Rebalancing

dunstonh

cfw1994 said:

What are "fluid weightings" versus static ones?

Static weightings are where you use the same weightings as you used at the start.  Rarely making any changes.   Crude example (which shouldn't be copied) is 10 funds invested with 10% each.   And always rebalanced back to 10% each.
Fluid weightings are where you adjust the weightings to reflect economic data, actuarial data, value of assets etc.    For example, corporate bond, index-linked gilts, UK equity and property weightings are lower today than in 2017. Rebalancing with fluid weightings brings you to the same allocations you would use if you were investing today.  Not those you invested with at the outset.

[Deleted User]

cfw1994 said:

I think this topic got bogged down in another thread recently.
Noticed some analysis released yesterday by Abraham (a smart fella) - you can register and get the short report.
Essentially it reads broadly that you are best off by not rebalancing until things are 10% adrift.  Certainly avoid quarterly, and probably avoid annual.  
Curiously, I note he adds on twitter that letting things drift even further continued to improve returns...but were discarded because they would breach risk tolerance.
Maybe people need to up their "risk tolerance"?!   
An argument for letting the winners run.   
I've noted that my "4 way equal split" now has the best one around 20% higher than the worst.   Should I rebalance?     For now, I think I will let it lie.  Presumably an IFA would have rebalanced long before now.   
Rebalancing: overated?

This makes sense because over time stocks outperform bonds. If you don’t rebalance at all then you get more and more stocks which improves long term return. And you benefit from momentum. But the volatility of your portfolio changes and you get to a different point on the “efficient frontier”. 

Personally I rebalance when allocations are over 5% off target. Otherwise I just add money to the fund which is “short”. Its a very rare, extreme event that forces me to rebalance. 

cfw1994

Ahh.
Sounds more like "fluid weightings" is a faintly meaningless term.   
Sure, "changing your view dynamically" is perfectly reasonable and I would suggest sensible - nothing is static - but really just means you're changing how or in what you are investing in!   
10 years ago, I didn't have any money in the "pre-retirement interest" fund, & gilts/bonds were only a small % of the pot. 
Same reason I suggest my kids (early 20s) invest (pensions or longer term ISAs) broadly in 80-100% equities - I expect that to make most sense over a 10+ year timeline....but I bet if they met an IFA who formally assessed their risk profile, they might be moderately risk averse.  
Assessing risk is the hardest thing for humans.   No-one likes the idea their money might drop 20% or 50%.
Wonder if COVID, with it's abundance of 'risk assessments' in many areas of our lives (schools, scouts, playgroups, pubs, etc, etc) will change that.   

dunstonh

Sounds more like "fluid weightings" is a faintly meaningless term.   

What term would be better to use?

Sure, "changing your view dynamically" is perfectly reasonable and I would suggest sensible - nothing is static - but really just means you're changing how or in what you are investing in!   

You would be surprised at how many people stick with static though.  

Same reason I suggest my kids (early 20s) invest (pensions or longer term ISAs) broadly in 80-100% equities - I expect that to make most sense over a 10+ year timeline....but I bet if they met an IFA who formally assessed their risk profile, they might be moderately risk averse.  

Many IFAs will have time weighted portfolio allocations.  So, you can sit within a risk band but have weightings based on timescale.  Others that dont have time weightings explicitly will often move someone up the scale a notch with the justification of time invested.        Risk profiles are not hard or cast in stone.   

However, you should not underestimate the average UK consumer.  They want maximum return with no risk.   You get an awful lot of people who baulk the minute there is a 2% loss in value.    Some you can discuss it with and help them understand.  Some don't want to understand.    Every single risk analysis should be personal and include their knowledge, understanding and behaviour as well tolerance and capacity for loss.   

However, you get some people that will make all the right noises say they can handle risk but the minute a risk event occurs, they panic.  We have seen it on these forums.  Often with those that have gone fashioning investing into high risk and warned about the risks they are taking. They say they can handle it but then the following month it has fallen 1% and they are back asking if they should take their money out.

The other issue is the amounts involved.   A 30% on someone with a tiny value paying in monthly will usually go unnoticed.   Someone with £500k, on the other hand, a 30% loss is very noticeable.  Their value has just dropped by an amount that could by a house.     Some people can handle a 30% loss when they have £10,000 but couldn't handle it when they have £100,000.

Audaxer

dunstonh said:

Someone with £500k, on the other hand, a 30% loss is very noticeable.  Their value has just dropped by an amount that could by a house.     Some people can handle a 30% loss when they have £10,000 but couldn't handle it when they have £100,000.

dunstonh, if/when there is a crash and equities fall by say 30%, would you as an IFA rebalance a client's £500k portfolio, by selling bonds and buying more equities to get back to their original weightings? Is when to rebalance something you would agree with a client at the outset of the relationship?

cfw1994

dunstonh said:

Sounds more like "fluid weightings" is a faintly meaningless term.   

