Rebalancing: What’s your trigger?
You probably know that Vanguard advocates periodic rebalancing as a way to manage risk in investment portfolios.
Our Investment Counseling & Research Group, overseen by my fellow blogger John Ameriks, has written a detailed white paper on rebalancing. John weighed in as part of a post discussing whether buy-and-hold investing is a dead idea. And we’ve written numerous other articles and blog posts on the topic of rebalancing.
Vanguard’s research suggests that it’s sensible for you to rebalance your portfolio to its target asset allocation annually, semiannually, or when the percentage allocated to a given asset class (cash, bonds, or stocks, for example) is more than 5 percentage points off your target.
I just finished a rebalancing exercise because I use my birthday in late August as a trigger for checking out the portfolio and doing any rejiggering made necessary by the market’s movements or by accumulated cash.
Anyway, this got me to wondering what triggers other investors to rebalance—assuming, of course, that you regularly do so.
Do you pick a particular date? Or do you use some other trigger?
Thoughts?
Note: All investing is subject to risks.
I don’t rebalance. Craig, write a more detailed post about rebalancing. Do you have any financial theories you invented or gleaned from family/friends?
I have rebalanced but not on a regular basis.
Rather it has been when I have made a major withdrawal to pay cash for real estate or other large purchase. Or when volatility in equities took my balances well off target. Or when I changed my target.
So I am not sure life will ever be so settled for me that I could rely only on a birthday reminder to consider rebalancing.
Here is the totally unscientific method by which we re-balance our two sector funds (they are not our main holdings): whenever they go above our original purchase amount by $1,000.00, we take the thousand out and put it into one of our core holdings. If one goes below the purchase amount by $1000.00, we take a thousand out of our core holdings to bring the sector fund back to the baseline.
We aren’t looking to get rich off this scheme, but it is very simple and has provided lots of profits over the years to help build our basic bond and stock funds.
I try to use rebalancing bands… if an asset class exceeds a set range, I rebalance so I stay within my risk tolerance.
Speaking of rebalancing - why doesn’t Vanguard offer an automated way to rebalance in an IRA? Like a way for me to define that I want 20% in fund X, 10% in fund Y, etc. and then click a button to have Vanguard do the computations and requisite buying and selling?
The Federal TSP offers this functionality, and it is a very convenient management tool. If Vanguard is concerned about frequent trading to keep costs down, then limit the rebalancing tool to only function once or twice a quarter.
I do not believe in automatic rebalancing or in any particular triggering approach. I think common sense ought to rule. Specifically, I did not rebalance in the past year as my equities declined much below target. I chose not to rebalance into the darkness of uncertainty. I belief is that the stock portion of my portfolio will rebalance itself over time. This is in line with my conservative (retirement) strategy to be risk adversive at a cost of lost opportunity.
Thanks for your blog.
The “Market Crash” Taught me a lesson ! At my age, 75, I took too much risk. I am a “Buy & Hold’ Investor. In March of 2009, I decided to” Rebalance” my portfolio and become more conservative. To date, my Portfolio has had a 10% return. This may not seem to be very profitable, but, I’m back on track to reaching my goals. My trigger for “Re-Balancing” is not to not to go above the 4% “Withdrawal Level”. Preservation of Capital is the key to my future needs!!
I have only been at this for about ten years, but what a ten years this has been!
When I started investing, the end of the year (Holiday break) seemed like an appropriate time to rebalance the asset allocation because it allowed the impact of annual distributions to be taken into account. Additionally, dollar-cost averaging with accumulated cash helped keep hings on track. (Instead of investing with accumulated cash in line with the target asset allocation, I have a speadsheet calculate the drift from targets each month. Then the use of accumulated cash disproportionately invested in assets below target has tended to ‘fine-tune’ the actual allocation on a frequent basis.)
But, the market movement has reeked havoc with year-end or once-a-year rebalancing! So, I have now given up on annual rebalancing, and have moved to the deviation-from-target method. Certainly this has been more effective in the last cycle (taking cash out of equities in late 2007, and putting more cash into the same over the last six months) with the value of different assets jumping or falling with irregular frequency.
Averaging in with accumulated cash has helped smooth things a bit, but until the markets calm down, it seems that the deviation-from-target approach seems suitable.
I use the late fall for reflection in stocks as well as other things. If I have losses to capture I do so before year end. If I have gains, I make my plans and execute in jan of the new year. I also look hard during big run ups and markets drops like last year. I plan to buy during the correction this fall.
I normally rebalance at the end of the year: November, December, but the market was so volatile in Nov-Dec of 2008 that I decided to do nothing until things calmed down. I did rebalance in July of 2009. I tend to rebalance once a year and change my holdings so that they match my target of 66% stocks and 33% bonds. I have just turned 50 years old and this percentage of asset allocation allows me to sleep at night.
