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Use threshold rebalancing to lower your portfolio’s risk

A powerful technique for controlling risk in your diversified portfolio is threshold rebalancing.

Like other rebalancing strategies, threshold rebalancing is used to prevent your asset allocation veering too far off-target due to the diverging returns of the assets you hold.

There is endless debate about the ‘best’ rebalancing strategies and whether they can juice up returns.

It ultimately depends on future market conditions and the unique contents of your portfolio – in other words, whip out your crystal ball.

We therefore think it’s better for passive investors with a broadly diversified mix of equities and bonds to be aware of the rebalancing techniques available, and to choose a mix that best suits them.

I’ve already mentioned threshold rebalancing. The other main school of rebalancing is calendar rebalancing.

Calendar rebalancing is the simplest option – you just rebalance at the same time(s) every year, or every number of years.

However the threshold approach enables you to better fine tune your operations to take more control over costs and to reduce the impact of choppy markets.

Threshold rebalancing

Rebalancing occurs when threshold amounts are reached

As the name implies, with threshold rebalancing you set asset allocation boundaries and then rebalance whenever they are breached, as opposed to automatically rebalancing your portfolio on a pre-determined date.

Picture a portfolio with a 50/50 equity/bond allocation.

  • If the rebalancing threshold is set at 5% then you would swing into action when either asset accounted for 55/45 of the mix.
  • At that point you would sell enough of the dominant asset to rebalance the portfolio back to its original 50/50 asset allocation split.

The idea of threshold rebalancing is that you’re only forced to act when there’s a significant shift in your asset allocation.

You don’t tinker with tiny percentages that make little real difference, just because the calendar tells you to do so.

This can help to control trading costs, where applicable. In a fairly steady market you may not need to rebalance for a number of years, if you can live within a generous threshold.

The less you rebalance, the less you may pay out in trading fees. You could also save on taxes (although ideally you’ll have squirreled everything away in ISAs and pensions, in which case you’re in a nicely tax-protected position already).

Choosing your threshold

The first step is to choose a threshold that suits your risk tolerance:

Low threshold High threshold
Rebalance more often Rebalance less often
Portfolio sticks closer to target Drift to higher risk/reward assets
Suffer less volatility Some increase in volatility
Lower potential returns Higher potential returns
Higher costs of rebalancing1 Lower costs of rebalancing2

N.B. Based upon the conclusions of various rebalancing studies, not a guaranteed outcome.

The obvious conclusion is that the more risk you can take, the higher you can afford to set your threshold, the greater your returns are likely to be, and the lower your costs.

Even a relatively high threshold still needs to offer a decent level of risk control. There are a number of different levels to choose from:

Common or garden thresholds
5% or 10% bands are routinely used by the financial services industry in threshold rebalancing, triggered whenever any asset’s proportion of the total portfolio rises or falls by 5/10%.

Tim Hale’s risky/defensive manoeuvre
A 10% movement between aggregate risky and defensive asset classes is the rebalancing alarm bell. In other words, you act when the total number of equity assets in your portfolio swings 10% versus cash/bond assets.

William Bernstein’s urbane subtleties
Rebalancing occurs when an asset moves 20% from its specific target. So if an asset’s target allocation was 20%, you rebalance when it strays out of a 16-24% range i.e. 20% of 20%. This is obviously a better approach than a straight 10% threshold, which is too clunky to deal with assets that occupy small niches in your portfolio.

Larry Swedroe’s 5/25 rule
An even more subtle approach. Asset classes with a target allocation of 20% or more: rebalance when it moves by 5% versus the entire portfolio. Asset classes with a target allocation below 20%: rebalance when they drift by 25% in proportion to their target allocation.

Rebalancing ranges

You can refine your strategy still further by rebalancing towards a range, rather than strictly returning to an asset’s exact target allocation.

For example, let’s assume property occupies 20% of your portfolio with a range band of 5%.

If the asset drops 6% to 14% of your portfolio, you would only need to purchase an additional 1% to bring property back into your 15% to 25% tolerance band.

