Nearly time to look at my S&S ISA - rebalancing tips for current climate

bowlhead99

Linton wrote: »

The idea behind rebalancing is that having chosen your % allocation up front all you need do is make occasional regular adjustments to restore it. To avoid excess trading I suggest you dont rebalance any more frequently than once a year.

AnotherJoe wrote: »

I dont buy that theory, seems to me it doesn't stand up even to casual scrutiny.

Whose to say that ;
1) you chose it right in the first place, or
2) your circumstances have changed so you need different, or
3) economic circumstances have changed so you'd like to tweak it, or
4) more than one of the above apply ?

The OP was talking about rebalancing.

Re balancing is a process of bringing something back to a balance that meets your objectives /risk preferences etc. The "'re" implying that you had previously set up a portfolio model that met your needs, but due to various market movements and circumstances which have affected your individual components in relatively different ways, you no longer have that balance in your portfolio and need to "'re" balance it.

As Linton said it shouldn't need a huge amount of messing to bring it back to some sort of balance if you know what your balanced portfolio would look like, based on your model.

What you seem to be saying Joe is that you don't buy the idea that re balancing is bringing something back, to your balance. You prefer to just build a new portfolio each year based on your points 1-4. Well, each to their own but it is going to get confusing for newbies if you describe the process of scrapping what you had and building a portfolio from scratch for your current circumstances and your view of current economics, as "re-balancing" Surely that's just "building a portfolio".

AnotherJoe

bowlhead99 wrote: »

The OP was talking about rebalancing.

Re balancing is a process of bringing something back to a balance that meets your objectives /risk preferences etc.

And do you think those objectives and risk preferences are static ? If not, I don't understand why you don't agree with me. If you do think they are static, that seems like an indefensible position !

What you seem to be saying Joe is that you don't buy the idea that re balancing is bringing something back, to your balance. You prefer to just build a new portfolio each year based on your points 1-4. Well, each to their own but it is going to get confusing for newbies if you describe the process of scrapping what you had and building a portfolio from scratch for your current circumstances and your view of current economics, as "re-balancing" Surely that's just "building a portfolio".

I am saying that, if rebalancing means sticking with your original allocation come what may, then I think that's a foolish proposition because of the points I've made. Which can be summed up as, you might have been wrong first time, and things change.

The idea that everyone should have an allocation thats stays with them through a life time is risible even if they got their allocation right first time! What other human endeavour gets something right first time every time? I don't think anyone would support that would they ?

So assuming you dont believe those flights of fancy, then it's simply a matter of degree about what it means to rebalance. If Linton decided to change his maximum uk % allowed from 35 to 30 is that allowed? Is that a rebalance or is it building a new portfolio?

If you disagree, where does this initial allocation come from, how come its always correct, and why does it stay the same for a lifetime ?

Ray_Singh-Blue

Prudence1 wrote: »

I braved having a look, and it isn't all bad at all (Annualised return: 13.35% - I expected it to be less).

VLS80 has returned 23% this year. As it makes up 75% of your porfolio, I would expect your returns to be higher?

System

I do not understand the obsession with rebalancing portfolios. Some sectors/industries/countries grow and become a larger so there is no need to rebalance your portfolio as you would want to have a larger share of your portfolio in these sectors/industries/countries. Similarly, for sectors/industries/countries that contract.

Linton

Economic wrote: »

I do not understand the obsession with rebalancing portfolios. Some sectors/industries/countries grow and become a larger so there is no need to rebalance your portfolio as you would want to have a larger share of your portfolio in these sectors/industries/countries. Similarly, for sectors/industries/countries that contract.

It is possible that an investment will just grow and grow relative to almost everything else. At the individual company level there are plenty of examples. However at the sector level this seems rather unlikely. Do you believe "Healthcare" will eventually swamp everything else? Or what about "Energy" or Engineering? What happens more often is that areas of investment move up and down relative to each other over quite long time frames. Rebalancing takes advantage of this by selling at a relatively high price and buying at a low one.

Your suggestion that one wants more and more of the high returning sectors has the problem that it gets caught up in booms that must eventually bust, or crashes that cant continue for ever. Rebalancing prevents this. For example Raw Materials/Commodities funds typically fell by more than 50% between 2011 and 2015. This year raw materials funds were the best performing in my portfolio - JPM Natural Resources rose by over 70%. Keeping a constant balance ensured that a significant amount of money was still invested when this happened and ensured that over the long term I am showing a profit, despite a 70% rise not fully conpensating for a 50% fall.

bowlhead99

Economic wrote: »

I do not understand the obsession with rebalancing portfolios. Some sectors/industries/countries grow and become a larger so there is no need to rebalance your portfolio as you would want to have a larger share of your portfolio in these sectors/industries/countries. Similarly, for sectors/industries/countries that contract.

