DG,

"That said, the purpose of an AA is to have a portfolio that meets your personal RISK requirements. As long as it does that, you do not need to rebalance. IF you find over time it has 'drifted' (some people use 'bands), then you rebalance to put it 'right', OR if your risk tolerance changes, you should rebalance."

If I had some bacon, I could have bacon and eggs for breakfast, if I had some eggs!

First, you assume that the stock/bond allocation you have chosen matches your risk requirements.  What do you mean?  That is, how do you define risk, and how do you determine what your 'personal risk requirements' are?

Consider that portfolio volatility isn't the only measure of risk, although it is the one upon which EMH/MPT and traditional withdrawal strategys have been based.

Consider also that, once you are withdrawing from your portfolio, portfolio and income survivability, and real, versus nominal, withdrawal amounts become much greater risk factors, compared to the value of a portfolio.

The 'fraud' concerns what people in the business describe as churning!

Thanks for interesting article. I am curious to know how DCA plays into these portfolio theories? I have played with spreadsheets to look at few years returns of SPY/ QQQQ/ AGG/ etc under DCA assumption. All the XIRR returns are pretty low, making me think why to take extra risk in different asset classes while you are accumulation phase?

 Is there any academic study done to compare DCA to buy & hold portfolios?

 Sam

 JWR:

"Avoid Rebalancing

Rebalancing works, in theory, if all investments have equal expected returns. Rebalancing fails, if fact, because inferior investments drag down overall returns.Rebalancing still works, in theory, because it controls the risk to reward ratio. If fails, in fact, because it is possible to measure relative risk. Adjusting allocations according to valuations does far better than any fixed allocation."

JWR and Bogle are looking at rebalancing from two different perspectives.I think a lot of Bogle's reasonings come from his realization that most of us don't know what we're doing and so should set a reasonable course and stick with it without meddling about in it.JWR is seeing the problem in an entirely different light,giving reaons why it could technically fail.Both of them are right to the audience they are aiming their comments to.-wes 

ElLobo:

If I had some bacon, I could have bacon and eggs for breakfast, if I had some eggs!

he he he he --- Mmmmm.... bacon!!!!

First, you assume that the stock/bond allocation you have chosen matches your risk requirements.  What do you mean?  That is, how do you define risk, and how do you determine what your 'personal risk requirements' are?

I would love to have this discussion. However, I think it is interesting that there are three or four threads here right now maligning Bogle, telling bogleheads to get off of M*, etc.

I tihnk it is time to decide: Do we talk? Or do we square off like the Jets and the Sharks and have at it with knives? Or do we retire to neutral mutually self-reinforcing corners and tell our chosen cliques how great we are?

 I can tell you, I love to debate and to talk and to share, but I'll be DAMNED if I will insert myself where I am not wanted. So, we will have that dialog another time. Maybe.

 Consider that portfolio volatility isn't the only measure of risk, although it is the one upon which EMH/MPT and traditional withdrawal strategys have been based.

 SD is important for the nerves. Short term SD is *not* however, what I primarily think of when I consider risk, personally. Again, to be continued.

 Consider also that, once you are withdrawing from your portfolio, portfolio and income survivability, and real, versus nominal, withdrawal amounts become much greater risk factors, compared to the value of a portfolio.

 I agree.

 The 'fraud' concerns what people in the business describe as churning!

What? So you are saying this is JWR's way of denouncing excessive trading & fees? If so, why does he not just SAY THAT? Certainly 'fraud' is a huge container, and one that, IMHO does not fit very well with that, but I do appreciate you trying to bail him out/explain the inscrutable.

"I would love to have this discussion. However, I think it is interesting that there are three or four threads here right now maligning Bogle, telling bogleheads to get off of M*, etc.

I tihnk it is time to decide: Do we talk? Or do we square off like the Jets and the Sharks and have at it with knives? Or do we retire to neutral mutually self-reinforcing corners and tell our chosen cliques how great we are?"

I don't see any such threads here.  Can you name them?

 DG said,

"B) That said, the purpose of an AA is to have a portfolio that meets your personal RISK requirements."

