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April 28, 2014


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Purely speaking from my own experience, I've noted that the asset allocations in my 401K do not tend to vary more than a percent or two from the target allocations over six month to 1 year periods. I think the reason for this is that the constant influx of cash divided into the correct percentages tends to damp down the changes one would see from growth if one had done a lump sum investment into those allocations.
I go ahead and rebalance anyway, since it's just a button click away on the 401K custodians' sites.
As far as moving $$ from stocks to bonds, I suppose you could simply look at it as "taking some chips off the table". The closer I get to retirement, it makes me feel a little better to have a higher allocation to more "stable" fixed income investments, even though my total return is obviously going to be lower than remaining in equities.

My 401k provider includes several low-cost balanced funds and target retirement funds. I opt for these, and thus get effortless rebalancing.

Similarly with investments in my taxable accounts. Aside from some 'play money' (with which I dabble in individual stocks and options), everything is in Vanguard (low-cost and efficient) target retirement funds.

Thus I haven't worried about rebalancing in the last decade or so.

I am really grateful my 401k has an auto-rebalance reature. The computer does it for me every quarter and I don't have to think about it. I really think this is the way to go.

Alternatively, owning a Target-Date Retirement fund or a Balanced Fund are often very good ways to go. The Target Date Retirement funds from Vanguard & T. Rowe Price are both generally highly regarded. The T. Rowe Price funds are more expensive, but still reasonable, but yet have slightly better performance than comparable Target Retirement funds from Vanguard.

I tout the benefits of balanced funds all the time. My favorites are:

Vanguard Wellington
T. Rowe Price Capital Appreciation
Mairs & Power Balanced
Dodge & Cox Balanced
Oakmark Equity & Income

In addition, there are plenty of good "runner up" balanced funds that haven't performed quite as solidly as the above, but are still solid choices if you have them in your 401k plan. Some of these are load funds, so they are not worth owning if they're not in your 401k:

Invesco Equity & Income
American Funds Income Fund of America
American Funds American Balanced
American Funds Capital Income Builder
American Funds Global Balanced
Fidelity Balanced
T. Rowe Price Balanced
Vanguard STAR
Fidelity Four-in-One
Vanguard Balanced Index

I'm sure there are other good ones, but these are the ones I know off the top of my head.

In one of my retirement accounts I use a Vanguard Ret Target Date fund (I like doing this because I can use it as sort of a baseline to compare the rest of my accounts against). Their rebalancing is not exactly straight forward (I'm sure its mostly based on just applying new money coming in which probably varies a lot), but if a sector gets more than 2-3% off they force a rebalance, which is a lot more active than I am.

So this is a nice feature of these funds over just creating your own simple 3 ETF account that you'd have to rebalance on your own.

Turns out it may not even matter if you rebalance, under some circumstances you'll be better off, some you'll be worse, which basically amounts to market timing.

Rebalancing (between equities and fixed income at least) is not really supposed to "pay off". In fact, it will usually NOT as stocks should gain more over time, so you are more often rebalancing to bonds, which are most often the lower long term yielding asset.

Rebalancing keeps your volatility risk level at the place you decided was most appropriate. Whether keeping a set balance between equities and fixed income is reasonable is a separate question (and I think quite a bit oversimplified given the many other investments/income generators out there)

You do have to set a rebalance schedule (by date or amount off balance) ahead of time to prevent yourself from market timing.

I agree with Steve. Rebalancing doesn't pay off in absolute returns. But what it does do is help you stick to your plan. A lot of people bail out of stocks at the worst possible times and get back in at the worst possible times. That means their returns are usually a lot worse than the published returns of stock mutual funds. Being in balanced mutual funds or rebalancing automatically helps people to stick with their investing plan so that they actually get decent returns. Even if those returns are slightly worse than the overall stock market, they are typically better than what folks get if they don't have some sort of forced rebalancing plan.

I think you are exactly right.
Rebalancing amounts to unsophisticated market timing.

So far this year these 4 major indexes have done the following.
S&P 500 +3.63%
Nasdaq Composite -7.51%
Dow Jones Industrials -2.41%
Russell 2000 -12.08%

In the kind of market we have today if I were still investing in equities rather than bonds I think my approach would be as follows.

Use the charting and analysis software that I have subscribed to since 1993.

Sort all 1296 ETF funds in the database in the order of their risk adjusted return for a particular period, such as since the start of the year.

Then pick about half a dozen of the best performers, using my experience and knowledge, while making sure that they were distributed over very different categories, i.e worldwide diversification. Then as time went by I would replace a poor performer with a better performer as the need arose.