The idea of bands is to limit the costs you incur when rebalancing. If you only need to buy 1% worth of an asset class, then you may only have to sell one other asset in order to rebalance, for a total of two trades. Better still, you might be able to use new money or divert dividend or interest income to the cause for a total of one trade. The method also reduces any capital gains tax liabilities you may incur.

In contrast, if you rebalance to exact targets, then it is likely that whenever one asset requires rebalancing they all will, meaning more trades and potentially cost.

Proceed with caution, however. By only moving the asset back to the extreme of its range, there’s a reasonable chance you will have to rebalance again in the near future.

It may well be advantageous to make a bigger trade to return it back to the original target allocation, thereby potentially reducing the proportion of any trading commission payable, and the overall number of trades made.

Of course, swapping money from one index fund to another may well be costless these days (as opposed to if you’ve built your portfolio out of ETFs or investment trusts, where you will certainly incur trading fees).

We rebalance the positions in our model Slow & Steady portfolio for free, for example.

So time and the faff-factor may be more of an issue for many passive investors than costs nowadays.

Also keep in mind that you may be out of the market for some time with a portion of your rebalanced funds, which is another potential (small) risk.

Hybrid rebalancing

The downside with pure threshold rebalancing is that it requires greater vigilance than calendar rebalancing. You have to check regularly that the thresholds have not been triggered.

One solution is to combine calendar and threshold rebalancing into one custom rebalancing strategy.

For example, you could decide that the portfolio will be rebalanced no more than annually but even then you will only intervene if an asset class has drifted by more than 20% in proportion to its target allocation.

Or you could decide to rebalance at least annually, but also to intervene if any asset deviates by more than 5% from its target during the year.

US index fund giant Vanguard has researched the rebalancing question and concluded:

“The relatively small differences in risk and return among the various rebalancing strategies suggests that the rebalancing strategies based on various reasonable monitoring frequencies (every year or so) and reasonable allocation thresholds (variations of 5% or so) may provide sufficient risk control relative to the target asset allocations for most portfolios with broadly diversified stock and bond holdings.”

So don’t drive yourself around the bend trying to find the ‘best’ rebalancing technique. Experiment with the options to find your own strategy that balances your personal risk tolerance against the administrative effort and potentially the costs of rebalancing.

Take it steady,

The Accumulator

Series NavigationThe simplest way to rebalance your portfolioRebalance with new contributions to save on grief and cost
  1. May or may not be applicable, depending on the trading costs of your chosen funds and strategy. []
  2. May or may not be applicable, depending on the trading costs of your chosen funds and strategy. []

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{ 38 comments… add one }
  • 1 Mark June 22, 2016, 9:14 am

    Hi Accumulator

    Great stuff as usual.

    When rebalancing, if an overpriced asset is sold due to being overweight, is the money from the sale used to purchase more of an underweight one? If not, could it just be added to the pot for the next quarters investment?

    Cheers

  • 2 WestCountryEscapee June 22, 2016, 11:15 am

    I’m interested in the differing rebalancing scenarios, but surely many investors are still building up their portfolios in which case rebalancing by contribution is more appropriate?
    In this way, you add constituents so as to take you back to your original asset allocation (or as near as you can get) each time you pay money into the portfolio.
    Provided the contribution is reasonable there should never be a need for threshold rebalancing, but diminishing contributions and/or market fluctuations may make it possible I suppose.
    The only other thing to worry about is to make sure that the transaction cost is covered by the potential growth in the fund – there’s no point paying £1.50 + stamp duty (the typical charge for a regular investment)for a monthly investment of £75 but better to wait until the cash pool reaches, say, £300 (or set the amount to £300 so that the regular investment fails until the cash is available).

  • 3 Steve June 22, 2016, 1:27 pm

    I too am planning to re-balance through contributions but my gut tells me I should not be doing this too aggressively. Two of my funds have a target allocation of 25% of the total pot. Currently one is at 21% and one at 29% so I intend to increase the monthly contributions to the underweight one and decrease (or pause) contributions to the overweight one. I suspect that if I changed the contribution weights each month that I might end up chasing the loosing funds, which feels like it introduces risk (which re-balancing is meant to mitigate against).

