Rebalancing Funds

Hi All,

How often should you rebalance your funds?(sell the most profitable to buy the least profitable) Should you rebalance yearly, quarterly or bi-annual? What is the best time of year to do this? Is there any other rebalancing strategies?





Thanks, Johny.

 

Hi Johny,

There are two schools of thought:

1. Don't rebalance, why would you sell your outperformers to invest in your laggards?

2. Rebalance and take the profit from the outperformers to re-invest in undervalued investments which should at some stage perform.

There are pros and cons for both.

Cheers,

Dan

PS Before making an investment decision speak to your FPA registered Financial Planner.

 

There's actually several things to consider and it should be all written in your financial plan. And yeah if you are like me that plan is in your head and forever changing.

But in general:

Consider tax implications. Are your current investments holding Capital Gains liability? If so, when would be the best time to sell?

Are you nearing retirement age? If so, when you rebalance should you transfer the assets to a SMSF to tax advantage of the tax implications?

If you are moving across asset classes eg. cash to property, a large concern would be future interest rates. Remember, rising interest rates are generally good for cash generally bad for property (if you have had to borrow).

Do you have a partner with lower tax brackets than you? Then perhaps when you rebalance you should put some of the assets into his/her name so returns are taxed at a lower rate.

Just a few points to help you with.

 

Hi Kipps

I already am paying minimal Tax. I am not working and am drawing down to live off. The draw down comes from the cash fund.

No funds' have CGT implications at the moment.

The question isn't about the need to rebalance, but the frequency.



Johny

 

I personally think that is the wrong question. Why should you blindly rebalance at set time intervals? I personally think you should rebalance, when there is a change in circumstances. This could be in the investments (eg interest rates), or for personal reasons (eg needing to draw an income).

Also rebalancing by selling your profitable assets to buy the others, will always increase the tax you have to pay. I suspect this could outdo a lot of the benefit that rebalancing provides.

 

Hi,

I agree with Ashwright and hence don't use auto-balancing with clients.

Cheers,

Dan

PS This is a personal preference and not a recommendation, speak to your FPA registered Financial Planner before making an investment decision.

 

May 15 is the date of my next rebalance. I will get only a 50% CGT event on a low tax bracket.



Johny.

 

Why would you bother rebalancing if its going to cost you some $$ on tax....I reckon just leave it and divert more dollars elsewhere i the future to rebalance.

Also, ho do you manage the currency hedging in your portfolio

 

Hi Gerkin,

I will only get a $150.00 penalty from this years rebalance. I had been rebalancing quarterly in the past, but changed it to every May. The main reason I rebalance is to keep my bond/stock ratio at 40%/60%. Unfortunately any outgowings' comes out of cash, so this needs looking at yearly.

I only hedge my Fixed Income and Global Credit. It holds some US$. I decided not to hedge foreign stock, because of a)cost b)questional value over the long term.

There is a lot of threads, both, for and against hedging, on this site.



Johny.

 

Hi,

It has been a weird month. On April 15 the All Ords was 5024, then it dropped to 4507 on May 7. Then a big jump and back to 4500. We are now back to where we were at the start of September 2009.

I rebalanced. I was a bit suprised, that even with the AO at 4500, every equity had grown faster than my global index. So I bought quite a substancial
quantity of this index.

I have been thinking about all this EU business. What will happen next?




Johny.

 

Rebalancing is not going to work.
There is a one 'trick' in this business...
You should know when to be in and when to be out of the market.
Euro is still falling...

 

I have been out of the market since March 2007.
Felt that it was the wrong decision for the next few months as the market was still going up, till Dec 2007

was tempted to get back in Jan 2009 and again through out 2009-2010, but have still stayed away. Maybe I missed the gains from the last 12 month rally, but I am sleeping better instead of anxiously waiting to catch the dead cat falling.

I am an investor not a trader. or maybe I am just plain lazy

Can not doing anything be considered as doing something ?

 

oh wait, I did do something, bought gold at 950 thought i had left it tooo late.

wish i had bought more of the stuff, instead of leaving the cash sitting in a savings acount

 

"Maybe I missed the gains from the last 12 month rally, but I am sleeping better instead of anxiously waiting to catch the dead cat falling."

Probably you missed...but without a proper strategy you could not correctly re-enter and exit the market.

"I am an investor not a trader."

There is not much difference between investors and traders.

"...bought gold at 950 thought i had left it tooo late...."

And what are you going to do if gold changes direction??

 

Hey Tropo

Firstly, let me say that I totally respect you. Anyone that has typed two and a half thousand posts, combed the world media for great threads and taught me heaps, says a lot for your character. But what is this business 'trick'?

"You should know when to be in and when to be out of the market."

"but without a proper strategy you could not correctly re-enter and exit the market."

Do you know how to time the market? Can you pick where it wil be tomorrow, next week, next month, next year? Do you know the next hot asset class or growth country. Are you able to cash out, at the right time?

Am I missing this one 'trick' in the business!



Johny.

 

Johny,

There is no such thing as a real "trick" or "magic trick".
What I meant by "trick" is to know when there is a time to be in the market and when there is a time to exit the market.
But to know when market is changing direction, or when exit and/or enter the market you must have a rule/tested system, and simply follow it.
Without a system, you do not stand a chance to survive in the market long enough.
Also, you cannot time the market, but some players are trying to do just that with a mixed result.
Entry is not that important. But exit is...You are making real money if your exit is correct.
The most important thing to do when market is moving against you is to exit the market.
Nobody can predict where the market can be tomorrow, or next year. You do not need to know that.
If you get entry/exit signal from your system, simply buy or sell. As simple as that.