Periodic rebalancing is a standard way to reduce volatility in a portfolio. Leaving things to "run their natural course" can leave you with eggs in one basket.

For example, you decide you want a portfolio of equities and bonds. You know that over the long term the shares should outperform the bonds but you don't want the level of volatility that equities could deliver (>50% drop in a year) so you are happy to just go 50:50.

However, after 25 years of shares delivering their compound annual return of (say) 7% and bonds delivering their compound annual return of (say) 3.5%, your portfolio is no longer 50:50, it is 70:30 in favour of shares. Or if your portfolio had started at 67:33 it would have crept up to 82:18. The ending portfolios are a mile away from the asset mix at the beginning.

It is a similar concept if you are looking at just one broad asset class, say a global equities portfolio. To a point, it can make sense to put more money into the largest regions or industries. However, left unchecked, the bigger regions can dominate your portfolio and after a few years of a larger region or industries having "a good run", you can be going into a new year with a massive tilt to one area which has the potential to have a serious "eggs in one basket" effect when that one market has a wobble.

For example, the people holding financial stocks that were dominating indexes in 2007/8 did not have a good time when the FTSE All-World index suffered a peak to trough drawdown of 58% in dollar terms. Likewise dotcoms and telecoms in 2000. Or those who thought using world market cap would be the best way to allocate their 1989 portfolio, mostly to Japan - whose shares were on 60x earnings.

So, imposing your own (even if somewhat arbitrary) cap or collar on allocations to a region or industry can be sensible. Linton's example of an industry sector declining and being topped up by his rebalance, rather than just sitting there as a tiny holding, is simply the reverse example of having too much in an area and trimming it back.

As you don't have $40 trillion to allocate to listed equities, or $200 trillion to allocate to all financial investments including listed and unlisted shares and real estate and fixed interest opportunities, you are not constrained by "needing" to have 2% in Apple or 65% in US or whatever to get your money deployed. So, more than half your money in large-cap US equities might be more than you reasonably need, just like it was too much to allocate to Japan when the Nikkei or Topix were dominant in the 80s, before they weren't.

Linton

AnotherJoe wrote: »

I am saying that, if rebalancing means sticking with your original allocation come what may, then I think that's a foolish proposition because of the points I've made. Which can be summed up as, you might have been wrong first time, and things change.

The idea that everyone should have an allocation thats stays with them through a life time is risible even if they got their allocation right first time! What other human endeavour gets something right first time every time? I don't think anyone would support that would they ?

So assuming you dont believe those flights of fancy, then it's simply a matter of degree about what it means to rebalance. If Linton decided to change his maximum uk % allowed from 35 to 30 is that allowed? Is that a rebalance or is it building a new portfolio?

If you disagree, where does this initial allocation come from, how come its always correct, and why does it stay the same for a lifetime ?

There isnt a single "correct" allocation for equity investments. The precise allocation %s doesnt matter too much as long as there is a very broad diversification so that the risk from single limited points of failure is small. The whole point of setting allocations is to provide a constant base around which one can take profits from currently higher priced areas to put into lower priced ones. As Coldiron said a few posts ago:

The good thing about having a plan and sticking to it is it takes all the emotion out of it and avoids making a bad call based on a short term viewpoint.

It seems to me a much better approach to seek to gain from actual price gains than to study the financial news from from around the world and, with the help of a dollop of gut feeling, try and predict future ones. Tweaking your portfolio at every change in your gut feeling and predictions is likely to be futile at best, if not counter productive.

System

Supporters of rebalancing seem to assume that all sectors are in a cycle of booms and busts (what goes up must come down and what goes down must come back up), but there may be sectors that are in long-term decline where it would be unwise to keep investing more and more, which is what rebalancing would imply.

Linton

Economic wrote: »

Supporters of rebalancing seem to assume that all sectors are in a cycle of booms and busts (what goes up must come down and what goes down must come back up), but there may be sectors that are in long-term decline where it would be unwise to keep investing more and more, which is what rebalancing would imply.

The sectors are sufficiently broad not to be too dependent on individual technologies. Do you foresee a real risk of the need for healthcare, industry, insurance, mining etc disappearing? I guess it could be possible but such massive social and economic changes are going to take decades rather than happen overnight.

Even if the need for a major sector does decline it doesnt mean that prices will fall - it could just as easily happen through there being fewer companies.

System

Just look at what has happened to the shares of manufacturing and services in national income over the last few decades. Such changes may take decades but rebalancing seems to imply going back to some 'perfect' allocation every year, and you are therefore stuck with this 'perfect' allocation for decades.