    With Interactive Investor the platform “fee” of £20 a quarter covers the £1.50 cost per fund per month for a simple four-fund portfolio, so I can avoid the complication of grouping contributions.

  • 4 Mathmo June 22, 2016, 1:47 pm

    I rebalance using the Swedroe 5/25. I built a spreadsheet that pulls in live stock info and then highlights in red if an asset moves out of its range and needs rebalancing. (It also highlights when assets are over-concentrated in a single ETF).

    Of course — knowing that one asset is out of whack doesn’t tell you which one to switch it into, but I usually look for the one that’s off in the other direction, and ideally try to move the big allocation (equities / FI / alternatives) towards par.

    Contributions and dividends are all cash and cash has an allocation so eventually that turns red and needs to be “sold” (ie something else bought).

    I also built in the ability to shamelessly and actively tinker (hey — you have to spend the money on something) while still maintaining rebalancing provision. So if I decide that I fancy a flutter on Brexit/Bremain, I can do that while keeping the underlying portfolio in balance. Of course, I’m trying to stop doing this.

  • 5 John B June 22, 2016, 2:09 pm

    Rebalancing a property portfolio is one of the hardest things to do. It first depends on whether on the thorny issue of whether you consider your primary residence as part of your portfolio or a spending reducer because of the forgone rent. BTL properties are hard to liquidate and have big CGT implications, but I suppose you could rebalance by paying off mortagage fragments or remortgaging, but is that something you would do as regularly as share transactions? The BTL fund market is in its infancy, but I suspect if your allocation there fell dramatically, foolish people would bite your hand off if you offered to buy them out, in the same way they’d pile in at the top of the market. Risky business though.

    For investments outside tax-efficient wrappers, once a year consideration for both rebalancing and CGT defusing is sensible. Too often and the tax calculations become onerous.

    I try and take advantage of market swings when rebalancing. I know I shouldn’t try to time the market as a passive investor, but its too tempting.

    I keep a 2 year rolling plan of what I think I’ll be doing, to spread the burden. Oh, and never ask a company to do more than one thing in a single letter!

  • 6 John B June 22, 2016, 2:18 pm

    Oh 2 more points. I’m going to try disabling automatic reinvestment of dividends for a bit as an aid to rebalancing. 3.5% p/a might prove too slow though, and quarterly decisions might be too frequent. We’ll see.

    There is also the issue of rebalancing between SIPP/ISA/other wrappers which is a complicated dance. Do you try to keep your portfolio balanced within them, and so triple the number of allocations, how do you minimise tax, how quickly do you want to deplete a pension to fund an ISA.

  • 7 Patrik June 22, 2016, 2:37 pm

    I find this article somewhat counter intuitive. A passive investor is often best off not logging onto the fund accounts to often as you sometimes iterate over and over again. I agree completely, less insight brings better sleep. But this is more or less what is needed for threshold rebalancing unless you have some magic software on your computer that keeps track of the funds for you (but doesn’t show you!). So far i’ve not found any such software or similar.

    So for passive investors i’d think a calendar based rebalancing scheme would make more sense.

  • 8 dearieme June 22, 2016, 2:56 pm

    “the thorny issue of whether you consider your primary residence as part of your portfolio or a spending reducer because of the forgone rent.” We count it as part of our wealth, on the grounds that it is, but not as part of our rebalanceable portfolio, because we do not yet intend to trade it.

    But someday we may sell off part of the garden, trade down, do equity release, …..
    I mean, have you seen the cost of “care” homes?

  • 9 Planting Acorns June 22, 2016, 8:25 pm

    @Patrik…I’m in agreement. First time I read this article, I thought “that sounds good”, but on more reflection I think a yearly stear back to target would suit me better… here’s to hoping my portfolio becomes big enough for threshold rebalancing to be worth considering ;0)

    On a similar note – I only invest in equities (due to age/ rather pay mortgage than buy bonds/ have past six months my six funds (2* dev world ex UK, FTSE all share, small cap, property, developing world) all seem to be in more or less perfect correlation… I look forward to seeing this quarter’s ” model portfolio” to see how much rebalancing takes place !

