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Weekend reading: Rebalancing portfolios in the real world

What caught my eye this week.

Two diligent bloggers took a run at the subject of rebalancing portfolios this week.

First up – in a tour de force that could give our own @TA a run for his carefully husbanded money – Occam Investing [1] dove deep into the fabled ‘rebalancing bonus’, where investors see extra returns from regularly rejigging their asset allocation.

The post concludes that while such a rebalancing windfall is obviously welcome, the bonus cannot be banked on in the real-world:

Am I personally likely to benefit from the rebalancing bonus over the long term?

Probably not.

I’m not confident it’s possible to forecast anything with a great level of accuracy in markets, let alone being able to predict correlations, returns, and volatility. I’m certainly not confident enough to start making my portfolio more complicated by splitting it up, and therefore increasing trading costs, time required for monitoring, and risk of tinkering.

I may be sacrificing a potential rebalancing bonus by investing in a global tracker because I can’t rebalance its constituent parts.

But in my view, the benefits of a global tracker are worth it.

Not so well endowed

Funnily enough, this very same week on a A Wealth of Common Sense [2], Ben Carlson spotted the rebalancing bonus roaming in the wild.

After showing how a simple portfolio of index-tracking ETFs would have beaten the returns of a bunch of sophisticated endowment funds over the past decade, Ben noticed that an investor with an 80/20 stock/bond split across three particular Vanguard tracker funds could have conjured up even higher returns by annually rebalancing:

If you were to simply multiply the weights for the 80/20 portfolio (48% U.S. stocks, 32% int’l stocks, 20% bonds) by [their] returns you would get an overall annual return of 8.9%.

But the actual 10 year annual return for the 80/20 portfolio shows 9.1%.

How could this be?

The difference here is the rebalancing bonus.

Both authors show their workings, and both are well worth a read.

Everything in moderation

While any investor would take bonus returns where they can get them, rebalancing is best thought of as a risk management tool rather than a source of alpha.

You may or may not see a rebalancing bonus in your years as an investor. That’s down to the luck of the historical draw.

But you might well expect to have a lower-risk portfolio if you keep your allocations broadly in-line with where you’ve determined they should be.

As a naughty active investor [3], my portfolio is to a passive 60/40 set-up what quantum mechanics is to Newtonian physics. Investments pop in and out of existence in my portfolio all the time. Any one of them could affect my returns (for good or ill) much more than the modest impact of annually rebalancing between asset classes.

Nevertheless, these days I too try to ensure nothing grows too far out of whack. This can mean trimming winning positions, which I do knowing full well this can be a behavioural bias and mathematical blunder that curbs long-term returns.

So why do it?

Because you never really see a catastrophic blow-up in investing that doesn’t involve over-exposure to a share, sector, geography, or asset class.

Stay vaguely diversified and the worst you will likely do is relatively poorly.

Of course we all hope to do better than that! But avoiding disaster is the number one rule.

As Warren Buffett’s sidekick Charlie Munger says: “All I want to know is where I’m going to die, so I’ll never go there.”

Amen to that!

From Monevator

The 22 maxims of Sir John Templeton – Monevator [4]

Bond credit risk valuation rule-of-thumb – Monevator [5]

From the archive-ator: How gold is taxed – Monevator [6]


Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1 [7]

Pandemic fuels broadest global house price boom in two decades [Search result]FT [8]

…but UK housing boom cools as stamp duty holiday winds down – Guardian [9]

HMRC closes unit set up to investigate family investment companies [Search result]FT [10]

…but half a million UK partners and sole traders face bigger tax bills in 2022 [Search result]FT [11]


Indexing has saved US investors £357 billion since 1996 – T.E.B.I. [13]

Products and services

Five-year mortgage rates drop below 1%. Time to fix? – Which [14]

Hostages of sky-high service charges – ThisIsMoney [15]

FSCS to review its website after savers’ complaints [Search result]FT [16]

China’s heavy hand in emerging market ETFs – ETF.com [17]

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade [18]

A look under the hood of Vanguard’s world tracker funds – The Escape Artist [19]

Homes for sale with summer houses, in pictures – Guardian [20]

Comment and opinion

Salaried – Indeedably [21]

Get off my lawn! – Slightly Early Retirement [22]

The cost of friendship – Incognito Money Scribe [23]

Playing with FIRE: The millennial movement to quit work [Video]BBC [24]

Nobody wants money – Breaking the Market [25]

Sleeping on expensive financial pillows – Investing Caffeine [26]

A life of meaning, without buying – Zen Habits [27]

My investing nightmare – Of Dollars and Data [28]

An interview with Carl Richards, aka ‘Sketch Guy’ [Podcast]Morningstar [29]

Naughty corner: Active antics

Howard Marks goes all macro… [PDF newsletter]Oaktree Capital [30]

Interesting stuff they don’t teach financial advisors in books – Josh Brown [31]

The benefits of sin stocks – Alpha Architect [32]

How the crypto market really works [Podcast] – OddLots via Stitcher [33]

Do institutions or individuals win in the battle for alpha? – Larry Swedroe [34]

Just like people [35], companies need cash to best survive black swan events – Klement on Investing [36]

What’s the point of hedge funds? – Verdad [37]

Covid corner

Covid infection level in England falls to one in 75 people – Guardian [38]

The surprise dip in Covid cases in UK baffles researchers – Nature [39]

Fifth of patients in hospital with Covid are young adults – BBC [40]

An ICU doctor despairs of those who avoid vaccination – HuffPost [41]

Kindle book bargains

The Moneyless Man: A Year of Freeconomic Living by Mark Boyle – £0.99 on Kindle [42]

Hired: Six Months in Low-Wage Britain by James Bloodworth – £0.99 on Kindle [43]

Happy Money by Ken Honda – £0.99 on Kindle [44]

You Are a Badass at Making Money by Jen Sincero – £0.99 on Kindle [45]

(Don’t have a Kindle? Buy one [46] and join the cheap book club.)

Environmental factors

The six countries likeliest to survive societal collapse from climate change – Mic [47]

Would you eat sushi made from tomatoes? [Video] – BusinessWeek via Twitter [48]

Wildfires rage in the Med as climate change reaches Europe – via Twitter [49]

Then the birds began to die – The Atlantic [50]

Off our beat

The strange 19th-Century sport that was cooler than football – BBC [51]

Blame the Bobos – The Atlantic [52]

Other people’s mistakes – Morgan Housel [53]

Putting in the reps – Banker on Fire [54]

The truth about the quietest town in America – Wired [55]

Fake political and vaccine news makes bad actors millions – Forbes [56]

Apple is now an anti-fragile company – TidBits [57]

Sell everything [Funny] – Litquidity via Twitter [58]

And finally…

“The average investor is terrible at investing.”
– Tim Hale, Smarter Investing [59]

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [ [65]]