The Value Of Tactical Rebalancing

May 22, 2017 8:08 AM ETVBMFX, VFINX, AAPL, AMZN, META, JNJ16 Comments
Ryan Brannigan profile picture
Ryan Brannigan
404 Followers

Summary

  • Having a rebalancing system to follow takes emotion out of investing.
  • Find the right percentages based on type of security and risk tolerance.
  • Buy low and sell high is the objective.
  • An assumption of 10% of your gains being taxable is used for this article.
  • All values given are after tax.

Many people who manage their own portfolios often don't have a systematic process to tell them when to rebalance. There are many factors which come into play when deciding whether or not to sell a security such as risk tolerance and tax efficiency. Sometimes, the trend may continue over your rebalancing point, but following a system of taking profits at a specified point can be a great way to profit off of the normal variations in price and miss some corrections.

Since 2000, the average annual return of Vanguard 500 Index Inv (VFINX) is 5.89% with a standard deviation of 19.66%. The high standard deviation is reflective of the two recessions during this time period. The cyclicality of price movements is a reason for having this systematic approach. Keeping your desired asset allocation also is a great way to manage risk. Without rebalancing, a portfolio can become overweight in a certain asset class, which may be too risky for an investor, or vice versa.

The 60/40 portfolio of Vanguard S&P 500 ETF Index Fund Inv and VBMFX with an initial $1,000,000 investment and no rebalancing would have an after tax balance of $1,940,335 at the beginning of 2016.

Since VFINX has a much higher standard deviation than the bond fund, the movements will be of much greater magnitude and can be taken advantage of, while VBMFX is much more stable. Tactical asset allocation allows for each asset class to be in a range of percentages of your total portfolio. For example, if you want your 60/40 portfolio to stay in a +/- 5% range at all times, you will sell when the equity reaches 65.1% to bring it down to 60%. The purpose of this is to keep allocation consistent with your risk portfolio and possibly take advantage of the cyclicality and variations of the market. A percentage as

This article was written by

Ryan Brannigan profile picture
404 Followers
Investor with a strong Finance background. Proficient in macro and equity research.

Disclosure: I am/we are long AAPL, FB, AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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