We try to re-balance in Dec. if it’s needed. Last Dec. our 60% stock, 40% bonds and cash desired allocation was actually more like 52% stocks and 48% bonds and cash; so with the market being cheap, we did some reallocation by selling bonds and buying stock mutual funds, which brought the stock allocation up to about 56%. With the market being so volatile, we held some cash in reserve, and when the market dove again in March, we bought more stock mutual funds and brought our stock allocation up to the desired 60% of total assets. With the market rebounding since March, our stock portion is now 66% and it’s time to sell some stock mutual funds and put the proceeds into bond and money market funds to bring them up to 40%. We’ll do it before the end of the year, probably Dec.
I rebalance every 60 days, the highest frequency which Vanguard allows. I think I have done better than if I had only done it only annually. I agree that there is an opportunity for Vanguard to automate this task for us while continuing to keep costs down.
I’m still relatively young, and accumulating at a rate that’s large enough I can do most of my portfolio balancing with new money, which is good, since most of my investments are not in tax-sheltered accounts. I think I’d use the 5% rule if I had most of my money sheltered. Does it ever really make sense to re-balance taxable investments? Seems like it becomes a much more complex calculation. The IRA limits are absurd, given what you can put away in a 401(k) or 403(b)… if you’re lucky enough to have one.
David Swensen’s “Unconventional Success” convinced me of the sound reasons for rebalancing, and I’ve put the principle to practice in my 401K accounts, for which transaction costs and tax impacts are a minor concern. A 2% deviation from my initial target allocation PER FUND was my rebalancing trigger, but after reading John Ameriks’s white paper, I think I’ll use his “recommended” 5% deviation from targets as the trigger. The question is, should I look at deviation PER FUND, or PER ASSET CLASS? The latter would seem to be more appropriate since risk control is the primary objective of rebalancing. Coincidentally, I was going to rebalance one of my 401K accounts yesterday because of the recent brisk growth in stock asset values relative to bonds. But when I saw that bond prices for the funds I invested in are at their 52-week high (despite their weaker performance relative to stocks), I cancelled the transaction because, in addition to risk control, I expect rebalancing to be an easy mechanism for “buying low and selling high”. Was such an expectation wrong?
I put a task in my Outlook to remind me to rebalance in October, and it recurs every 4 months. October also provides me a time to look at things with enough time to make tax decisions for year end. February is a nice month or two before April 15. And June is just a good time between the other two.
If you have a 2025 Target Fund with Vanguard in a taxable account, should you rebalance it? I thought one of the features of target funds was not to be fooling with them: Leave them alone as they move towards their target dates.
Being a “Diehard” I just ask myself “what would John Bogle do? “Actually, I use the Bogleheads book to set up my portfolio and follow its advise on maintaining it .
I don’t like to make large one-time moves, on any day of the year, since day-to-day prices are unpredictable. So, I usually rebalance slowly and continuously by redirecting new savings or spending. One exception is that if stocks become crazily over-priced (above P/E of 25, like in 90s), or become very over-sold (below P/E of 15, like in 2008), then I exchange 1% monthly untily I reach the target, or until stock prices go back to within a reasonable range. I never sell taxable stock funds with gains, to avoid taxes, but instead do such exchanges in retirement accounts. On the other hand, I do exchange taxable funds to rebalance, if they are showing a loss, since there can be a tax benefit.
I don’t rebalance on any set schedule, although my research suggests that doing so as often as quarterly can improve returns and lessen volatility. Two practical problems that prevent more frequent rebalancing: the additional complexity come tax time for all those fractional mutual fund shares (for non tax-deferred accounts), and frequent trading policies (and other limits on how much can be added to particular funds like Capital Opportunity) at firms like Vanguard. (Theoretically there is a tax cost as well to frequent trading but my experience is that this is overblown in the real world and in any event focusing too much on taxes can be counterproductive in investing.) The latter is a more significant problem. I’d like to see Vanguard adopt a more nuanced approach to its frequent trading policies. E.g., for Flagship customers w/an asset allocation plan developed with a Vanguard adviser they could waive or reduce redemption fees or otherwise relax restrictions for trades that rebalance in accordance with the plan. While target date funds are useful, they are one-size-fits-all and omit certain asset classes/investment choices that belong in more sophisticated portfolios. ETFs are a partial solution only for those of us who like some actively managed funds in our portfolios. Finally, I suspect many Vanguard investors would also like more help rebalancing in an automated fashion or at least with software that prompts us to do so.
I’m using 5% as a trigger, stocks & bonds. I’ve tried to do it with new contributions, but lately it hasn’t been enough. My twist is that I think 5% is too much to move in one transaction. I can’t stomach moving all that at once. So i’ve been dollar cost averaging at .5-1% every two weeks. It’s not without it’s problems though. With the market really moving, it’s hard to actually *finish* the rebalancing using this method. It starts to look like *continual* rebalancing, which is a proven bad strategy.
