We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind. Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually. That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary.
We also did an earlier study of all 25-year periods beginning in 1826 (!), using a 50/50 US stock/bond portfolio, and found that annual rebalancing won in 52% of the 179 periods. Also, it seems to me, noise. Interestingly, failing to rebalance never cost more than about 50 basis points, but when that failure added return, the gains were often in the 200-300 basis point range; i.e., doing nothing has lost small but it has won big. (I’m asking my good right arm, Kevin, to send the detailed data to you.)
My personal conclusion. Rebalancing is a personal choice, not a choice that statistics can validate. There’s certainly nothing the matter with doing it (although I don’t do it myself), but also no reason to slavishly worry about small changes in the equity ratio. Maybe, for example, if your 50% equity position grew to, say, 55% or 60%.
In candor, I should add that I see no circumstance under which rebalancing through an adviser charging 1% could possibly add value.
This is an interesting contrast to How to Make Money By Rebalancing.
A footnote: Mr Bogle has been an outspoken opponent of ETFs (he believes they lure too many investors into excessive trading). But you could easily implement the asset allocation he mentions above with ETFs -- at a lower cost than using Vanguard index mutual funds -- as follows:
- 48%S&P 500: Shares S&P 500 Index Fund (IVV)
- 16% small cap: iShares Russell 2000 Index Fund (IWM)
- 16% international: Vanguard All-World Ex-US ETF (VEU)
- 20% bond index: Vanguard Intermediate-Term Bond ETF (BIV)
I've used an intermediate term bond fund because that's what Mr Bogle recommends. You can easily survey the alternatives to these ETFs in the Seeking Alpha ETF Selector's listing of Core Building Blocks: Large, Mid & Small Cap US ETFs, Broad International ETFs and Broad US Bond ETFs.