Portfolio Rebalancing?

Curious: how do folks experienced in shares rebalance their portfolios, if at all?

I know many are averse to selling, ever (eg Thornton's "If the wish to sell appears, take two aspirin and lie down") but do most folk here who are doing well periodically rebalance their portfolios? If so, how often (every 6/12 months)? Or do you prefer to just hold forever, regardless of the composition or the balance of your shares:cash(/?) ratio?

 

I think the smart thing to do is rebalance but I must admit I prefer to let my investemts play out. The Perpetual WFIA platform has some features which may be of interest to people who like to switch things around.

SWITCH INVESTMENT OPTIONS WITHOUT TRIGGERING CGT
You can move across investment options within WealthFocus Investment Advantage without triggering capital gains tax (CGT).

NO CGT ON PARTIAL WITHDRAWAL OF FUNDS
If you withdraw a portion of your investment, partial withdrawals are cost base adjustments. There is no CGT on partial withdrawals until withdrawals exceed the cost base of your investment.

CGT DISCOUNT ON ALL WITHDRAWALS AFTER 12 MONTHS
As long as the initial investment is held for 12 months or more, a 50% CGT discount will be available on all withdrawals. This includes withdrawals on additional investments that have been held for less than 12 months.

Perpetual WealthFocus | Perpetual

 

I rebalance with cash inflows to avoid selling and CGT, much like the large LICs do (this is what they are doing with funds from rights issues/share purchase plans). Of course I will sell a stock if the thesis no longer looks to stack up, but that is not for the purpose of rebalancing.

 

Questions (for you and others, just trying to make my OP clearer I guess)
I understand that if the value of the share portfolio falls, cash inflows to maintain share:cash ratios are preferred by many (most?) experienced folks, and this makes sense as well as it enables you to "buy low". But what about the following scenarios:

1. Stock A grows from 5% of portfolio (desired balance) to ~10%. Would you
- leave as is
- sell the excess over 5% and put in cash
- sell and use funds to purchase Stock B which is new to your portfolio

2. Share portfolio grows by a large percent. Instead of having share:cash ratio of 70:30 (or whatever your desired ratio is) it's now 80:20. Would you simply leave as is, or cash out to maintain the ratio, with the goal of buying more shares if/when the ratios move in the other direction (and by default there's a dip in share prices)?

 

Currently I don't hold a lot of cash. When I'm no longer working I'll be using the buffer approach, whereby one holds 3 years of cash spending in cash management account. Say its $500k (3years at $150k pa +$50k for a rainy day). All dividends are paid into the cash management account. Twice yearly, excess cash (amount in account over $500k) is used to buy additional stock. This provides opportunity to rebalance. (Personally I use a semi equal weight approach that keeps minimum position size to 1.5% - it forces buying beat up stuff first). I wont be selling big winners when outside of targeted weights, but rebalancing from the bottom up.

Now to your second point, No, I'd be remaining close to fully invested with exception of cash buffer.

 

Thanks for the response. Your approach makes sense, especially for those with a growing (non static) portfolio size. Also just read the Vanguard research paper on portfolio rebalancing and they mentioned a similar "bottom up" approach. I found interesting the findings of Vanguard regarding a non-rebalanced portfolio (in short - it outperforms all types of rebalancing by about 0.5% annualized with about 2% increased volatility).

 

@SerenityNow can you post a link to the Vanguard study please mate?

 

On a different device currently but fairly sure it was this one:
https://www.vanguard.com/pdf/icrpr.pdf
(Best Practices For Portfolio Rebalancing)
Fun read.

Another idea as pointed out by the husband when I mentioned rebalancing or not - rebalancing could be more important for those who invest in small/mid caps where volatility is greater vs large cap holders who plan to hold forever and no real shockers happen (on a historic/comparative basis).

 

Ok, now I understand where you are coming from. What Vanguard is referring to is rebalancing across asset classes (ie. Bonds / Domestic stocks / international stocks / domestic reits / international reits / cash etc). The purpose is to keep portfolio weights in line with a predetermined asset allocation model.

For mine, I am invested solely in common stock - and as I am a stock picker, rather than holding stock indexes I don't necessarily draw a line between domestic and international companies that I hold a fractional ownership stake in, and my holdings are much chunkier than the granularity of an index. Accordingly, my rebalancing relates to stock weights (bottom up rebalancing if you like), rather than switching between asset classes.

If I was running a typical diversified investment portfolio, not sure how I would rebalance. I'd probably just try to cut the best deal I could with Vanguard on one of their wholesale diversified funds and let them take care of it

 

Just finished 'Boglehead's guide to investing' and there is entire chapter allocated to 'rebalancing'. The link attached summarizes the similar concept. I find this topic quite interesting and fell this can be summarized in one line 'The primary goal of a rebalancing strategy is to minimize risk relative to a target asset allocation, rather than to maximize returns.'

We are going through target allocation currently (focusing on ETF, LIC & minor holding in direct shares) and then undertake the rebalancing approach, if I've to choose right now i will go with 'Time-and-threshold’ strategy but i see this as moving target with changes in asset allocation,market returns, personal situation and goals...it would be impossible to concrete the rebalancing approach and stick to it. IMO, It has to be reviewed but does not need actioned always...