Jack Bogle – On Portfolio Rebalancing

Jack Bogle – On Portfolio Rebalancing

There are many discussions about what Jack Bogle says and how to rebalance ones portfolio. For me, the following sets the record straight about stance, attitude and the nuts and bolts of what to do. Jack seems to take a very relaxed view of it, and practices how he describes it as well, which is always important. When I visit forums such as Bogleheads I see a lot of frantic and detailed discussion about how and why and when to rebalance a portfolio extrapolated, supposedly, from what are JB’s “principles”. But, in my opinion, they don’t resemble closely how he describes it below, read for yourself, you can do a web search to find this quote online elsewhere as well:

Hi, Mr. M,

Sorry it’s taken me so long to respond to your thoughtful note.  Busy!

We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind.  Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually.  That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary.

We also did an earlier study of all 25-year periods beginning in 1826 (!), using a 50/50 US stock/bond portfolio, and found that annual rebalancing won in 52% of the 179 periods.  Also, it seems to me, noise.  Interestingly, failing to rebalance never cost more than about 50 basis points, but when that failure added return, the gains were often in the 200-300 basis point range; i.e., doing nothing has lost small but it has won big.  (I’m asking my good right arm, Kevin, to send the detailed data to you.)

My personal conclusion.  Rebalancing is a personal choice, not a choice that statistics can validate.  There’s certainly nothing the matter with doing it (although I don’t do it myself), but also no reason to slavishly worry about small changes in the equity ratio.  Maybe, for example, if your 50% equity position grew to, say, 55% or 60%.

In candor, I should add that I see no circumstance under which rebalancing through an adviser charging 1% could possibly add value.

Use your own judgment, but perhaps these comments will help.


portfolio rebalancing

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