What term would be better to use?

Sure, "changing your view dynamically" is perfectly reasonable and I would suggest sensible - nothing is static - but really just means you're changing how or in what you are investing in!   

You would be surprised at how many people stick with static though.  

Same reason I suggest my kids (early 20s) invest (pensions or longer term ISAs) broadly in 80-100% equities - I expect that to make most sense over a 10+ year timeline....but I bet if they met an IFA who formally assessed their risk profile, they might be moderately risk averse.  

Many IFAs will have time weighted portfolio allocations.  So, you can sit within a risk band but have weightings based on timescale.  Others that don't have time weightings explicitly will often move someone up the scale a notch with the justification of time invested.        Risk profiles are not hard or cast in stone.   

However, you should not underestimate the average UK consumer.  They want maximum return with no risk.   You get an awful lot of people who baulk the minute there is a 2% loss in value.    Some you can discuss it with and help them understand.  Some don't want to understand.    Every single risk analysis should be personal and include their knowledge, understanding and behaviour as well tolerance and capacity for loss.   

However, you get some people that will make all the right noises say they can handle risk but the minute a risk event occurs, they panic.  We have seen it on these forums.  Often with those that have gone fashioning investing into high risk and warned about the risks they are taking. They say they can handle it but then the following month it has fallen 1% and they are back asking if they should take their money out.

The other issue is the amounts involved.   A 30% on someone with a tiny value paying in monthly will usually go unnoticed.   Someone with £500k, on the other hand, a 30% loss is very noticeable.  Their value has just dropped by an amount that could by a house.     Some people can handle a 30% loss when they have £10,000 but couldn't handle it when they have £100,000.

What term?
Just say "adjusting the holdings".   Fluid weightings sounds a bit "Billy Bulls***" to me!   Either you have static weighings that you rebalance to, or you adjust the holdings according to what you see in the market.   Ideally, in the 12 months ahead, not behind 

I doubt I would be surprised at how many people stick with static though.  I've seen all manner of ignorance across the planet, especially this year!   Always remember that 50% of people are below average!
There is a lot of lack of knowledge in finance - no surprise, given we never teach it!   That is an education thing.

Sticking with static isn't necessarily a 'terrible' thing, I suspect.....but I do think people should examine their finances at least every year to see how they are set up.   

The rest, I don't disagree with.  Nowt so strange as folk!

Thrugelmir

Audaxer said:

dunstonh said:

Someone with £500k, on the other hand, a 30% loss is very noticeable.  Their value has just dropped by an amount that could by a house.     Some people can handle a 30% loss when they have £10,000 but couldn't handle it when they have £100,000.

dunstonh, if/when there is a crash and equities fall by say 30%, would you as an IFA rebalance a client's £500k portfolio, by selling bonds and buying more equities to get back to their original weightings?

Portfolio should hold more than one equity market and one bond fund.  You are writing as if there aren't multiple investment options available. Not every crisis is going to global i.e. Covid\GFC.   

[Deleted User]

cfw1994 said:

dunstonh said:

Sounds more like "fluid weightings" is a faintly meaningless term.   

What term would be better to use?

Sure, "changing your view dynamically" is perfectly reasonable and I would suggest sensible - nothing is static - but really just means you're changing how or in what you are investing in!   

You would be surprised at how many people stick with static though.  

Same reason I suggest my kids (early 20s) invest (pensions or longer term ISAs) broadly in 80-100% equities - I expect that to make most sense over a 10+ year timeline....but I bet if they met an IFA who formally assessed their risk profile, they might be moderately risk averse.  

Many IFAs will have time weighted portfolio allocations.  So, you can sit within a risk band but have weightings based on timescale.  Others that don't have time weightings explicitly will often move someone up the scale a notch with the justification of time invested.        Risk profiles are not hard or cast in stone.   

However, you should not underestimate the average UK consumer.  They want maximum return with no risk.   You get an awful lot of people who baulk the minute there is a 2% loss in value.    Some you can discuss it with and help them understand.  Some don't want to understand.    Every single risk analysis should be personal and include their knowledge, understanding and behaviour as well tolerance and capacity for loss.   

However, you get some people that will make all the right noises say they can handle risk but the minute a risk event occurs, they panic.  We have seen it on these forums.  Often with those that have gone fashioning investing into high risk and warned about the risks they are taking. They say they can handle it but then the following month it has fallen 1% and they are back asking if they should take their money out.