  • 10 Sharpespur June 22, 2016, 8:27 pm

    I use monthly contributions (which include dividends received) as a balancing tactic too. At the moment I’m overweight on US and underweight on UK equity. So last month and this month my full contribution has gone into my FTSE All-Share tracker and that will more or less bring me back in line.

    @Steve – I think see you concern about chasing the poor performing fund. I guess you mean you don’t want to be catching a falling knife by moving money into something that’s going to underperform. But to a degree isn’t that exactly what you want to do? I mean, assuming they are not active managed funds, it’s not the ‘fund’ or fund manager itself that you are chasing but rather it’s the sector or asset allocation that you are trying to realign to. In that sense if you have decided that you want a portfolio with 25% UK equity, 50% Global equity and 25% Bonds then what’s changed? You could argue that keeping your money in the asset class that’s done better you are trying to chase winnings which could go just as wrong.

    I’m not recommending trying to time the market, but I sort of see this as a natural way of being a little contrarian (if you get my drift) . Hopefully by doing this I will tend towards getting more units for my money over the long-term too.

    Of course as my pot grows this tactic will lose its effectiveness and then will need to bringing selling into play.

  • 11 Patrik June 22, 2016, 8:59 pm

    I’ve found that the re-balancing doesn’t really make sense at all until you have some specific amount on your account. Where that threshold would be is something that would be very interesting to know.

    I guess it would at least be based on how big monthly contributions you actually make. It would most likely be somewhere about when your monthly contribution doesn’t tip the scale all the other way.

    Even using monthly distributions as a re-balancing method require some special amount on the passive account before it starts making sense it seems.

  • 12 Deano June 22, 2016, 9:50 pm

    I can see the reasoning behind using new funds to rebalance your portfolio. However, isn’t selling the overweight asset (to release the growth is has made) to invest in the underweight asset, the favoured approach here?

  • 13 Mathmo June 22, 2016, 11:07 pm

    Re: catching the falling knife — the joy of threshold rebalancing is that you know even if it’s on its way down that it’s already lost a big chunk of value. Since all the scary bear charts are measured peak to trough, you know that you’re not buying at the peak so it’s not as bad as the headline will read… Also: you’ll have a clear signal as to when to buy. The trick is not to wait for the bottom (you don’t know you are there) but to have a dispassionate indicator of when it’s enough to buy (and when to buy again if it falls further).

    On property, paying off mortgage is not the same as selling some property. The mortgage is leverage across your entire portfolio, the exposure to the property stays the same regardless of debt applied to it. I strip out the investment property from any rebalancing except where I am making specific allocation decisions (buy another? sell one?) and simply consider its net income to be a reduction in FIRE requirement.

  • 14 hariseldon June 22, 2016, 11:55 pm

    Personally not entirely convinced that rebalancing is necessary at all….

    The idea is risk reduction but I consider the risk of equities is reduced by a finite amount of low risk assets, the value of the risky assets is not relevant to the required amount of safe assets.

    The implication of reducing a good performer to top up an underperforming asset is the assumption of reversion to the mean, which may or may not happen, it implies I can decide that something is relatively expensive or cheap. On occasions one might make a judgement on value but only when the deviation from fair value is extreme. Rebalancing could cause one to sell winners to buy losers, who knows ? It requires judgment of timing and/or value that a wise passive investor is reluctant to make.

    The concept of a fixed proportion of low risk , low return assets seems inherently unsound to me. If I need a fallback position in retirement of capital to provide 5 years ” income” then the size of the risky asset base is not relevant.

  • 15 magneto June 23, 2016, 12:18 pm

    Another impressive article. We are fortunate for the quality of the writing and the careful research and thought displayed here by TA, and also by TI in parallel articles.
    Long may Monevator thrive!

    The importance and implications of this rebalancing thing are not always taken on board fully by investors.
    Done well by adding low and reducing high, a portfolio position can over the years gently grow, while the ‘book cost’ reduces, the latter sometimes to less than zero.
    That capital gain Buzz Lightyear? might say is “beyond infinity”.
    Those gains should by far outweigh any concerns about frequency/costs of rebalancing.

