The Great Rebalancing Debate

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hotels in saint germain en laye of 9:00PM April 10, 2010

Surely, traditional rebalancing would have taken allocations to tech down and down and down over this period. And surely, a follower of this approach would have abandoned it, and gone whole hog into tech anyway ! - That was where the returns were, until suddenly they weren't.
Ben Stein co-wrote a book, entitled "yes, you can time the market". He based timing on valuation criteria. If you read closely, you saw that he would have taken you out of the market (and into fixed income) and kept you out through 1999.
By some acounts, bonds have out-performed buy-and-hold stocks since 1966!
By and hold is dead. The "efficient market hypothesis" (AND with it, traditional rebalancing) is dead. But Goldman Sachs is alive and VERY well ....

jock of MO 12:01PM November 15, 2009

In my experience of 25 years as an investor, eventually the market would rebalance for me! All sectors of the market get oversubscribed from time to time. Deciding to "take profits" or "reduce risk" just because I thought the market frothy was problematic market timing. Quarterly rebalancing, on the other hand, offers somewhat automatic cues. When REITS or Asia-ex-Japan or Domestic smallcap growth are so hot that they now occupy 7% more of the portfolio than they did a quarter ago, that market is potentially overheated. Rebalancing back to the initial allocation reduces my exposure to the bear that is likely to follow the bull, while maintaining exposure to the hot sector.

Steve Austin of TX 10:54PM November 12, 2009

timing, selection & direction all equate to an approach to guessing. to me, limiting downside risk is more important than 'following the herd'
www.definedriskstrategy.com

Drew of TX 11:17AM November 12, 2009

I endorse MarketRiders rejection of traditional mutual funds in favor of ETFs. But I wish they had the intestinal fortitude to also reject rebalancing. Tied in with asset allocation, this is a seriously flawed theory. First, the investor is advised to decide how he thinks he wants his assets allocated. Then, instead of using subsequent experience to improve his judgment of how his assets should be allocated, which would almost surely result in some changes for the better, he is advised to stick with his original notion, regardless of how bad it proves to be in the light of hindsight. Two identical investors would most likely decide on different asset allocations. Why are both urged to stick with their original ideas, regardless of the fact that one, or the other, or both, can readily see that some adjustment is needed. Rebalancing in order to stubbornly maintain the original asset allocation is absurd. Before any "rebalancing" is attempted, asset allocation must be tweaked in the light of initial misjudgments, changes in personal circumstances, changes in investment goals, changes in the economy, stock market dynamics, interest rates, etc etc etc. That's the first and most important step. After that, advisability of rebalancing is still doubtful. It cannot be denied that it is just a euphemism for dumping your winners and picking up more losers. There is nothing intrinsically wrong with owning more of a good-performing security than of one not doing so well. This is not a circumstance that needs corrective action. I remember the really valid advice of really good advisers: get rid of your losers, and let your winners ride. Just the opposite of the "rebalancing" advice. It should be obvious to anyone that the main purpose of "rebalancing" is to increase trading volume, and thereby increase commission income, at the expense of the investor.

Chuck S. of OR 2:00AM November 12, 2009

I switched from my high-fee advisor to the MarketRiders approach - using ETFs to gain global diversification while shunning fees which erode my wealth and compounded returns. The results have been excellent.

Russell Stephens of CA 12:33PM November 11, 2009