The first topic this morning is rebalancing. There was a question about it and a good post about it too on Seeking Alpha by James Picerno.
Having the balance you think is proper is of course important but I think that the frequency with which rebalancing needs to occur is lower than most people think.
Taking the data from Picerno's article which goes through April 6, the Russell 3000 (IWV) was up 11.55% for 12 months, iShares EAFE (EFA) was up 19.61% and iShares Lehman Aggregate Bond ETF (AGG) was up 6.07%.
Taking these three as a lazy portfolio hypothetically weighted at $45,000 in IWV, $25,000 in EFA and $30,000 in AGG on April 6, 2006. Using James' numbers IWV is worth $50,197.50, EFA is worth $29,902.50 and AGG is worth $31, 821.00 for a total of $111,921.00 on April 6, 2007.
This leaves IWV with a 44.8% weight versus a target of 45%, EFA at 26.71% weight versus a target of 25% and AGG at a 28.43% versus a target of 30%. To rebalance you need to buy $220 dollars of IWV which is about three shares, sell $1700 of EFA which is 22 shares and buy $1500 of AGG or 15 shares.
I can't say you should not rebalance at this level but I wouldn't do it. Keep in mind this is one year of results and the need to rebalance is, at a minimum, questionable.
Here's a novel concept; rebalance as the market action of your holdings dictate regardless of the calendar. I took action yesterday with a stop order of 1/3 of the position for a stock that has been white hot of late which serves as a rebalance of sorts. The trend is seems to be up so I don't want to sell, it has grown to be fairly large and if it turns I will be cutting back at price that seems high.
The other topic this morning was from a comment that asked about how to deploy a lump sum; whether to go in all at once or go in some other way like waiting for dips.
A reader or two quickly jumped in to say to go all at once and provided a link on the subject.
From a numbers standpoint going in all at once is clearly the better choice. However it is not always the most comfortable choice depending on an individual's tolerance for volatility.
I tend to wade in slowly with new accounts over the course of a couple of months for most new accounts. Most people inclined to hire a money manager would feel a lot of discomfort if they went all in, for example, on February 23rd only to be down 5% one week later.
I can't defend the concept from a numbers standpoint but it does make people feel better.
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6 comments:
I can't argue with your logic for deploying a new client's money, but I'm curious as to what new clients say if they feel like they've missed out on too much of a multi-month rally?
I totally agree that rebalancing shouldn't be a calendar event. You should probably look at your allocation targets annually to make sure positions aren't too far out of whack, but there's no sense in trying to maintain precise allocation targets...especially if it's going to cost you commissions.
i have never had a client say they want to be all in tomorrow. if someone said they want all in at once i would go all in at once.
we tell a client ahead of time what going in will look like and then the pros and cons of either approach.
the important thing is no surprises.
Thanks for posting on this. I "feel" better about not going all in all at once, but I usually like to back up feelings with hard numbers. :). I'm sure this is not an exact science. I imagine if two months from now I haven't gotten close to my target allocations, I may just take the plunge. Thanks again to all for all of the comments.
On rebalancing:
Your example from the Picerno article makes a good point, but misses something critical. How far did the allocation get from targets at various points during that one-year timeframe? My guess is the May swoon last year would have caused a great deviation, and if one had rebalanced then, the performance for the same timeframe might have been better (buying more EFA after the drop). But you are spot on with the recommendation that you should avoid rebalancing based on the calendar and instead rebalance based on market action. My point is that following a market action rule may cause you to rebalance more than you think.
Roger, are you familiar with the work of Dr. Gobind Daryanani? He has published several works about the optimal rebalancing strategies and he turned that research into a software product called iRebal. You can easily find his work at the FPA site or by googling iRebal. I am not promoting it, I have no stake in it, and it is a disgustingly expensive product. But his research is very interesting in this area. He claims to be able to add a "rebalancing alpha" based on back-testing.
On implementing a new portfolio:
My understanding is that over the long term, market timing does not work and markets go up in value. Those two facts argue for getting invested as soon as possible for a long term investor. However, an advisors role is also to reduce downside volatility, which requires getting into the market over time, so as not to expose all the portfolio to a sudden drop early on (as you point out).
Roger.
Perhaps you might want to lend anon 11:05 your copy of "Financial Armageddon" when you're done with it before he goes all in ;).
At any rate, I would keep at least 50% on the side-lines until some sort of correction occurs before I would go all in in the market environment IMHO.
No sweat. I'm not going all in. I lived through the bear of 00-02 (was all in at that time, what? Tech doesn't go up forever and ever??) and have learned to play much more cautious since then.
Thanks again folks.
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