# Index investors - How often do you review & rebalance?



## jeremykl (14 April 2015)

Are there people who are 100% index (like ETF) investors? How frequently do you rebalance? 

What is the best way to stay on top of when to rebalance? Do you have a tool to set alerts, triggers, etc?


----------



## Value Collector (14 April 2015)

jeremykl said:


> Are there people who are 100% index (like ETF) investors? How frequently do you rebalance?
> 
> What is the best way to stay on top of when to rebalance? Do you have a tool to set alerts, triggers, etc?




My super is 100% ASX 200 index for about the last 3 years, I don't rebalance into cash or anything else at all. If the market got super over heated, I might bring it back to 50% ASX200 / 50% fixed interest rebalancing after moves of 5%, but if there was a move down ward and things became value again I would go back to 100% asx 200.


----------



## jeremykl (14 April 2015)

Value Collector said:


> My super is 100% ASX 200 index for about the last 3 years, I don't rebalance into cash or anything else at all. If the market got super over heated, I might bring it back to 50% ASX200 / 50% fixed interest rebalancing after moves of 5%, but if there was a move down ward and things became value again I would go back to 100% asx 200.




Ok ... so you shift between 50% - 100% ASX 200 Index (and cash) ... there is no hard rule on when to rebalance. Just when you think stocks is over heated then you sell off 50% of your holding in ASX Index? 

How do you determine things are over heated and when things settle down? Based on ASX 200 PER or another measure? and why 5% shifts?


----------



## Value Collector (15 April 2015)

jeremykl said:


> Ok ... so you shift between 50% - 100% ASX 200 Index (and cash) ... there is no hard rule on when to rebalance. Just when you think stocks is over heated then you sell off 50% of your holding in ASX Index?
> 
> How do you determine things are over heated and when things settle down? Based on ASX 200 PER or another measure? and why 5% shifts?




it's not something I pay close attention to, as I said my super fund has been 100%asx 200 for years, these are not definite rules, but yes, If I got the feeling the market in general was way to high, I would probably pull 50% back into cash or anither asset class.

The PE of the market would be one factor, but I would generally have an idea of where the market is by the work I do managing my investments outside of my super, I only use indexes inside my super.

but to me an index is a set and forget investment, you don't need to micro manage it dancing in and out. I won't need my super for many years so it could just sit 100% without rebalancing and it would do fine.


----------



## luutzu (15 April 2015)

Value Collector said:


> it's not something I pay close attention to, as I said my super fund has been 100%asx 200 for years, these are not definite rules, but yes, If I got the feeling the market in general was way to high, I would probably pull 50% back into cash or anither asset class.
> 
> The PE of the market would be one factor, but I would generally have an idea of where the market is by the work I do managing my investments outside of my super, I only use indexes inside my super.
> 
> but to me an index is a set and forget investment, you don't need to micro manage it dancing in and out. I won't need my super for many years so it could just sit 100% without rebalancing and it would do fine.




do you mean you invest your super from among the ASX200, or the index itself?

Just my opinion but I thought that since it's a superfund you wouldn't touch for a while yet, it'd make more sense to take a longterm view and select individual stocks rather than play it "safe" and put them into an index.

Anyway, just me and since I got little capital and still years away from retirement, am taking the chance and use the superfund to invest and learn from now.. .will probably diversify approach into other asset classes and maybe an index close to and into retirement.


----------



## stevealimore (15 April 2015)

jeremykl said:


> Are there people who are 100% index (like ETF) investors? How frequently do you rebalance?
> 
> What is the best way to stay on top of when to rebalance? Do you have a tool to set alerts, triggers, etc?




With Super: I am invested 100% into VTS.AX (US equities) from last 4 years. Once a year (Jan), I buy more with the amount accumulated in super during the year. By not selling to rebalance, I can ensure that I do not realise any capital gains tax.

I still have more than 35 years to go before I can access my super so this arrangement serves me fine. If I was closer to retirement I would probably have 70-30 allocation between stocks and bonds, in which case I would rebalance on annual basis. Regardless.

I would avoid a rebalancing strategy where I try to judge (overvalued-undervalued)/time the market.

Outside Super: I use leverage in my portfolio. The amount is not a fixed % of total portfolio value but a function of current borrowing rate and dividend income. In short, the interest (which I pre-pay) on the borrowed amount should equal to my dividend income. At the end of the year, I review my portfolio, if the interest rates have gone up or my dividend income has gone down, I rebalance my portfolio to bring it in line. If my dividend income has gone up, I take on further leverage.

Of course, there are pros and cons to this strategy. Feel free to request more info, if required.