    The controlling risk thing is a valid motive, but for some does raise the question whether a 60/40 allocation is equally risky with Stocks at a PE of 8 or 30? So a bit agnostic on that one.

    Then there is this “catching a falling knife” thing.
    What we are looking at here is Momentum versus Reversion to Mean, operating in opposition.
    An investor can either :-
    a) Look at the imbalances present today and correct today assuming RTM.
    b) Anticipate the price movements of tomorrow and delay action (assuming Momentum).

    Whatever we do, it is without knowledge in advance of the most successful route.
    The rebalancing towards a range mentioned in the article, is a sensible compromise, which some have taken further by moving only a proportion of assets at a time (e.g. 10% of deviation per month).

    For those in accumulation, esp early stages, as quite rightly pointed out this is all a bit academic.
    New contributions should do all the heavy lifting.
    But one day as Assets grow, rebalancing will have to be on the menu.

  • 16 Nicholas Stone June 25, 2016, 3:37 pm

    I rebalance every month. I have 10 ETFs and I just buy the 4 which have lagged the most. I have a spreadsheet that calculates exactly how many shares I need to buy of each, according to how much money I’m putting in, in order to get as close as possible to my target allocations. I can also choose the number of ETFs I want to buy. I chose 4 because that is the number that will generate the minimum commission I need to pay each month ($10 at Interactive Brokers).

    If anyone is interested in seeing the spreadsheet, you’re welcome to view it here (view only, no editing!) I welcome feedback.

    https://docs.google.com/spreadsheets/d/1TBjWq9UC0iBWe4S2u0kuLSQITVrxt4rn7EYlIX9JIoU/edit?usp=drive_web

    (Apologies in advance if linking isn’t permitted! Please edit the post as necessary).

  • 17 The Accumulator June 26, 2016, 2:27 pm

    Hi all, sorry it’s taken me so long to respond. Heavy week at work.

    @ Mark – yes, precisely, you’d use the money realised from selling off overweight asset(s) to rebalance the underweight asset(s). They should even out.

    @ West Country – yes, rebalancing with new contributions will save you time and cost with a small portfolio:
    http://monevator.com/rebalance-with-new-contributions-to-save-on-grief-and-cost/

    As your portfolio grows, you’ll find it increasingly difficult to rebalance with new money as its fluctuations dwarves new contributions.

    There’s a strong argument for sticking to annual rebalancing with a small portfolio.

    @ John B – haha. You’re inability to resist temptation made me smile. Like market-timing is a delicious slice of cake.

    @ Patrik – That’s a fair point. Personally I combine the two. I don’t check in daily to see if I need to perform a threshold balance but you could decide to check in six-monthly or quarterly. Morningstar’s portfolio tracker is a simple (and free!) way to track your portfolio. If there’s a large shift in the market then threshold rebalancing is a good way to potentially grab an asset on the cheap. Of course, you have to draw the line somewhere, we’re not talking about active investing here.

    @ Deano – by spending new money on the underweight fund rather than the overweight one, you’re effectively achieving the same thing.

    @ Hariseldon – You’re right that reversion to the mean is not guaranteed to happen but then neither are equities guaranteed to outperform bonds. As a risk management tool, the relative size of an asset allocation is relevant to most people i.e. if I don’t wish to see my portfolio drop by more than 20% then I better make sure I’m not more than 40% in equities.

    Passive investing does not imply doing nothing or not making judgements. It does mean working within a rules based framework based on evidence. Evidence suggests that there’s no inherent advantage between rebalancing monthly versus annually or even bi-annually. Threshold rebalancing enables you to take a firmer grip on risk management and potentially bag a rebalancing bonus but, as you say, no guarantees.

    Re: momentum versus reversion to the mean. William Bernstein did some work on this. His conclusions were far from, um, conclusive, but best advice was yearly to two-yearly rebalances. Layer threshold rebalancing on top of that and you may even rebalance less often.

