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Portfolio Rebalancing

MYRA may rebalance your portfolio in two ways:

  1. Time-based (e.g., monthly, quarterly, annual)
  2. Threshold-based (i.e., deviation from target allocation percentage)

Why rebalance?

Many people think rebalancing can be used to either increase returns or lower risk (or both). This is only partially true. Rebalancing has only historically been effective in managing investment risk, but only marginally effective in increasing return.

Vanguard published a paper in 2015 that showed the merits of using various rebalancing strategies from 1926 to 2015. Their findings showed gross returns are minimally affected by rebalancing. Risk, however, was managed well regardless of rebalancing methodology.

While the differences are small, the irony of the Vanguard study was that the ideal rebalancing strategy was with as large a threshold and as long a time sequence as possible. Using the above chart we can see that an annual time frame with a 10% threshold compared to a monthly time frame with a 0% threshold increases return by 0.3% while lowering the volatility by 0.1%.

The primary reason is by lengthening the rebalancing time frame and increasing the threshold we are harnessing the power of momentum in our investment strategy. In other words, we let our winners run a little longer.

There are other benefits too.

By increasing the time of frequency and increasing the threshold, we also trade less. This reduces investor costs as well as taxes (based on account individual client tax considerations).

Vanguard didn’t have data going back to 1926 but did run a test using only threshold and no preset frequency from 1980 to 2015. The results of this study are below.

So, when will MYRA rebalance my portfolio?

MYRA may rebalance your portfolio at least annually (time-based), but may also rebalance it more frequently if the deviation from target allocation percentage is greater than 25% (threshold-based). 

This means that your portfolio will be monitored daily but only rebalanced if it has drifted at least 25% from the target allocation, or if a year has passed by since the last rebalance. For example, if you have a simple 50% VTI and 50% BND portfolio, if either holding reaches 62.5% or 37.5% it would trigger a rebalance. If a year passes by, and neither portfolio triggers a threshold-based rebalance, then we may execute a time-based rebalance.The benefit of this method is that you will have a lower cost, lower turnover, and most likely, lower tax consequences.