Cheers, 
Steve


----------



## jeremykl (15 April 2015)

stevealimore said:


> With Super: I am invested 100% into VTS.AX (US equities) from last 4 years. Once a year (Jan), I buy more with the amount accumulated in super during the year. By not selling to rebalance, I can ensure that I do not realise any capital gains tax.
> 
> I still have more than 35 years to go before I can access my super so this arrangement serves me fine. If I was closer to retirement I would probably have 70-30 allocation between stocks and bonds, in which case I would rebalance on annual basis. Regardless.
> 
> ...




Hi Steve

Why 100% US equities? If you live in Aust and plan to retire here, there is a bit of FX & single market risk you are taking on ... but i'm sure you've done well in the past 4 years 

on rebalancing, my idea is not about timing the market but sticking to an investment strategy (asset allocation mix). Some research in the US showed that rebalancing should happen based on a % deviation from target allocation, rather than a time based one (ie once per year), to really get the benefit that rebalancing is suppose to provide (some say that you get an extra 1-2% return over time ... however, this doesn't take into account the 10% tax your super would have to pay for investment income

in your case, I guess the rebalancing is only moving cash back into US stocks, assume all the dividends you accumulate throughout the year sits in a cash account?


----------



## Value Collector (15 April 2015)

luutzu said:


> do you mean you invest your super from among the ASX200, or the index itself?
> 
> Just my opinion but I thought that since it's a superfund you wouldn't touch for a while yet, it'd make more sense to take a longterm view and select individual stocks rather than play it "safe" and put them into an index.
> 
> Anyway, just me and since I got little capital and still years away from retirement, am taking the chance and use the superfund to invest and learn from now.. .will probably diversify approach into other asset classes and maybe an index close to and into retirement.




I was in the Army for a while, and the Super I have from that I can't touch, it had to stay with the defence Super fund, my options are limited to basically 5 settings, (Cash, conservative, balanced, growth and high growth), So I have that on High Growth which is a mix of Australian and global indexes, with some other things.

My personal Super that I have built up since I left the army, is probably to small to warrant self managing, there is only about $50K there, it's just with an industry super fund, where I have selected 100% ASX200 index. I am happy for it to sit in the index, it's kind of an insurance policy should my own investment strategy not deliver. If you look at the ASX200 accumulation index, it has done pretty well over time (most people fail to look at the accumulation index rather than just the index)


----------



## Value Collector (15 April 2015)

jeremykl said:


> Hi Steve
> 
> on rebalancing, my idea is not about timing the market but sticking to an investment strategy (asset allocation mix). Some research in the US showed that rebalancing should happen based on a % deviation from target allocation, rather than a time based one (ie once per year), to really get the benefit that rebalancing is suppose to provide (some say that you get an extra 1-2% return over time ... however, this doesn't take into account the 10% tax your super would have to pay for investment income
> 
> in your case, I guess the rebalancing is only moving cash back into US stocks, assume all the dividends you accumulate throughout the year sits in a cash account?




I get their point about rebalancing for that effect, However, if your investment mix includes asset classes who economics will mean they generate a high return over time, wouldn't you rather that growth compounds at the higher rate, rather than always pruning the high performing class to help build up the slow class just so your portfolio meets an arbitrary allocation number.

I would prefer a strategy where a certain percentage of the funds you contribute go into different classes, but each class is allowed to retain and compound it's earnings.


----------



## stevealimore (15 April 2015)

Value Collector said:


> I get their point about rebalancing for that effect, However, if your investment mix includes asset classes who economics will mean they generate a high return over time, wouldn't you rather that growth compounds at the higher rate, rather than always pruning the high performing class to help build up the slow class just so your portfolio meets an arbitrary allocation number.
> 
> I would prefer a strategy where a certain percentage of the funds you contribute go into different classes, but each class is allowed to retain and compound it's earnings.




Investing in index funds (ETFs) is based on an underlying assumption - overall the market will continue go up with time. We do not have to look further to identify this, however, has not always been the case. Take Japan for instance.  I am not qualified to predict if Australia will face issues similar to Japan or not. In fact, I also deem myself unqualified to predict if US will face issues similar to Japan or not. This is one conundrum I have been unable to answer, despite, the fact that the whole of my investing strategy is based on the single assumption that overall market will go up with time. 

