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I often read a recommendation that one establish percentages for desired distribution of investments in various sectors and then rebalance to achieve that distribution annually. Manulife does not charge me for moving money between funds within an account and so I have been in the habit of rebalancing monthly (allowing a 2.5% +/- variation in a particular sector).

I like the way that this forces me to sell high and buy low and to keep up with the flow of changes in the investing scenario. Are there reasons why it would be better for me to do this less often than monthly?

Thanks,
Terry
 

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The general issue would be cost, but if you within one fund family cost wont be an issue. I personally do it quarterly, just because I get at least some quarterly results from my holdings and I can base my re-balancing on that.
 

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Thank you, MFD. That article was very interesting. I am recently retired so I am in the withdrawal stage which means that volatility is an issue, but what I saw has inclined me to increase my percentage tolerance significantly. As I said, I have been working with 2.5% but I began to wonder if I was cutting off possible gains in a sector too quickly. I plan to increase that tolerance level but to continue to check my analysis on a monthly basis. In short, I will not balance more often than monthly but I will require larger differences from my allocation goal before triggering a rebalance.

Terry
 

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i rebalance yearly and by buying only. so for instance instead of putting $100 in my bond ETF and $100 in my stock ETF, this year i might put $50 in my bond ETF and $150 in my stock ETF to try to rebalance it. saves v. capital gains too!

calculation is pretty easy

bond ETF/pay = (0.5*(current total invested + $200*26 pays)-current bond ETF)/26
stock ETF/pay = $200-bond ETF/pay (above)

of course the $200 is just for an example any number can be put in there, same with the 0.5, let's say you wanted 75% bonds you could stick 0.75 in instead. of course this makes a couple of fairly big assumptions. generally, the stocks will return higher (on average) than the bonds so i'll always be a little heavier on stocks than the 0.5 that i put in there. also, the numbers are likely to go out of whack once you're contributing significantly less than 1% of the total/pay and something like what happened last year happens. nothing's perfect :) in any case, the idea of rebalancing by buying only, i believe, has some validity
 

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I often read a recommendation that one establish percentages for desired distribution of investments in various sectors and then rebalance to achieve that distribution annually. Manulife does not charge me for moving money between funds within an account and so I have been in the habit of rebalancing monthly (allowing a 2.5% +/- variation in a particular sector).

I like the way that this forces me to sell high and buy low and to keep up with the flow of changes in the investing scenario. Are there reasons why it would be better for me to do this less often than monthly?

Thanks,
Terry
I don't think that you should rebalance so frequently. Personally, my wife and I only rebalance between cash and stock and only once every few years or so. When there is a bull market and the media has great news, we pile up cash because we can't find anything reasonable to buy, when there is a bear market and the media has bad news, we move the cash into stock.

In any case, my point is that frequent rebalancing is a bad idea, however I'm sure that you will find many financial advisors (who depend on churn) with the opposite opinion.
 

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I think frequency of rebalancing should be driven by trading costs. I certainly wouldn't use a rebalancing strategy that costs more than 0.25% of my portfolio per year. Having said that, my own allocation is 100% stocks -- rebalancing isn't an issue for me. Of course, I don't have money I'll need within 3 years in stocks. So, if you count the short-term investments as well, my allocation does include cash, short-term bonds, and GICs. But, I don't maintain fixed allocations. The amount I keep in fixed income is based on my anticipated needs over the next 3 years.

Michael James
 

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I'm in the asset accumulation stage, so in most accounts, I almost always rebalance by putting new contributions in asset classes that are below target. So far, I've only rebalanced an existing portfolio by buying and selling only once: in the fall of 2008.

The question of how often to rebalance is a difficult one. But I think rebalancing as often as once every quarter is too frequent. Jason Zweig wrote about this very topic in the Wall Street Journal:

'Rebalancing' Your Portfolio Can Be a Tough Ride

For younger investors with horizons of several decades, rebalancing is probably a chance worth taking. But you shouldn't feel compelled to rebalance constantly; once a year is plenty. Pick a date that will never vary and that you will always remember, like your birthday. If you are retired, rebalancing into stocks could hurt more than it may help; catching a butcher-block full of falling knives is a risk you mightn't be able to afford to take. I will still rebalance on my next birthday, because I am nowhere near retirement and I know I don't know what the future holds.

The bottom line: Whether rebalancing will heal or hurt your portfolio depends not only on what the markets do but also how they do it. Even techniques that are supposed to reduce risk carry risks of their own.
 

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If you think about what you are trying to achieve by rebalancing, you may come to the conclusion that coming up with a schedule with a prescribed frequency doesn't directly address your goals.

I think that using deviation ranges is probably a more direct approach, but requires more discipline to carry out. If you do not have the interest or time to do that, rebalancing on a set schedule is perfectly fine. One year seems to be reasonable to me.

I wrote about this topic in more detail here.
 

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Discussion Starter #10
. . .I think that using deviation ranges is probably a more direct approach, but requires more discipline to carry out. If you do not have the interest or time to do that, rebalancing on a set schedule is perfectly fine. One year seems to be reasonable to me.

I wrote about this topic in more detail here.
Thanks, I think you are right about the benefits of working with deviation ranges rather than a fixed time schedule. I wrote a longer comment directly on your post.
 

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I'm glad you found the post helpful. You mention that you've picked ranges that are out of your comfort zone. If that's because you feel that the current situation is unique and want to capture that, I would suggest that you also set an "exit strategy" to return to ranges that are really in your tolerance zone. I have a slightly longer reply in the comments section of the posting on my blog.

If you are tracking volatility, maybe you want to use the VIX volatility index as your trigger to get back to your "reasonable ranges". Or maybe it's when the TSX index hits some value. It's a personal decision, but maybe others on this forum have some other suggestions for you too.
 

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I'm glad you found the post helpful. You mention that you've picked ranges that are out of your comfort zone. If that's because you feel that the current situation is unique and want to capture that, I would suggest that you also set an "exit strategy" to return to ranges that are really in your tolerance zone. I have a slightly longer reply in the comments section of the posting on my blog.

If you are tracking volatility, maybe you want to use the VIX volatility index as your trigger to get back to your "reasonable ranges". Or maybe it's when the TSX index hits some value. It's a personal decision, but maybe others on this forum have some other suggestions for you too.
Actually, MFB, I don't know that I am actually uncomfortable with the 15%, I'm in quest of my comfort level. I settled on that deviation range from what I observed on the graph to which MFD linked in the post above. In that study, 15% looked to be a reasonable point for mediating between return and risk.

Your comment about picking some point at which to seek a more comfortable deviation range as a norm comports well with another decision I have made recently. For reasons I won't go into here, my allocation got out of whack from my goals and I do need to increase the fixed income funds at the expense of equities. Right now, however, I have decided not to sell any equities in pursuit of rebalancing until the TSX reaches 12000. I am aware that this may not be until 2011, given what I am hearing but I think that is feasible for me.

The other factor worth mentioning in regard to rebalancing is that I am in the withdrawal stage. It is my intention to make each monthly withdrawal from the category that is most beyond the goal for allocation. As this is done, it may actually look after the rebalancing function (particularly if my deviation tolerance is generous) so that further redistribution will be unnecessary. Since I can move between funds without cost, my options look excellent.
 
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