  • 18 The Accumulator June 26, 2016, 2:32 pm

    Lovely spreadsheet, Nicholas. I take it you pull in live data? Is there a good tutorial somewhere that explains how to do that?

  • 19 Mathmo June 26, 2016, 10:07 pm

    In google sheets you just use the function — for example
    ‘=googlefinance (“lon:vgov”)’ and you’ve got the price. Other stuff is available through that feed. super useful. mostly works. watch for £ vs p.

  • 20 The Investor June 26, 2016, 10:34 pm

    @TA — Hah! 🙂 I can show you how to do that sometime, my monster live active spreadsheet does the same thing, albeit with several dozen more live positions at any time, multiple sub-sheets, and far less prettiness than Nicholas’ elegant effort. 🙂

    As @mathmo says it can be a bit finickity, but generally good.

    The Motley Fool did some articles years ago, that I leaned on when I created my spreadsheet. Not sure if they’re still up-to-date:

    http://news.fool.co.uk/news/investing/2011/03/09/working-with-web-data.aspx

    http://news.fool.co.uk/news/investing/2012/05/09/creating-a-stock-data-dashboard-spreadsheet.aspx

    http://news.fool.co.uk/news/investing/2011/08/17/working-with-web-data-revisited.aspx

  • 21 The Accumulator June 28, 2016, 6:30 pm

    Thanks, Mathmo and TI. Have you ever got it to work with funds as opposed to stocks / ETFs?

  • 22 Nicholas Stone June 29, 2016, 2:47 pm

    Um, yes, the quotes are all live, from Google. Can’t remember but I think there’s a built in back up from Yahoo as well.

    Most of the spreadsheet is my own work. The foundations I got from Investormoat’s spreadsheet which he says its OK to modify and add to.

    There are instructions on how to use it but it’s a little tricky to set up because the calculations required for the returns data use the today() function and they slow the whole thing down to a crawl. So what I did was set up a second spreadsheet which does all the legwork. But you have to link it to the first one which wouldn’t be fun for novices.

    I’m happy to share the thing with anyone who’s interested. It’s the only way I can give back to the community 🙂 Maybe I can set up a new copy which people can fiddle around with so they can see how cool the rebalancing function is.

  • 23 Nicholas Stone June 29, 2016, 2:47 pm

    *Investmentmoat, sorry. He’s a Singaporean (I think).

  • 24 Lord June 29, 2016, 9:24 pm

    One approach that intrigues me would be leaning into the wind. Accept an allocation range and move towards a riskier allocation in down markets and less risky allocation in up markets but limiting the size of shift as long as within range. During accumulation you probably just want to max out what you are comfortable with, but during decumulation this would lower risk.

  • 25 Caino July 3, 2016, 12:05 pm

    @ TA

    I’ve also been playing around the live feed from google finance in googlesheets. As far as I can see, it works well for ETFs/stocks but seems that not all the UK funds are supported – for example was stuggling to get blackrock prices to work, and they also return a blank in googlefinance.

    If you type this into google sheets.

    =googlefinance(“MUTF_GB:ABER_EMER_MARK_1T6ICGK”,”price”)
    For Aberdeen Emerging Markets Equity Fund A Acc – you’ll see it works fine.

    However

    =googlefinance(“MUTF_GB:BLAC_EMER_MARK_6LA0I2″,”price”)
    For BlackRock Emerging Markets Equity Tracker Fund D Accumulating only ever returns zero. It seems that most US funds work, but not yet all the UK ones.

    To get a uk fund in googlesheets you need to use MUTF_GB:'(then type fund code from googlefinance afterwards)’

    As Nicholas said you can also feed it through Yahoo into google sheets, but I have left that test for a rainy day, and starts to rather veer off topic.

    Below is a test sheet with some google tickers working.

    https://docs.google.com/spreadsheets/d/1d9OfuokzhCvU69JmswXY2g8HdcJ9eOo8OxM2vAVPpKY/edit?usp=sharing

  • 26 The Accumulator July 3, 2016, 1:22 pm

    Thanks for sharing Caino. That’s fantastic. Will have a play with that some time the sun isn’t shining.