So why US equities, solely because of the words of the man I trust, Warren Buffett, '_Indeed, who has ever benefited during the past 237 years by betting against America?  .  .  . the dynamism embedded in our market economy will continue to work its magic. America's best days lie ahead._'

There are other minor reasons why I prefer US equities

Cheaper expense ratio (.05% vs .12%)
US equities offer lower dividend yield (buy-backs). This translates into higher percentage of gains in the form of capital appreciation. (Which won't be taxed until I realise the gains)
US corporations are truly global. S&P 500 had 50% of their income from outside US.
US is the largest market in the world, which gives companies in the US an envious economy of scale against global corporations. (Imagine WOW or WES against Wal-Mart)
Another little known fact about the US is that they are a tax-haven for foreign investors. See http://www.tax-freedom.com/IBClaws.html for more details. (Although, the laws can change anytime)

You are correct in pointing out the currency risk I am undertaking by investing 100% in US equities. My hedge against the currency risk is my background. I migrated to Australia six years ago. Undoubtedly, Australia is an amazing country (with amazing people) and offers very high quality of life. I have a lot of my friends and family members living in US.  If the currency risk (over 20-30 years) ends up making a sizable impact to my portfolio, I am prepared to migrate to US (lol, if I am allowed).

Your approach to rebalancing sounds good (based on certain %). I remember reading something along the same lines on boglehead forums. 

Yes, all the dividends I accumulate sit in a cash account.

Cheers,
Steve


----------



## stevealimore (15 April 2015)

jeremykl said:


> Hi Steve
> 
> Why 100% US equities? If you live in Aust and plan to retire here, there is a bit of FX & single market risk you are taking on ... but i'm sure you've done well in the past 4 years
> 
> ...




Apologies I replied to the wrong person earlier.

Investing in index funds (ETFs) is based on an underlying assumption - overall the market will continue go up with time. We do not have to look further to identify this, however, has not always been the case. Take Japan for instance. I am not qualified to predict if Australia will face issues similar to Japan or not. In fact, I also deem myself unqualified to predict if US will face issues similar to Japan or not. This is one conundrum I have been unable to answer, despite, the fact that the whole of my investing strategy is based on the single assumption that overall market will go up with time. 

So why US equities, solely because of the words of the man I trust, Warren Buffett, 'Indeed, who has ever benefited during the past 237 years by betting against America? . . . the dynamism embedded in our market economy will continue to work its magic. America's best days lie ahead.'

There are other minor reasons why I prefer US equities
Cheaper expense ratio (.05% vs .12%)
US equities offer lower dividend yield (buy-backs). This translates into higher percentage of gains in the form of capital appreciation. (Which won't be taxed until I realise the gains)
US corporations are truly global. S&P 500 had 33% of their revenue from outside US.
US is the largest market in the world, which gives companies in the US an envious economy of scale against global corporations. (Imagine WOW or WES against Wal-Mart)
Another little known fact about the US is that they are a tax-haven for foreign investors. See http://www.tax-freedom.com/IBClaws.html for more details. (Although, the laws can change anytime)


You are correct in pointing out the currency risk I am undertaking by investing 100% in US equities. My hedge against the currency risk is my background. I migrated to Australia six years ago. Undoubtedly, Australia is an amazing country (with amazing people) and offers very high quality of life. I have a lot of my friends and family members living in US. If the currency risk (over 20-30 years) ends up making a sizable impact to my portfolio, I am prepared to migrate to US (lol, if I am allowed).

Your approach to rebalancing sounds good (based on certain %). I remember reading something along the same lines on boglehead forums. 

Yes, all the dividends I accumulate sit in a cash account.

Cheers,
Steve


----------



## stevealimore (15 April 2015)

Foreign sales accounted for 33% of aggregate revenue for the S&P 500 in 2013 not 50% profit I mentioned earlier. Sorry.


----------



## Value Collector (15 April 2015)

stevealimore said:


> Investing in index funds (ETFs) is based on an underlying assumption - overall the market will continue go up with time.




Not really, dividends are a major factor in the compounding of a long term index strategy, and over time you will do better if the index goes through periods where it doesn't rise or even falls, Because each time the underlying companies you hold pay dividends, in an accumulation index these dividends will be used to purchase more shares in the index, if the market is down when this happens you will be buying a bigger piece of the pie.


Outside of super I hold some US stocks, I have The Walt Disney company and Berkshire Hathaway. the same is true for these, Disney Buy backs it's own shares, sometimes Berkshire does too, long term these buy backs will do more for me if the share price is lower than it was 12 months ago.


----------



## stevealimore (15 April 2015)

Value Collector said:


> Not really, dividends are a major factor in the compounding of a long term index strategy, and over time you will do better if the index goes through periods where it doesn't rise or even falls, Because each time the underlying companies you hold pay dividends, in an accumulation index these dividends will be used to purchase more shares in the index, if the market is down when this happens you will be buying a bigger piece of the pie.
> 
> 
> Outside of super I hold some US stocks, I have The Walt Disney company and Berkshire Hathaway. the same is true for these, Disney Buy backs it's own shares, sometimes Berkshire does too, long term these buy backs will do more for me if the share price is lower than it was 12 months ago.




