Tony Sivori <TonySivori[at]yahoo.com> writes:

- quote -

It's not just about them being of "similar risk" - it's also
about them being *uncorrelated* in order to reduce risk overall.

There shouldn't be any need to constantly rebalance or even
do so once per quarter. As infrequently as once per year
or two is probably adequate, at least if we're talking about
rebalancing with respect to asset classes. You can do that
yourself - you don't need any automatic program or such
for this, and it shouldn't take more than an hour or two
to do.

If you're talking about individual stocks, it's a whole
different story, of course.



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HW "Skip" Weldon wrote:
- quote -

Thanks for the advice, both from you and the others in this thread.

It looks like I was wrong to be so suspicious of it. But on the other hand
it isn't a wonderful thing either. Since all of my investments are
of similar risk, I don't have to worry about that getting out of whack. I
won't be re-balancing.

--
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On Mar 14, 11:29*am, BreadWithS...[at]fractious.net wrote:
- quote -


Defining when to rebalance (annual or by percent difference) is more
about reducing risk than getting better performance (IMO).

Smart Money ran a story years ago which back tested using monte carlo
type analysis and concluded (based on past performance) that letting
winners ride for more than a 1 year period is what gave best long term
performance (long term returns). Rebalancing in most cases only
changed returns by around .75% to 1.25% per year. Over time that adds
up, but even with a mid term investment of 10 years, a .75% annual
return difference was not "significant", where as when compounded over
long periods, would have more impact.

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"HW "Skip" Weldon" <skip5700removethis[at]hotmail.com> wrote
- quote -

So to clarify: If an investor is invested only in mutual
funds, has an allocation plan consistent with her/his risk
tolerance where the desired split is say 50-50 stocks and
bonds, and the allocation rises to 61-39 due to market
changes, what would you advise? I cannot call advice to
rebalance in this very common instance, "hogwash."

In particular with mutual funds, I think rebalancing when
the allocation falls some 10 percentage points off is very
much appropriate. It ensures the investor is still within
his/her risk tolerance. Studies do tend to suggest that
rebalancing in this way is best.

A recent article on the subject that seems thoughtful, since
it does not say rebalancing is right in all cases all the
time:
http://www.marketwatch.com/news/story/new-research-finds-portfolio-rebalancing/story.aspx?guid={5A754C68-C018-4A67-B916-CC0D2A2DB073}&dist=TNMKTW

I agree that stocks require more analysis and should not
simply be sold based on a high price. E.g. if P/E and other
fundamentals remain low, and prospects look good, of course
hold the stock, even if it's much higher than at purchase.

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"HW \"Skip\" Weldon" <skip5700removethis[at]hotmail.com> writes:

- quote -

With respect to individual stocks, indeed, individuals have
an unfortunate habit of selling winners too soon and/or
holding on to losers too long (to "lock in" gains and,
in the latter and sometimes more unfortunate case, in
the feeling that losses aren't "real" until the sale).

However, in the larger context, "rebalancing" is generally
more about maintaining diversification (ie. in the case of
stocks) and/or maintaining target asset allocations (in the
case of funds, especially index/asset-class funds).

In the individual stock case, if you have 10 stocks and
one of them takes goes up by 10x while the rest double
(let's hear it for optimism...), you went from having
an even distribution across the stocks (and hopefully
across sectors, too) to having 50% of your assets in
a single stock. Even it it's still a good stock, your
portfolio is now a *lot* riskier.

In the case of asset allocation - suppose you have
80% stocks and 20% bonds. And then stocks tank - say
they go down 20%. While bonds go up by, say, 10%.
Your allocation is now 72+% stocks and 27+% bonds.
There's nothing wrong with your new allocation - but
it's not what you'd planned on and your new portfolio's
expected future return is lower (and less volatile)
than your original portfolio. If you're okay with the
new plan, that's fine, but it should be *conscious*
choice to keep that new allocation - a choice to have
a different portfolio structure than you'd originally
planned for.

- quote -

See above re: diverified. Of course, single stock outperformance
of the order-of-magnitude sort is more likely in certain
asset classes than in others. Almost certainly not going
to happen in, say, large-cap-value. But in micro-cap growth,
certainly possible.

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On Fri, 14 Mar 2008 04:25:27 -0500, bucky3 <bucky3[at]mail.com> wrote:


- quote -

I think it's important to remember that the investment advice we see
here and elsewhere is opinion - and that there's nothing that all of
us agree with.

The above is opinion. My opinion is that the idea that everyone
should occasionally rebalance is hogwash. Good stocks should perform
well, and good performance does not necessarily mean that the stock
(or stock fund) is "overvalued". And it certainly doesn't mean we
should sell good performers just because they are good performers.

My uncle gave me some of the best advice (my opinion again) that I
ever heard: Unless you need the money and can't get it elsewhere,
don't ever sell good stocks or good land.

(Caveat: The above assumes the investor is diversified to the extent
he/she is comfortable and has adequate cash reserves.)




-HW "Skip" Weldon
Columbia, SC

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On Mar 10, 1:21 am, Tony Sivori <TonySiv...[at]yahoo.com> wrote:
- quote -

That's a valid concern. However, rebalancing a portfolio from time to
time (e.g. every year) is solid long term investment advice. Instead
of thinking "selling winner and buying losers," think "selling
overvalued and buying undervalued."

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On Mar 10, 4:21*am, Tony Sivori <TonySiv...[at]yahoo.com> wrote:

- quote -

They are not trying to "sell you something". There is a good
possibility they don't even charge you for this. It is not uncommon
for a 401k to allow movement between funds without commissions
charges.

