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  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?
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 , 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 , 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!
The 22 maxims of Sir John Templeton – Monevator 
Bond credit risk valuation rule-of-thumb – Monevator 
From the archive-ator: How gold is taxed – Monevator 
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 
Pandemic fuels broadest global house price boom in two decades [Search result] – FT 
…but UK housing boom cools as stamp duty holiday winds down – Guardian 
HMRC closes unit set up to investigate family investment companies [Search result] – FT 
…but half a million UK partners and sole traders face bigger tax bills in 2022 [Search result] – FT 
Indexing has saved US investors £357 billion since 1996 – T.E.B.I. 
Products and services
Five-year mortgage rates drop below 1%. Time to fix? – Which 
Hostages of sky-high service charges – ThisIsMoney 
FSCS to review its website after savers’ complaints [Search result] – FT 
China’s heavy hand in emerging market ETFs – ETF.com 
Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade 
A look under the hood of Vanguard’s world tracker funds – The Escape Artist 
Homes for sale with summer houses, in pictures – Guardian 
Comment and opinion
Salaried – Indeedably 
Get off my lawn! – Slightly Early Retirement 
The cost of friendship – Incognito Money Scribe 
Playing with FIRE: The millennial movement to quit work [Video] – BBC 
Nobody wants money – Breaking the Market 
Sleeping on expensive financial pillows – Investing Caffeine 
A life of meaning, without buying – Zen Habits 
My investing nightmare – Of Dollars and Data 
An interview with Carl Richards, aka ‘Sketch Guy’ [Podcast] – Morningstar 
Naughty corner: Active antics
Howard Marks goes all macro… [PDF newsletter] – Oaktree Capital 
Interesting stuff they don’t teach financial advisors in books – Josh Brown 
The benefits of sin stocks – Alpha Architect 
How the crypto market really works [Podcast] – OddLots via Stitcher 
Do institutions or individuals win in the battle for alpha? – Larry Swedroe 
What’s the point of hedge funds? – Verdad 
Covid infection level in England falls to one in 75 people – Guardian 
The surprise dip in Covid cases in UK baffles researchers – Nature 
Fifth of patients in hospital with Covid are young adults – BBC 
An ICU doctor despairs of those who avoid vaccination – HuffPost 
Kindle book bargains
The Moneyless Man: A Year of Freeconomic Living by Mark Boyle – £0.99 on Kindle 
Hired: Six Months in Low-Wage Britain by James Bloodworth – £0.99 on Kindle 
Happy Money by Ken Honda – £0.99 on Kindle 
You Are a Badass at Making Money by Jen Sincero – £0.99 on Kindle 
(Don’t have a Kindle? Buy one  and join the cheap book club.)
The six countries likeliest to survive societal collapse from climate change – Mic 
Would you eat sushi made from tomatoes? [Video] – BusinessWeek via Twitter 
Wildfires rage in the Med as climate change reaches Europe – via Twitter 
Then the birds began to die – The Atlantic 
Off our beat
The strange 19th-Century sport that was cooler than football – BBC 
Blame the Bobos – The Atlantic 
Other people’s mistakes – Morgan Housel 
Putting in the reps – Banker on Fire 
The truth about the quietest town in America – Wired 
Fake political and vaccine news makes bad actors millions – Forbes 
Apple is now an anti-fragile company – TidBits 
Sell everything [Funny] – Litquidity via Twitter 
“The average investor is terrible at investing.”
– Tim Hale, Smarter Investing 
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