I agree that temporary dips in the market provide an excellent buying opportunity for the long-term investors given that the market continues to go up over the long term. 

What if the stock market takes the same turn as it did for Nikkei Index, where even after 25+ years of waiting, the index is at 50% of what it was in the peak of 1990. In fact, between 1987 to 2015, over a period of 28 years (quite long term), you would have just broken even. Nikkei Index has been in a long term decline over those 28 years. Under such a scenario, would the dividend income be sufficient to cover up for loss of capital? (As of today, the dividend yield is 1% on Nikkei index fund).

Going by your analogy, under such scenario, you would be buying a bigger share of ever shrinking pie.


----------



## DeepState (15 April 2015)

I review equity index positions weekly.  However, rebalances are triggered depending on market moves. This review changes levels at which stops and limits are placed.  Where target exposure differs materially enough from actual exposure at a review date, a spot trade is also generated and implemented.  I am invested in selected individual developed market indices for this component of my portfolio strategy.  I implement this component via a mix of physical and futures.

FWIW, the target weights are volatility based. There is also a protection layer on top of this. Trades can be generated even if there is no movement in the relative prices of the markets under examination.  It is possible for trades to be generated even if there is no market movement.

Over time, rebalancing to something other than price-movement (ie. no rebalancing) is expected to generate a higher return than a portfolio of indices which are not rebalanced but otherwise consist of the same underlying components.  'Expected' falls short of a guarantee.  This is a statistical property which holds in the absence of strong and persistent trends in relative movement within the basket as a whole.


----------



## Value Collector (15 April 2015)

stevealimore said:


> I agree that temporary dips in the market provide an excellent buying opportunity for the long-term investors given that the market continues to go up over the long term.
> 
> What if the stock market takes the same turn as it did for Nikkei Index, where even after 25+ years of waiting, the index is at 50% of what it was in the peak of 1990. In fact, between 1987 to 2015, over a period of 28 years (quite long term), you would have just broken even. Nikkei Index has been in a long term decline over those 28 years. Under such a scenario, would the dividend income be sufficient to cover up for loss of capital? (As of today, the dividend yield is 1% on Nikkei index fund).
> 
> Going by your analogy, under such scenario, you would be buying a bigger share of ever shrinking pie.




The Nikkei is an extreme case, But the problem I have with such examples, is that when people make the analogy as you just did they make 2 mistakes, Firstly they assume a person is going to put 100% of their assets in right at the peak, then they ignore all the dividends and only look at the unit price of the index and come to the conclusion that it took X number of years to break even.

When in reality if the allocation had been done 5 years either side of the peak, and the dividends consistently compounded back into the asset class, the investment would have done ok, and out performed cash.

If the allocation would have been spread over a long period of time, such as super contributions, they would have done better.

But as I said above if the market was getting super over heated I would have started heading for cash, so would have not been exposed at the peak.

But also Japan is a shrinking pie, and also has issues that affect shareholder returns, I wouldn't put my money into a Japanese index.

However, the USA, Australia and the world in general is not a shrinking pie. See the link below.

http://www.census.gov/popclock/


----------



## stevealimore (15 April 2015)

Value Collector said:


> The Nikkei is an extreme case.




Agreed, but the fact remains that it is a case. 



Value Collector said:


> When in reality if the allocation had been done 5 years either side of the peak, and the dividends consistently compounded back into the asset class, the investment would have done ok, and out performed cash.




Agreed. 



Value Collector said:


> But also Japan is a shrinking pie, and also has issues that affect shareholder returns, I wouldn't put my money into a Japanese index.
> 
> However, the USA, Australia and the world in general is not a shrinking pie. See the link below.
> 
> http://www.census.gov/popclock/




Thanks for the link, would read up on this.

What in your opinion cause the market in Japan to behave the way they did?


----------



## Value Collector (15 April 2015)

stevealimore said:


> What in your opinion cause the market in Japan to behave the way they did?




I am no expert on it, But I know Japan went through a stage of extreme over valuation, and it's major companies have never really had a decent return on the capital invested in them, the return on equity is terrible, managements are also less shareholder friendly, they are more concerned about building bigger businesses than returns to share holders.

Also Japans population is shrinking, that's not good for growth, especially if you over pay for the companies to begin with.

