Comments on: Rebalancing in a Bear Market

By: Monevator

Monevator — Fri, 14 Aug 2009 21:38:23 +0000

Great, honest post — and a nice new blog to me. In terms of your findings though, I have to agree with Don that 1% is very significant. If I could get an extra 1% a year from executing a couple of trades a month (after costs – crucially) why wouldn’t I — it’ll really add up? The rebalanced portfolio will probably be less volatile, too.

That said this data is almost certainly skewed by your particular methods and start and end dates, as I’m sure you realise, so it can’t be considered definitive.

Good deep investigation though!

By: TFB

TFB — Tue, 11 Aug 2009 13:42:39 +0000

@pop77 - Wash sale involves shares of "substantially identical securities." I don't think the ETF and actively managed funds are substantially identical. Different managers, different strategies. However the IRS has never clarified what exactly are substantially identical. See Substantially Identical Securities on Fairmark.

By: pop77

pop77 — Tue, 11 Aug 2009 13:30:06 +0000

TFB,
In a related note, one thing I am considering is to sell some actively managed funds and replacing them with ETF when I do asset allocation/rebalancing. Though this is a tax type question on wash sales will selling actively managed fund and buying index fund trigger wash sale rule?

By: TFB

TFB — Mon, 10 Aug 2009 23:10:28 +0000

@Dave – Changing the allocation on new cash is the same as rebalancing, only on a smaller scale. Think of putting 100% of new cash into stocks as a two-step process: first allocate new cash proportionally as the current portfolio composition, then sell some bonds to buy stocks. If changing the allocation dramatically as in overbalancing didn’t make much difference, small changes on the edge would do much less.

@Don – 2008 was a record year. There was a huge divergence between stocks and bonds. Stocks were down 37%. Bonds were up 5%. For rebalancing, it can’t get any better than this. Prior to doing the math exercise, I was expecting a large difference, but the best I got was 1.2% from end-of-year rebalancing. Luck was a factor in end-of-year rebalancing. It just so happened the end of year was close to a market low. If the year ran from July to July, rebalancing would’ve been done in July 2008 and July 2009, missing the lows. I’m sure in a normal year the difference will be much less than 1%.

By: Don

Don — Mon, 10 Aug 2009 21:48:44 +0000

I’m not sold on the idea that it’s no big deal to save 1%. If you could do 1% better over 30 years, you might be 25% richer…. I suppose it’s fair to say that you won’t do 1% better every year.

And this is probably much more important: You can’t forget of course what your assumptions were: a starting 60/40 portfolio. If you were not a rebalancer, you could hardly expect to start 2008 with that kind of portfolio. You’d very likely have had a higher allocation to stocks, and your losses would have been worse.

So the conclusion could very well have been, “If you are a rebalancer, but end up in the hospital for a (short) period and suspend your allocation strategy for a time it probably won’t make a huge difference.”

By: Dave C.

Dave C. — Mon, 10 Aug 2009 19:10:49 +0000

TFB – I wonder, would you consider just changing your purchase allocation rates, instead of rebalancing your entire portfolio? (honest question, I’m wondering if others consider this)

What I’m considering is instead of doing an annual, or semi-annual rebalancing of my portfolio, I will instead make regular changes to the allocation of for my scheduled share purchases (occurring with each employer paycheck).

For instance, my current allocation for each purchase period is 100% stocks, but I will be moving away from that as the market goes up. So, maybe next month I will set it to 95% stocks, 5% bonds- and on up as the market goes.

So, eventually the amount of shares of stocks vs bonds will change, though not as dramatically.

By: Wai Yip Tung

Wai Yip Tung — Mon, 10 Aug 2009 18:32:11 +0000

It is great to hear someone talk about an investment plan that does not work out as it is supposed. Because every other investment article talk like they have a plan and strategy that should yield profit in the future.

I have also did some investment allocation maneuver during the past year. By having a larger cash allocation before the stock plunge I thought I will emerge as a winner when everyone else suffers. But looking at the balance in July it doesn’t seems I’m that much better than do nothing. I haven’t compare various scenarios in detail on a spreadsheet. It is just q quick impression.