  • 27 The Investor July 3, 2016, 4:23 pm

    @Caino — Just a quick note… when you say “but not yet”, I’ve seen no improvements to Google Finance over the years, and read various articles suggesting Google should just kill it off. I like it, perhaps for reasons of habit, but if you can work up the Yahoo solution (and post it here! 🙂 ) it might be for the best. 🙂

  • 28 Caino July 3, 2016, 7:53 pm

    @TI – True, was forgetting I’d also read the comments that Google Finance might be cancelled.

    So, a Yahoo Finance / Google Sheets hack for you.. it involves importing their url & api direct into Google Sheets. Thanks to these guys at Market Index for the info, it’s worth reading the page.

    http://www.marketindex.com.au/yahoo-finance-api

    If you’ve basic experience at html, excel forumlas or just happy to play then the instructions are quite straight forward.

    Here it is dropped into the previous google sheets for all to have a look.

    https://docs.google.com/spreadsheets/d/1d9OfuokzhCvU69JmswXY2g8HdcJ9eOo8OxM2vAVPpKY/edit?usp=sharing

    Interestingly it seems both those UK funds Blackrock and I&G, appear blank in Yahoo Finance. Strange. If anyone can shead any light on that would be interested.

    Watch out for pounds/pence in the price, and date formatting.

    Afraid I’m hitting my technical limits now, and I can’t guarantee how stable this method is, and I’ll probably be at loss to help if it stops working.

    On how to solve those UK funds – the next option could be to take the UK fund info from the ‘fund.ft.com api’. Which I can’t find anywhere, if anyone knows that then I’m sure we would work out the UK funds from the ft site.

    For another day…

  • 29 The Investor July 3, 2016, 8:27 pm

    @Caino — Useful, thanks! One for that rainy day of TA’s, will report back if/when I get the chance to play.

  • 30 VerySlowHand August 30, 2016, 8:34 am

    These strategies are missing something: do you need to re-balance in advance of a major change in the country’s situation?

    In June 2016, according to various polls, there was at least a 45% chance that voters would choose Brexit. That means there was at least a 45% chance that the pound would dive against the dollar after 23rd June.

    Therefore, a portfolio with large amounts of bonds of short-term-maturation gilts was far from a “minimum risk asset” in June 2016.

  • 31 The Accumulator August 30, 2016, 9:49 am

    No, rebalancing is a strategy that seeks to keep your portfolio on course *after* major market moves. Trying to predict the unpredictable is a mug’s game – and Brexit was just another example.

    Not sure what you mean by your bonds comment. Passive investing is about taking advantage of the long term properties of asset classes – not guessing what they may do on any one day or month.

    Short-term gilts still low risk now and then for UK investors, if by low risk you mean likely to exhibit low volatility over time in comparison to other assets bar cash.

  • 32 VerySlowHand August 30, 2016, 10:58 am

    Dear Accumulator,
    The Brexit vote was NOT some kind of “black swan event”, it was NOT unpredictable. As I said, there was at least a 45% chance that the population would vote for Brexit and the value of the pound would drop like a stone against the dollar *

    My main point about the short-term gilts was that it would have been a win-win situation to sell your short-term gilts and buy dollars prior to 23rd June. Then, after 23rd June, in the event of Brexit, sell the dollars at a handsome profit, in the event of Remain, you’ve lost nothing. Win-win.

    I don’t understand your point about “passive investing being about taking advantage of the long-term properties of asset classes”. I thought passive investing was mainly about the avoidance of paying massive fees to “active” fund managers?

    My other point about the short-term gilts was that if their value can drop by 15% against the dollar as the result of a fairly predictable event, how can they be described as a “minimum risk asset”?

    * Note: I am not trying to make ANY type of “political statement” here or in my earlier comment. I still have no idea whether “Remain” or “Exit” was the correct vote. I have no political axe to grind, my sole focus in these comments is on investments, risk and probability.