The problem with this statement is that perceived "personal RISK requirements" vary from day to day.  Face it, if you are an investor that needs to sell a portion of their portfolio each year for income, and you see 300 point declines in the DOW, your gut instinct is to "re-balance" out of stocks.  BTW, if you read many M* forums, that is exactly what I see some investors doing.  IMO, re-balancing promotes buying high, selling low, during declining markets.

Just as Bogle dislikes ETFs because he believes they tend to promote "excessive trading", I suspect he is not enthusiastic about re-balancing for exactly the same reason; "re-balancing" may promote excessive trading.

Theoretically, re-balancing should add to stocks during market declines.  However, psychologically that is counter-intuitive and as I said, my observation is that re-balancing is used by some investors as an excuse to move away from stocks, at precisely the wrong times. 

BTW, Dividend Investors have unique advantages during market declines over investors who depend mainly on capital gains for income.  First, there is no necessity to sell stocks each year for income and this insulates Dividend Investors somewhat from price anxiety.  Secondly, and more to the point, as dividend paying stocks decline in price, their yield increases, which makes them even more attractive to own and add to a portfolio. 

Anticipating a comment, yes, it is possible for a stock to cut it's dividend.  However, the time honored principle of diversification of assets mitigates this problem even better for dividend investing than it does for price appreciation investing.  Dividend cuts are relatively rare, price declines are common.

Regards,
Russ

bilperk:

"I would love to have this discussion. However, I think it is interesting that there are three or four threads here right now maligning Bogle, telling bogleheads to get off of M*, etc.

I tihnk it is time to decide: Do we talk? Or do we square off like the Jets and the Sharks and have at it with knives? Or do we retire to neutral mutually self-reinforcing corners and tell our chosen cliques how great we are?"

I don't see any such threads here.  Can you name them?

 Here's one:

Re: A Serious Intellectual Challenge for Bogleheads twinlabs 3 hours, 18 minutes ago | Post #2533506

 http://socialize.morningstar.com/NewSocialize/forums/thread/2533171.aspx

Now, I like Taylor, and respect him, but I will also be the first to admit in this one instance he was a little quick to the draw (kind of like lili was with me!) in assuming someone was being trolled, not that a legit question was in play. And he was promptly corrected! And thenm, though,  we get the 'piling on' and painting everyone with a broad brush. (sigh)

 Frankly,  Bill, if it's okay with you, I'll also let this topic of intraboard communication/exchange slide, too, because I don't want that to be pegged as my agenda, either -- I came neither to bury Brutus, nor to exhume him; but merely to read his notes on investing. (chuckle)

DG,

"I tihnk it is time to decide: Do we talk? Or do we square off like the Jets and the Sharks and have at it with knives? Or do we retire to neutral mutually self-reinforcing corners and tell our chosen cliques how great we are?

 I can tell you, I love to debate and to talk and to share, but I'll be DAMNED if I will insert myself where I am not wanted. So, we will have that dialog another time. Maybe."

Well, rebalancing was mentioned in your other thread, and I stated that my opinion of same was more consistent with JWR then with the traditional thought, which you tout.

In this thread, you made a simple statement, that you rebalance to maintain some personal risk/reward profile.  I ask you what you mean by that simple statement, and you now walk away.

Specifically, we both understand that 'risk', in the traditional rebalancing world, means SD, that is, the volatility of the value of one's portfolio.  There is no need to discuss that here.  Most of us understand the concept, and we have had extensive discussions on such minutae as the rebalancing bonus.

Now, I threw down the gauntlet to you.  Specifically, if 'risk' ISN'T volatility, but, say, the amount of income generated by one's retirement portfolio, how would THAT risk factor tie in to rebalancing?  You obviously haven't gone there, while some of the I&D regulars have.

Or the other risk factor I mentioned above, portfolio survivability.  How does rebalancing lead to a portfolio that lasts (survives) longer then one that isn't rebalanced?

If you are going to spew forth the Max Headroom mantra (regarding traditional retirement portfolio withdrawal strategies) and NOT be interested in a critical review of same, then, no, don't bother posting.  Nor criticize someone (JWR) who has done extensive work (good or bad, your opinion) in that area.