The USA however gets 4 new people per minute, they need a new house built every minute,  this time next year there will be 1000,000 new people needing to be entertained, housed, fed etc, that's good for growth.


----------



## DeepState (15 April 2015)

stevealimore said:


> What in your opinion cause the market in Japan to behave the way they did?




Refer Plaza Accord.


----------



## stevealimore (16 April 2015)

Thanks,

Cheers 
Steve


----------



## Bill M (16 April 2015)

I re-balance my wife's super portfolio every 6 Months. She is drawing a pension from it and topping up the cash part of it is a good idea as we are drawing on it Month by Month. I can't see the point of letting the winners keep winning to the point where all the cash gets drawn down and there is nothing in reserve should a 1987 or 2009 crash occur. This way (should a crash occur) we have enough cash in the account to keep the pension going for 4 years. This strategy seems to be working well for us and we will stick to it.


----------



## Value Collector (16 April 2015)

Bill M said:


> I re-balance my wife's super portfolio every 6 Months. She is drawing a pension from it and topping up the cash part of it is a good idea as we are drawing on it Month by Month. I can't see the point of letting the winners keep winning to the point where all the cash gets drawn down and there is nothing in reserve should a 1987 or 2009 crash occur. This way (should a crash occur) we have enough cash in the account to keep the pension going for 4 years. This strategy seems to be working well for us and we will stick to it.




Totally agree Bill, the pension phase is a different game, I was talking from my perspective as a guy 30years away from pension phase.

The closer you get to retirement the more you will need to have your assets spread.

Saying that though, it's still important to have growth assets in the pension phase, those that go to 100% cash with suffer.


----------



## noirua (1 November 2020)

Historically, the Australia S&P/ASX 200 Stock Market Index reached an all time high of 7199.79 in February of 2020. Australia S&P/ASX 200 Stock Market Index - data, forecasts, historical chart - was last updated on November of 2020.
The ASX 200 closed Friday at 5,927, down 17.6%.

Historically, the New Zealand Stock Market (NZX 50) reached an all time high of 12545.33 in October of 2020.
The NZX 50 closed Friday at 12,084, down 3.6%

The UK FTSE100 index began on 3 January 1984 at the base level of 1000. The highest closing value of 7,877.45 was reached on 22 May 2018. The highest intra-day value of 7,903.50 was reached on 22 May 2018.
The FTSE closed Friday at 5,557, down 29.4%.

The Dow Jones Industrial Average, also known as the Dow or DJIA, tracks 30 well-known and large companies that trade on the New York Stock Exchange (NYSE) and NASDAQ. The Dow all-time high was 29,551.42 points logged on Feb. 12, 2020.
The DOW closed Friday at 26,501, down 10.3%.

Historically, the Germany DAX 30 Stock Market Index reached an all time high of 13797.12 in February of 2020.
The DAX closed at 11,556 on Friday, down 16.2%.

The French CAC40 hit a high point of 6,225 on 1 August 2000.
The CAC40 closed Friday at 4,592, down 26.2%.

Historically, the China Shanghai Composite Stock Market Index reached an all time high of 6124.04 in October of 2007.
The Shanghai Composite index closed Friday at 3,225, down 46.5%.
5166 was the 10 year high on 8 June 2015, down 37.5% at Friday's closing point.

The Nikkei 225, or the Nikkei Stock Average more commonly called the Nikkei or the Nikkei. The average hit its all-time high on 29 December 1989, during the peak of the Japanese asset price bubble, at 38,712.
The closing index Friday was 22,977, down 40.6%.
The 10 year high point was 24,145 on October 1 2018, index was down 4.8% at Friday's close.


----------



## noirua (1 November 2020)

noirua said:


> Historically, the Australia S&P/ASX 200 Stock Market Index reached an all time high of 7199.79 in February of 2020. Australia S&P/ASX 200 Stock Market Index - data, forecasts, historical chart - was last updated on November of 2020.
> The ASX 200 closed Friday at 5,927, down 17.6%.
> 
> Historically, the New Zealand Stock Market (NZX 50) reached an all time high of 12545.33 in October of 2020.
> ...



The currency movements have been quite extreme at times and it does matter a great deal as to which currency a person is, I suppose, sitting in. The Aussie has seen very big movements against the USD in the last 10 years. As high as 91c in 2011 to the USD and low at $1.72 in 2019 to the USD.




__





						US Dollar to Australian Dollar Exchange Rate Chart | Xe
					

USD to AUD currency chart. XE’s free live currency conversion chart for US Dollar to Australian Dollar allows you to pair exchange rate history for up to 10 years.




					www.xe.com


----------