  • 33 The Accumulator August 30, 2016, 11:29 am

    The Brexit vote itself was only ever going to have two outcomes but which way the country was actually going to vote – a coin toss. A loaded coin toss given most forecasts were for remain.

    If you’d bought your dollars and the pound then appreciated on a Remain vote then you’d be buying back less gilts than you started with. It’s just the other side of a trade which is only certain in retrospect.

    But that’s all a sideshow. The point of owning gilts if you’re a UK investor is that they’re unaffected by the volatility of currency fluctuation. The pound rising or falling against the dollar doesn’t affect the pound value of my gilt assets – hence they provide more stability than holding bonds in, say, dollars and watching them depreciate if the pound rises.

  • 34 VerySlowHand August 30, 2016, 11:50 am

    “If you’d bought your dollars and the pound then appreciated on a Remain vote then you’d be buying back less gilts than you started with. It’s just the other side of a trade which is only certain in retrospect”, you wrote.

    I disagree. A Remain vote, by definition, would have been a vote for the status quo. How could the status quo cause a 15% rise in the pound against the dollar?

    “The point of owning gilts if you’re a UK investor is that they’re unaffected by the volatility of currency fluctuation”, you continue.

    Again, I disagree. The point of owning gilts as a UK investor is that the are, IN THEORY, not subject to the same volatility as stocks, shares and corporate bonds and that you always “get your money back”. Note the “in theory”. My contention all along is that the advantages are in theory only. In practice, due to volatility in interest rates and inflation they can be just as volatile as shares, and you may not always “get your money back” in real terms, ESPECIALLY if the GBP drops substantially against the USD.

  • 35 The Accumulator August 30, 2016, 12:08 pm

    Historically gilts have been less volatile than the other assets you mention. It’s not theoretical but it’s not guaranteed that the future will look like the past either. It’s just the best guide we’ve got – that and the structural reasons why high grade gov bonds are generally less volatile than equities.

    No serious commentator would ever claim you always get your money back with bonds in real-terms. They can and have been subject to multi-decade real term losses.

    “A Remain vote, by definition, would have been a vote for the status quo. How could the status quo cause a 15% rise in the pound against the dollar?”

    The £ had already been appreciating in the run up to the vote in anticipation of a win for remain. I didn’t say a remain vote would cause a 15% rise. Only that it’s not inconceivable the £ would have risen further and trying to play the currency markets on that occasion may well have been a losing bet. Only in retrospect is your trade certain. You seem to be implying you can predict the currency markets. If so, good luck to you. You will be a very rich man.

  • 36 VerySlowHand August 30, 2016, 1:59 pm

    “You seem to be implying you can predict the currency markets. If so, good luck to you. You will be a very rich man”.

    I am absolutely NOT implying that at all. From the beginning, all I have been talking about is the relative probabilities of certain events. Not certainties, not guesses, nothing about things that are totally unpredictable, not black swans. Simply about relative probabilities. And the advisabality (or otherwise) of trying to hedge against events with the most negative outcome. You imply that that’s a preposterous attitude, pure guesswork, but many big companies do it all the time. It’s called hedging. For example, companies which use a lot of oil hedge against the possibility of major price fluctuations.

    I know very well that I am being iconoclastic in some of the other things I’ve said, especially about the presence of gilts in the portfolio. The “60/40 recommendation” goes at least as far back as Ben Graham. Buffett was a disciple of Ben’s, yet Buffett has said, “Boy, if I had listened only to Ben, would I ever be a lot poorer”.

  • 37 MarkB April 5, 2017, 12:02 pm

    When rebalancing, is there a case of considering income for your holdings rather than just market value?

    E.g. if an equity fund has paid a dividend of 20% in a year, should we take this in to account and decrease our holding accordingly?

    Sorry if this is a dumb question!

  • 38 The Accumulator April 9, 2017, 7:40 pm

    Hi MarkB, if you take that income and spend it then you wouldn’t account for it. It’s not part of your asset allocation. It’s gone on food or fast cars or whatever.
    If you reinvest it then it’s now part of your asset allocation and will be automatically accounted for when you make any adjustments.
    Wish I had an equity fund that paid out 20% 😉

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