I rebalance to my target allocations per fund at the end of every quarter. I agree with other comments found here that Vanguard should implement an automated rebalancing option with a few frequency options (annually, semi-annually, quarterly). If this is a practice that Vanguard advocates why not make it easier for their clients to do so.
Rebalancing sounds like the way to go. My strategy over the last 25 years or so was to just make ALL changes with future contributions ONLY. Instead of (overall) steadily growing over the last 25 years, my portfolio is only about $18k above what I’ve personally invested ($118k) - this is after the most recent rebound. My BEST growth EVER was somewhere around 50% profit. The problem I see with rebalancing, is asset allocation. They can preach all they want to about Stocks vs. BONDS, but given the limited options available in a company’s 401(k) plan, what should your initial allocations be within the STOCKS portion of your holdings?
I tried contacting my company by letter and phone to pettition for new fund choices in our vanguard 401(k), but they were basically shot down because they didn’t want to confuse investors with too many choices.
Also, we have had about 3 or 4 meetings on the 401(k) over the last 25 years - way too few - and they don’t cover SPECIFIC asset allocations.
When researching asset allocations online, no one takes into account - even Vanguard - that we are covered by a pension plan.
I believe the proper solution is rebalancing, but only AFTER you have set up the proper Asset Allocation within the choices available to you. Without this VITAL and SPECIFIC first step, all else is a waste of time - YEARS of time!
I also feel Vanguard should offer a automatic re-balancing feature. I think annually, semiannually, and quarterly options should keep the majority of Vanguard investors happy. I am sure Vanguard can figure out a much more efficient automated re-balancing program than thousands of investors doing it on their own. It may even cut down on overall costs. How about putting to a vote?
I’m using a 3% trigger to rebalance. When I make additional investments, I target those to aid rebalancing as well. Auto rebalancing works well if you have all of your assets at one firm, which I don’t. My workplace 401(k) is at another firm whereas my IRAs and after-tax investments are at Vanguard. When I look to rebalance, I look at ALL assets — this has to be done on customer spreadsheet which is automatically updated daily. I also use the Morningstar Principia product to track my aggregate portfolio against my custom benchmark and to test alternative scenarios.
I like the somewhat different rebalancing technique called “Oportunistic Rebalancing” developed by Gobind Daryanani and published in the January 2008 Journal of Financial Planning. The basic concept is to take advantage of trending markets by allowing outperformance to continue within wider bands to improve portfolio performance.
Rather than using calender triggers, rebalancing is done whenever an asset class fluctuates by 20% from the desired level (ie. if a 30% allocation grows to 36% or drops to 24% you rebalance). He recommends frequent monitoring but only rebalancing with the 20% trigger. His research estimates 1-2 rebalancing events a year over time.
If you make additional investments or withdrawals. you would use those events to rebalance to bring the portfolio closer to desired allocations.
I do monitor my funds at Vanguard, I think Vanguard should improve the frequent trading policies for the funds, 3 months is too long, maybe should make it one month or allow new funds to inflow after moving funds out, this give investors some flexibilities and chances to rebalance in this time of uncertainties.
I conduct my Planned asset allocation review each year after I’ve finished paying taxes, usually around mid or late March.
With my End of Year statements at hand, and the Tax consequences in front of me, I decide what/how to reblance or modify my Asset Allocation.
For Small AA corrections, since I am still working, I simply change how New money is invested.
My Theory for Medium-to-Large AA corrections was to schedule them to occur about one year after my review showed my AA had changed considerably. In the short term, I have think accepting the gains offered by Market Momentum is a worthwhile risk.
In 2009, since my review period coincided with an extraordinary steep stock market drop (I hope it was extraordinary), I ignored the momentum theory and decided I’d sell some Bonds to buy stocks.
Since I don’t like making snap decisions when it comes to money — I scheduled my exhanges for early May and again in July. I can’t claim to have ‘bought at the bottom’.
In the future, I do intend to revert to limiting Large AA modifications to every year or two.
I use rebalancing bands of +/- 10% of each asset class as thresholds and check fairly frequently. In my taxable holdings, which are still small, I try to rebalance with new purchases. In tax-advantaged accounts I exchange holdings, as new contributions will be insufficient. Otherwise, I stay the course. Rebalancing was a real challenge over the 2008/2009 bear but was certainly rewarding in hindsight.
Ive been using a Ray Lucia method,Starting with a money market fund with which to add or to take from. In my stock funds(Non Taxable Accts) I”ve settled on a 8% increase in value per year,thats 2% per quarterly statement. If the share price goes up more than 2% then I scrape the extra off and place it in the money market acct. If it dont make my 2% goal then I force feed it from the money market acct. to make it 2%