rather than sixteen.

In more 'normal' circumstances, probably some dedicated gilts or IL govt bonds, but good cash accounts seem a decent substitute presently.

EdGasket wrote: »

Rebalancing appears to be the opposite of that other motto 'run your winners and cut your losses'. One thing is for sure, either strategy makes money for the middlemen.

The "run your winners and cut your losses" concept can make sense when applied to someone trading individual company shares who has researched their target companies and industry sectors in great detail. If your conviction is that Google has soundly beaten Yahoo, keep it and dump Yahoo before its price slips further down the pan and into obscurity. Same if Nokia is getting hammered by Apple because the world has realised that the former has become a lame duck.

Cut your losses and move on. Perhaps it isn't worth betting on Woolworths and HMV and Blockbuster turning around their fortunes with an effort that will probably be too little too late. If they're going to turn it around it might be after the creditors take control or the board sell out to a private equity turnaround specialist, and you stand to lose your shirt if you blindly hang on as a small retail investor.

Applied to a broad portfolio which is constructed from funds with different sector specialisms or regional focus, it is pretty much a nonsense. It would be ridiculous to think that largecap stocks have 'beaten' smallcap stocks, or that developed markets had beaten emerging markets, or that energy firms and consumer cyclicals and utilities would all slip into obscurity while you should run with healthcare and industrials because they were the ones that had risen in the last year. It would be an incompetent way to run your diversified portfolio.

So, yes, 'rebalance' is the antithesis of 'run your winners, cut your losses'. But they serve different purposes for different people and both can be valid.

gadgetmind

bowlhead99 wrote: »

Mum's pot is a little different and at the moment she does want to take money out each quarter, so it's much simpler to have a bit more 'natural' income arriving in the cash account and rebalance the rest of it every so often

I hope soon to be in the position of relying on my investments as sole source of income for 35+ years. While some income is nice, I don't intend to focus only on assets that produce "enough" as I'm happy to include companies in their growth phase as well as those that have "run out of ideas" and instead pay out dividends.

I expect to have about 3% of income pa versus a 4.3% (before SP age and 3.3% after) income requirement. I'll simply take the 4.3% from the cash in the pot and then rebalance back to a roughly 5% cash allocation.

15% RIT, 15% PNL, 10% strategic bond, 10% real estate, 40% general developed equities,10% general emerging equities. Six funds rather than sixteen.

How about CGT rather than strategic bond?

Same if Nokia is getting hammered by Apple because the world has realised that the former has become a lame duck.

We spent years telling Nokia what sort of products they should be producing and they kept telling us we were wrong. And then along came Apple and the world changed. Sweet.

So, yes, 'rebalance' is the antithesis of 'run your winners, cut your losses'. But they serve different purposes for different people and both can be valid.

I've seen "regression to mean" so many times that I now work with it rather than against it.

ChopperST

I rebalance quarterly and add in extra cash at the end of the tax year to keep in line with my asset allocations, try to avoid selling at all and use new cash to keep everything in line as my portfolio is still relatively small.

This article from marketwatch (US bias) does a retrospective analysis of rebalancing and seems to illustrate the point well...

http://www.marketwatch.com/story/the-right-way-to-rebalance-your-portfolio-2014-02-18

bigfreddiel

I would have thought rebalancing every quarter was too frequent, but sometimes the intuitive answer is incorrect!

I may be adopting this frequency, cheers fj

gadgetmind

I do a "full" rebalance once a year, and usually in mid April once I've finished my my tax year end/start CGT-driven transactions and have funded ISAs for the year., My wife is now working, so this is the time of year when I see how much she earned and throw 0.8x the difference between 3600 and this into he SIPP, so that's also got new cash to invest.

I will do other tracking during the year and adjust anything that's way out, but it's £7.95 a trade so I don't go mad.