The other issue is the amounts involved.   A 30% on someone with a tiny value paying in monthly will usually go unnoticed.   Someone with £500k, on the other hand, a 30% loss is very noticeable.  Their value has just dropped by an amount that could by a house.     Some people can handle a 30% loss when they have £10,000 but couldn't handle it when they have £100,000.

What term?
Just say "adjusting the holdings".   Fluid weightings sounds a bit "Billy Bulls***" to me!   Either you have static weighings that you rebalance to, or you adjust the holdings according to what you see in the market.   Ideally, in the 12 months ahead, not behind 

I doubt I would be surprised at how many people stick with static though.  I've seen all manner of ignorance across the planet, especially this year!   Always remember that 50% of people are below average!
There is a lot of lack of knowledge in finance - no surprise, given we never teach it!   That is an education thing.

Sticking with static isn't necessarily a 'terrible' thing, I suspect.....but I do think people should examine their finances at least every year to see how they are set up.   

The rest, I don't disagree with.  Nowt so strange as folk!

1. Are you classifying static asset allocations as “ignorance”? 

2. People who don’t examine their investments tend to do better. 

[Deleted User]

Very overrated imo, cfw1994.
In my view rebalancing is like watching a Grand Prix half way through and expecting the race order to revert to the positions on the grid; quite logical from one perspective but has never happened yet.

Back along I proposed a four stock portfolio for another thread,  £40000 invested in each of 4 stocks. The stocks were not chosen for illustrative purposes but actually work very well in that regard: two high growth mega caps AAPL and Microsoft, and two stolid defensive
high dividend shares Glaxo and BHP. What I would call a balanced portfolio.
In August I worked back to see what difference rebalancing made to the overall value over the last ten years.  (I know: aftertiming but the result was an eye opener).
With rebalancing, £160000 in Aug’10 became £662381;
without rebalancing £1,109,080. 
And the breakdown was APple £614,707
Microsoft £403,593
Glaxo £50,901
BHP £39879 (no increase over a decade).

I didn’t count in dividends which would have narrowed the gulf somewhat but still quite a stark difference.

Prism

cfw1994 said:

dunstonh said:

Sounds more like "fluid weightings" is a faintly meaningless term.   

What term would be better to use?

Sure, "changing your view dynamically" is perfectly reasonable and I would suggest sensible - nothing is static - but really just means you're changing how or in what you are investing in!   

You would be surprised at how many people stick with static though.  

Same reason I suggest my kids (early 20s) invest (pensions or longer term ISAs) broadly in 80-100% equities - I expect that to make most sense over a 10+ year timeline....but I bet if they met an IFA who formally assessed their risk profile, they might be moderately risk averse.  

Many IFAs will have time weighted portfolio allocations.  So, you can sit within a risk band but have weightings based on timescale.  Others that don't have time weightings explicitly will often move someone up the scale a notch with the justification of time invested.        Risk profiles are not hard or cast in stone.   

However, you should not underestimate the average UK consumer.  They want maximum return with no risk.   You get an awful lot of people who baulk the minute there is a 2% loss in value.    Some you can discuss it with and help them understand.  Some don't want to understand.    Every single risk analysis should be personal and include their knowledge, understanding and behaviour as well tolerance and capacity for loss.   

However, you get some people that will make all the right noises say they can handle risk but the minute a risk event occurs, they panic.  We have seen it on these forums.  Often with those that have gone fashioning investing into high risk and warned about the risks they are taking. They say they can handle it but then the following month it has fallen 1% and they are back asking if they should take their money out.

The other issue is the amounts involved.   A 30% on someone with a tiny value paying in monthly will usually go unnoticed.   Someone with £500k, on the other hand, a 30% loss is very noticeable.  Their value has just dropped by an amount that could by a house.     Some people can handle a 30% loss when they have £10,000 but couldn't handle it when they have £100,000.

What term?
Just say "adjusting the holdings".   Fluid weightings sounds a bit "Billy Bulls***" to me!   Either you have static weighings that you rebalance to, or you adjust the holdings according to what you see in the market.   Ideally, in the 12 months ahead, not behind 

I doubt I would be surprised at how many people stick with static though.  I've seen all manner of ignorance across the planet, especially this year!   Always remember that 50% of people are below average!
There is a lot of lack of knowledge in finance - no surprise, given we never teach it!   That is an education thing.

Sticking with static isn't necessarily a 'terrible' thing, I suspect.....but I do think people should examine their finances at least every year to see how they are set up.   

The rest, I don't disagree with.  Nowt so strange as folk!

How about valuation based rebalancing or risk based rebalancing?