Time to Rebalance Your Portfolios
Portfolio rebalancing is perhaps the only 'free' lunch once you have set a strategic portfolio allocation based on your risk profile. Numerous articles have been published to study the pros and cons of portfolio rebalancing. The key factors behind portfolio rebalancing are:
The most popular rebalancing method is to periodically rebalance monthly, quarterly or annually rebalancing. For people who would like to be more active, opportunistic rebalancing strategy proposed by Gobind Daryanani from TD Ameritrade Institutional has shown to be effective if proper parameters are chosen. The opportunistic rebalancing method examines a portfolio periodically (such as biweekly). For those assets whose allocations are out of certain preset threshold (such as 20% more or less than the target percentage), these assets are rebalanced back to their target allocation percentages. For example, an asset with 30% target allocation would be rebalanced back to its 30% target if its allocation is over 36% or under 24%. The following table compares the performances of three methods: no rebalancing, annual rebalancing, quarter rebalancing and opportunistic rebalancing (monthly check and 20% band) on a Roger Gibson Five Asset Portfolio.
It should be noted that there are various parameters to be set for the opportunistic rebalancing method. Some of them are not as good as even a periodical rebalancing. However, rebalancing in some way definitely helps to improve your portfolio performance. Interested readers could further compare the risk (standard deviation and maximum drawdown) for these portfolios (and their various settings) from here.
It is also interesting to apply timing techniques to portfolio rebalancing. In our previous article we showed that applying timing to a diversified portfolio could reduce risk and enhance return. Using this in a portfolio rebalancing manner deserves a separate serious study.
- Risk and return control: when certain assets have appreciated too much, you would like to "take some money off the table" by selling portions of assets to bring back to your preset allocation targets. When certain assets have gone down too much, you would like to "buy cheap" so that you could take the "on sale" opportunity.
- Psychological feeling: when your portfolio allocation is out of balance, the over weight or under weight will give you uneasy feeling. Such a feeling is best described as the urge to do something in behavioral finance. Investors so often want to do something about their investment and most of time, they venture into markets without a clear guideline on their portfolio allocation. By the time they realize, their portfolio is out of whack and very often, they also lose money. Portfolio rebalancing with target allocations fixed is a sensible safe guideline to curb such "random" behavior.
Major Asset Performance
as of 9/25/2009, sorted by 13 weeks performance
| Description | Symbol | 1 Week | 4 Weeks | 13 Weeks | 26 Weeks | 52 Weeks |
| US Equity REITs | VNQ | -5.38% | 3.39% | 33.72% | 71.82% | -29.51% |
| International REITs | RWX | -3.54% | 3.64% | 22.04% | 58.26% | -11.72% |
| Emerging Market Stks | VWO | -1.94% | 6.28% | 18.57% | 56.09% | 10.61% |
| International Developed Stks | EFA | -2.43% | 2.22% | 18.04% | 45.45% | -6.10% |
| Frontier Market Stks | FRN | -1.31% | 5.61% | 17.89% | 60.39% | -5.25% |
| US Stocks | VTI | -2.40% | 1.79% | 15.16% | 30.68% | -11.42% |
| US High Yield Bonds | JNK | 0.84% | 5.94% | 13.83% | 38.80% | 10.95% |
| Emerging Mkt Bonds | PCY | 0.04% | 3.72% | 13.43% | 26.74% | 22.77% |
| International Treasury Bonds | BWX | 0.05% | 2.95% | 6.49% | 13.47% | 10.91% |
| Municipal Bonds | MUB | 0.47% | 2.58% | 5.93% | 7.20% | 10.80% |
| US Credit Bonds | CFT | 1.06% | 1.62% | 5.54% | 15.49% | 16.50% |
| Gold | GLD | -1.69% | 3.33% | 5.10% | 6.96% | 11.96% |
| Total US Bonds | BND | 0.46% | 0.81% | 2.29% | 4.33% | 7.13% |
| Intermediate Treasuries | IEF | 1.10% | 0.93% | 1.89% | -2.87% | 6.96% |
| Mortgage Back Bonds | MBB | 0.31% | 0.62% | 1.57% | 2.06% | 7.93% |
| Treasury Bills | SHV | -0.02% | -0.01% | -0.03% | 0.07% | 0.60% |
| Commodities | GSG | -2.24% | -5.34% | -2.92% | 12.76% | -47.54% |
| Annualized Return | Last 5 Years | Last 3 Years | Last 1 Year | Since 12/31/1997 |
| Opportunistic Rebalancing Monthly 20% Band | 3.39% | -3.35% | -15.67% | 5.61% |
| Roger Gibson Annual Rebalancing | 2.37% | -4.4% | -17.6% | 5.41% |
| Roger Gibson Quarterly Rebalancing | 3.09% | -3.7% | -16.15% | 5.31% |
| Roger Gibson Monthly Rebalancing | 2.35% | -4.65% | -17.84% | 4.92% |
| Roger Gibson No Rebalancing | 1.69% | -5.85% | -18.77% | 4.17% |
It is also interesting to apply timing techniques to portfolio rebalancing. In our previous article we showed that applying timing to a diversified portfolio could reduce risk and enhance return. Using this in a portfolio rebalancing manner deserves a separate serious study.
Labels: BWX, CFT, DBC, EEM, EFA, GLD, HYG, IWM, IWN, IYR, JNK, LQD, MDY, PCY, SHY, SPY, Strategy_340, TIP, TLT
0 Comments:
Post a Comment
<< Home