Does Portfolio Rebalancing Work?

[Ves]

How is it that you are so sharp on this?

I know of a lot of these rules from my work. I work as a tax accountant / administrator for SMSFs. Not high up or anything, but I keep an eye out for any ATO updates. Read enough of them, and you begin to know where to look. I'm no expert, but find that discussing some of these things enhances my knowledge.

Yeah, that div washing stuff is all linked to options creating a cum-div market for a few days around ex-div as calls are exercised. And then the hole was found and exploited. I would never have dared do this sytematically. But across the line for the ATO and way beyond the intent of the Act and any conceivable concept of 'incidental purpose'. Took years for the crackdown to occur. It's just an example of how much you can push the law beyond what is written before the ATO bites.

Cheers

As far as I know, the secondary market for "cum div" stocks was set up by the ASX to allow foreign investors who could not claim the franking credits because they were not Australian residents.

Of course, others saw an opportunity in this. The ATO is often slow with this stuff as you said, but when they catch wind, the door gets jammed shut pretty quickly.

 

[Rubberneckin]

TPI,

Rebalancing, from some limited research, within the category of shares, will only work with a group of shares going up in price.

If the portfolio includes shares that go down in price and stay down (or go bust) then underperformance can be expected. Another weakness with rebalancing is that it cuts the big winners off at the knees. For the longer term portfolio, 1 or 2 shares that are multibaggers are often the basis for a large percentage of the overall gain.

If you take small gains off these and cut the number of shares in the winners, while adding to losers, the long term result is certain, loss and underperformance. Only if the losers turn around can the system work. The assumption of returning to the mean will work most of the time with fundamentally sound companies, it is the times that it doesn't work that will destroy the portfoilio in the long term.

I still can't find a system that is better than simple buy, add to winners, cull losers quickly. Simple to say, simple to understand, very hard to do for most.

I can see why this might be a problem if you own individual company shares, but what if you choose from a population of say a dozen uncorrelated ETF's and only selected say the top 3 or 4 based on their relative strength, re-balancing on a monthly basis?

 

[brty]

Rebalancing on a monthly basis is not going to work as the combination of slippage and commissions is going to kill any slight gain.
With a large enough portfolio, rebalanced yearly, should give some minor out performance. I had a brief look at ARG and AFI over about a 15 year period. What I noticed was one would out perform the other for a number of years, then it was the other ones turn. Instead of time based redistribution, in this case it looked like percentage under/over performance was the time to rebalance (by eyeballing the price graphs together).
However, it still looks like the CODB would eat most of any minor gain.
For instance, if you wanted to sell 6,000 ARG and buy 7,000 AFI to rebalance, just buying at the ask and selling at the bid reduces the gain, assuming there is enough on offer close enough. If you 'wait' for your orders to be hit, one will go off while the other sits, suddenly your open to market risk with only one of the transactions taking place.
And before some-one jumps in being all knowing,I know they are LICs and not ETFs but the principle is the same. Then again ETFs that are weighted to different sectors of the market shouldbe worth studying, off you go