"volatility harvesting".
Originally posted by kidmugsy

I have found over the years that whenever there is a financial advantage to be gained in some way it almost always comes with the (basic) need for volatility. Volatility in numbers is something that confuses the human brain very easily and if you can see through that and use it to your advantage you will do yourself proud. There seems to be almost always an extra edge gained for increasing the volatility as well.

So when do you rebalance? Is it an autonomic annual/6 monthly/more frequent event? I read the OP as a 'this is how well you could do in the market if you timed the market', which is obvious, if impossible.

Without in any way diminishing the value of a superb post, this stuff is obvious once one has "got it".

It is well worth posting, because few people will get it intuitively and most of us need reminding when we are staring at "losses".

If all our holdings moved up and down together, we wouldn't be diversified.

Thanks Bowlhead.

Due to being a new user here I can post links so cannot help with the post of the month, despite this being a great example. One similar suggestion for long term visibility might be a link in the sticky on this board?

On a more on topic note, I reread the motivator section linked to above. Combined with the thoughts here and, well let's say that I'm glad there is a bank holiday coming up to let me refine some of my thinking about my investments!

Thanks for the post bowlhead99

I already knew that rebalancing was important but seeing the side by side examples of TEM, USA, and UK being rebalanced vs left alone, helped to reinforce it. Was educational to see the 5 year and 10 year returns from TEM tell completely different stories about EM.

It's given me food for thought regarding my own investments. May I ask that you provide a short teaser for your possible upcoming thread that active EM is better than passive? I'm currently in passive, mainly due to my lack of research of funds in that sector. The most compelling argument I've heard for active is that EM can be rife with dodgy accounting and the like, which a human fund manager can get an inkling for but a tracker cannot. How much do you think is acceptable to pay for a good EM fund? Would you use a mixture of active and passive to reduce overall cost?


I read the OP as a 'this is how well you could do in the market if you timed the market', which is obvious, if impossible.
Originally posted by KrytenIceCubeHead

You're right, timing the market is a nice thing to do from a returns perspective but you are not supposed to get it perfectly right, because that's impossible without hindsight.

The worked example was really just to show that making an effort to keep your portfolio at its target allocations would likely serve you better from a performance perspective - rather than just the obvious risk perspective - than letting them do their own thing. And that the 'cost' of using uncorrelated assets together, rebalanced periodically, rather than just buying assets you think will have the very highest returns, is not as high as might have been thought by a newbie.

As another poster mentions it is not rocket science and some people will think, yeah this is obvious, so what. But for investors who are newer at the game and have heard about daytrading where you shun certain assets to pile into the rising 'trend' assets, it might be a revelation of sorts.

When you have a target allocation and aim to stick to it, the very last thing you should do is say, "hmm, Fund A seems to have doubled in size and is now half my portfolio while it was only a third when I started. Things going up is good. I should probably buy more of this and less of those other funds.". But there are people who do exactly that, because they never really try to step back and see the big picture of how the funds allocations look at a moment in time and consider how others are approaching the situation more rationally.

So when do you rebalance? Is it an autonomic annual/6 monthly/more frequent event?

If you said you would rebalance semiannually rather than monthly or quarterly or annually or biannually, there would be some periods when one of the other 4 choices would have worked better with the benefit of hindsight. You'll never get it bang on.

But just the actions of 'bringing them back on track' is inherently going to give some of the benefits of 'market timing' because it is an enforced 'sell high buy low' (or if you are making ongoing contributions from salary or dividend income, a buy low) to get you back towards the long term target asset split.

The prices will be what they will be and you can't control them or know them in advance, so my example was not that you should try to specifically sell Fund A on 1 Jan 2000 because it's looking high; the example is saying that you should aim to rebalance at set points in the calendar and then if Fund A is very high you will be selling a lot of it and if Fund A is very low you will be buying a lot of it and if it is middling you might not touch it at all. The result is that your portfolio stays on track from a 'making sure I'm not overexposed to anything' perspective and the actions of doing this will generally not be harming your performance returns, more often the opposite.

If you're not adding new money very often giving you an easy chance to check up on your portfolio, then reviewing once a year is probably fine. If a fund was 10% of your portfolio and it adds 30% in a year while the overall portfolio doesn't change because other things are shrinking, then the fund has only moved up to 13% of your portfolio which is probably not a grave concern. Some wildly volatile component at 1% might be fine if it grew to 2% in a year. There is no real need to look at it every week. If you cut something off too soon and try to take profits daily you are making more work for yourself and never really getting the full effects of a market upswing which, over time, we all need.

I agree with Masonic's approach of having perhaps a couple of rules of thumb - review at a fixed interval but also if something's weight has drifted by some trigger percentage earlier (e.g. a 30% holding becomes a 50% holding or a 3% holding becomes a 5% holding) then it may be worth stepping in at that earlier point - taking profits or topping up decent holdings that have had a short-term hard time, is never a bad thing. For the 'winners' you don't need to sell out, you just need to reduce back to your desired percentage (which is unlikely to be 0% if it was something that was in your portfolio for a decent long-term reason).

but it does make me wonder whether these multi-asset funds that rebalance quarterly (or even more frequently) are missing a trick.
Originally posted by masonic

That's a function of marketing as much as anything. If you are running a vanguard 60% equities fund that people can subscribe into every day, you don't want to say that today it's actually 78.4% equities but you'll be dumping lots of the equities on Tuesday.

Other funds are quite happy to be 40-70% equities depending on their prevailing views on the market and review strategically from time to time. Some more 'consensus' driven funds seek to emulate what other market participants use as their proportions, subject to a specific hard cap. It depends what they agree with their investors by the prospectus but there are various ways to skin a cat.

Nice post, I was just wondering about the results of such a spreadsheet.

One point - I would have used HSBC American Index Acc instead of the AXA fund. The HSBC fund tracks the S&P500 and has the required timescale.


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