This is akin to rebalancing but it's much more sophisticated and would also take my years of experience and the tools I have available into account by favoring categories that have low volatility.

I am not a great believer of "Rebalancing", particularly when all, or most of the funds are invested in US only equities. Fortunately, at 79, I'm in the position of only holding income investments, the vast majority of which are corporate and municiapl bonds along with two bond funds.

If I were a much younger man and still looking for growth I would do something like this:

I would use the charting and analysis software that I have used since 1993, as follows.

1) Load in the whole family of 1296 ETF funds.
2) Rank them in order of the highest risk adjusted return for a period such as the last 6 months.
3) Starting at the top of the list I would pick six funds that had the following attributes:
Diversity by Country or region
Diversity by Type of holdings
Diversity by Maximum Drawdown
Diversity by Volatilty

I would also omit types of funds that I don't like for various reasons.

I would start off with an equal percentage in each of the 6 funds.
As time went by I would repeat the ranking process and under performers would be sold and replaced with higher performers.

Unfortunately most investors don't have a large database of funds with dividend adjusted prices, and even with that there's a substantial learning process required to use the system.

Bottom Line
To get great results you need the right tools and data, and the knowhow and experience required in using them.

The motley fools had a good method for selling in one of there books or applying in this case rebalancing.

"Only sell if you have a better opportunity for something else."

I rebalance annually, assuming that my target is off by at least 5%. As for the current state of bonds, I have most of my bond money in short-term bonds since they will be affected the least when interest rates start to rise. I realize that I will still most likely lose principal, but the goal is that the loss is small and the increased interest rates will offset most of the losses.

Since I'm now 79 and only own income investments such as Municipal & Corporate bonds, a few CDs, and a couple of bond mutual funds, rebalancing is not applicable for me and not something I want to do.

If I did have a portfolio that warranted rebalancing
every so often I would do it as described below.

I would use the charting & analysis program to which I have subscribed since 1993.

I would hold a small number of funds, maybe six.
I would only use exchange traded funds.
I have 1490 exchange traded funds to pick from.
I would rank these funds by various parameters over a short term period such as the last 6 months.
I would then, in turn, sort the results by each parameter, typically Total Return, Maximum Drawdown, the Ulcer Performance Index, and Volatility.

Thus I have narrowed the total list of funds to a much smaller list of possible candidates. I would then go over these and eliminate ones that for other reasons I don't wish to invest in, ending with the six funds whose performance I like the most.

This is rebalancing, but it selects from all the ETF funds available not just a few funds from a particular fund company. Some of the funds would likely not be funds where all the holding are from the US.

The system I use isn't cheap and may be more than a lot of people woud pay. To subscribe to the system and only be able to access all of the ETF fund histories is $462/year. I am by no means promoting this system because I no longer have any affiliation with it but because I am a long time user my subscription is now free.

With the charting & analysis software that I have used since 1993 I can analyze the whle family of ETF funds. If I had a need to rebalance my portfolio, which I don't I could pick a short period such as 6 months and rank all 1490 ETF funds by any parameter I choose. With the results in hand I could then narrow my choices to, for example, the very best six funds that suit my needs.

This would take a few minutes and I could easily repeat it every time I felt a need to rebalance. I would also be able to choose any kind of ETF fund I want rather than just from a particular fund company.

However since I am totally in individual bond investments I have no need for rebalancing anything. I just reinvest interest as it arrives as well as the proceeds from any bonds that mature.

There are 1490 ETF funds available.
If you want to rebalance an account that has no restrictions on your choice of funds, then why not rank all of the ETF funds by various parameters and then pick a small number of the ones that come out near the top and that also satisfy your needs for diversification.

I no longer do any rebalancing because I only own municipal & corporate bonds, a few CDs and a couple of bond income mutual funds.

My retirement accounts are in targeted funds, so they rebalance quarterly. I don't sweat it, they carry the percentage I want right now between equities and bonds and cash equivalents. As others have said, my biggest challenge is keeping my mitts clear of the funds which seem to do better overall than when I begin mucking with them.

I'm in the Steve camp; I've always understood that the reason to re-balance is to try to mitigate risk and volatility exposure in your portfolio. As i age, I am gradually moving from an 80% equities/ 20 % bonds and short term to a more balanced 50/50 portfolio. I only rebalance when the ratios changes by more than 5% off my target, rather than based on the calendar. I have only had to rebalanced a few times over the past 10 years as a result.
About half of my portfolio uses target date funds from T. Rowe Price, Vanguard, and Fidelity, so half of the re balancing act is done for me automatically anyway.

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