Rebalancing is a useful concept supported by most (I hate to say
"all") asset allocation investors. To reiterate jIM's post, retaining
your original risk tolerance is the most important feature. Suppose
you have a portfolio made of only two funds ABC and XYZ. They are both
$100 a share and your risk tolerance says you should own equal shares
of each (we'll suppose 10 of each). If, after a year, ABC doubles in
price ($200/shr) and XYZ halves ($50/shr) your asset allocation has
changed from 50% of each to 80/20. You are now too heavily invested in
ABC (which now makes up 80% of your entire portfolio) even though you
didn't buy any additional shares.

Rebalancing too frequently can have the unintended consequence of
trading on insignificant market fluctuations. The most commonly used
interval is annually.

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On Mar 9, 2:26 pm, Tony Sivori <TonySiv...[at]yahoo.com> wrote:
- quote -

I thought the following was a pretty interesting article regarding
this...

http://www.fpanet.org/journal/articl...p0108-art7.cfm

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HW "Skip" Weldon wrote:

- quote -

Yes.

I guess I am somewhat suspicious of all people and companies that want to
sell me something. Obviously, they will put their own benefit before mine.
So it seems to me that siphoning off from the best investments and
subsidizing the least successful ones may just be a way of keeping the
casual investor like myself from seeing how bad the worst ones are doing.

--
Tony Sivori

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joetaxpayer wrote:

- quote -

In this case, frequent means they (Principal) are recommending automatic
rebalancing every three months.

--
Tony Sivori

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Douglas Johnson wrote:

- quote -

That does seem to be my situation. My employer's 401k committee decided
that a certain Putnam investment would no longer be available to us. The
automatic rollover was to an Alliance Bernstein investment.

The Putnam investment had done well for me. In 2006 it make a nearly 20%
return on my money, which obviously I was very happy with. But the
Alliance Bernstein underperformed and lost a lot of money even before the
market fell. It lost money well before my other investments that were in
the same risk category.

--
Tony Sivori

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- quote -

To add to this, there are more reasons and ways to rebalance.

Rebalance with new contributions- meaning put new contributions in the
lowest performing investments (so you are buying "low").

In addition rebalancing is about defining risk tolerance. If you
invest say 5-10% in a speculative (risky) investment (like tech or
emerging markets) and you get a 70% return, what is your new risk
profile? You are currently taking on more risk in a speculative
investment.

At minimum, you will not go broke selling the 70% gain for a profit.
If you let it ride, you have a larger chunk of your porfolio going to
something you didn't want a big risk on in the first place. If you
sell, you lock in some or most of the current gains. If it goes up
70% again the next year, then you will have even more profits and
gains to sell- but the 5 or 10% original position will be a higher
dollar amount because the portfolio is worth more.

I rebalance 2X per year. In June I adjust contributions based on my
allocation (so lower performing assets get more money in second half
of year). In December I realign contributions and buy/sell as needed
to keep everything in balance.

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On Mar 9, 11:26*am, Tony Sivori <TonySiv...[at]yahoo.com> wrote:
- quote -


In simple terms by re-balancing you can achieve the same return with
reduced risks. Take a look at modern portfolio theory.

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"Sandra Loosemore" <noreply[at]frogsonice.com> wrote in message
news:m3hcffbn1g.fsf[at]frogsonice.com...

- quote -

Also, there are some asset categories, such as stocks and bonds, that have
intrinsically different performance characteristics--and also intrinsically
different volatility characteristics. In other words: Stocks tend to earn
more than bonds over long periods, but bounce around more over short
periods.

Now, suppose you look at your risk tolerance, and decide you want to keep
40% of your money in bonds to reduce volatility. If you go too long without
rebalancing, and stocks and bonds perform as they typically do, your
portfolio will eventually have much less than 40% in bonds. Unless your
risk tolerance has changed, you will want to increase your bond holdings to
get back to that 40% figure.

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Tony Sivori <TonySivori[at]yahoo.com> wrote:

- quote -

It is a little bit, if you assume that the things that are successful will
continue to be successful and the things that are losing will continue to be
losing.

In fact, that's not true, at least for broad asset classes. Yesterday's winners
tend to be tomorrow's losers and vise versa. How many times have I written
"buy low and sell high" this week? Rebalancing is another version of it.

-- Doug

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On Sun, 9 Mar 2008 13:26:46 -0500, Tony Sivori <TonySivori[at]yahoo.comwrote:

- quote -

By "counter intuitive" do you mean that long-term, one ends up selling
things that do well and buying things that perform less so?


-HW "Skip" Weldon
Columbia, SC

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Tony Sivori <TonySivori[at]yahoo.com> writes:

- quote -

It doesn't seem counter-intuitive to me. Rebalancing means you take
some profits from investments whose prices have run up the most, and
use them to buy other things that are currently cheap.

-Sandra the cynic

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Tony Sivori wrote:

- quote -

What is frequent? I know the word, I am asking how frequent they
suggest. Rebalancing can be done many ways, one way is that you
reallocate every year+1 day so gains are taxed as long term (in taxable
accounts, of course). Another is to rebalance if your allocation is +/-
5% out of range, e.g. you want 40% US stock, 40% foreign, 20%
bonds/cash. If US % should go over 45% or under 35%, it's time to
adjust. In the case of the 401(k), if there is no cost to rebalancing, I
suppose you can do this quarterly or even monthly.

The concept is more applicable to sectors than individual stocks, but
consider, in the tech bubble many people rode the shares to the top and
then down to the bottom. Those who were diversified certainly didn't
lose the 80%+ that individual stock holders lost on some of those shares.
JOE

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The administrators of my 401k plan recommend frequent rebalancing
(equalizing all balances) of my chosen investments.

This seems counter intuitive to me. Isn't it just throwing good money
after bad, to transfer money from successful stock to a losing one?

--
Tony Sivori

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