Regarding rebalancing, the whole argument centers around why, when, and under what conditions, one should sell assets being held in their portfolio.  The traditional reason, which you have stated a few times now, is to maintain some predetermined equity/debt allocation.

An income/yield focused investor/retiree would not necessarily do so.  An example is in order.

Assume such a retiree held a 50/50 stock/bond portfolio, that the dividend yield was 2%, while the bond yield was 6%.  The weighted yield of her portfolio would then be 4%.  Assume that she was also taking a traditional real, inflation adjusted 4% from that portfolio.  In that case, the amount of yield generated by her portfolio matches the amount she wants to withdraw, and spend.

After a year, the stock market did something, the bond market did something else, and the total value of her portfolio did something.  The question now is whether or not it is advantageous to rebalance.

It is clear that, if she doesn't rebalance, the amount of yield income generated by her portfolio, next year, will be fairly close to what was generated this year.  It would all depend on whether the dividend and interest yield, in dollars/share, increased or decreased for the two funds she holds in her portfolio.

If she does rebalance, the act of rebalancing will increase, or decrease, the actual dollar amount of yield income generated next year.  That is, if she is moving money from the low yielding equity part of her portfolio to the high yielding debt part, her income will increase.  It will otherwise decrease.

So, if the major risk factor you want to consider, in retirement, relates to the amount of income you receive (funding your withdrawal), then you would always 'rebalance' towards the higher yielding part of your portfolio, rather then the lower valued!

That is, in my 'example', if the equity side had a good year, and your equity fund was up (good volatility!), you would rebalance some of it over to the debt side of your portfolio.  You are moving some 2%(now a bit less) yield money over to the 6% yield side of your portfolio.

But if the equity side had a bad year (down 10%), you would NOT rebalance some of your 6% money over to the 2% (now a bit more) side of your portfolio.  The reason is that the TOTAL amount of income you receive, next year, would be less then this year.  Taking the same amount out of your portfolio means that you would be spending capital/principal, not just the income.

Now, you can argue that this isn't a 'rebalance' in the sense of the traditional definition of rebalancing.  But it certainly isn't something that I have ever seen discussed on DH, Bogleheads, or anywhere.

Finally, hidden in this 'example' is the second risk factor that I asked you to consider.  That is, if the overall weighted yield of your portfolio (the income it throws off) is 4%, and your rate of withdrawal is also 4%, then the yield of your portfolio covers your withdrawals, and you don't have to touch capital/principal (to fund withdrawals).

So, let's discuss rebalancing, if you want.

DRiP Guy:

bilperk:

"I would love to have this discussion. However, I think it is interesting that there are three or four threads here right now maligning Bogle, telling bogleheads to get off of M*, etc.

I tihnk it is time to decide: Do we talk? Or do we square off like the Jets and the Sharks and have at it with knives? Or do we retire to neutral mutually self-reinforcing corners and tell our chosen cliques how great we are?"

I don't see any such threads here.  Can you name them?

 Here's one:

Re: A Serious Intellectual Challenge for Bogleheads twinlabs 3 hours, 18 minutes ago | Post #2533506

Taylor, the underlying tone of your post is the very reason I don't frequent here much anymore. You Bobbleheads need to stick with your own forum

 http://socialize.morningstar.com/NewSocialize/forums/thread/2533171.aspx

 

 

Now, I like Taylor, and respect him, but I will also be the first to admit in this one instance he was a little quick to the draw (kind of like lili was with me!) in assuming someone was being trolled, not that a legit question was in play. And he was promptly corrected! And thenm, though,  we get the 'piling on' and painting everyone with a broad brush. (sigh)

 Frankly,  Bill, if it's okay with you, I'll also let this topic of intraboard communication/exchange slide, too, because I don't want that to be pegged as my agenda, either -- I came neither to bury Brutus, nor to exhume him; but merely to read his notes on investing. (chuckle)

DG,

Well, I guess I thought you were talking about the I&D board when you said "here".

.