Vanguard Personal Advisor Services Portfolio Rebalancing Rules

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vglogoIf you read about investing in stocks and bonds, there is a lot of discussion about rebalancing your portfolio. Should you rebalance? When? How often? How much? Carl Ozeck contributes his thoughts on the Vanguard Blog article Capital gains are a good thing. However, sometimes you just like to see what the professionals actually settle on.

In Vanguard Personal Advisor Services®, we use a “time-and-threshold” blend for our rebalancing strategy. We review the portfolio quarterly and rebalance if its asset allocation has deviated by 5 percentage points or more. Blending these triggers results in a more complex strategy, but it has merit. If we use this strategy on a 60% stock, 40% bond portfolio, the average portfolio turnover would be about 1.95%2 and average Sharpe ratio about 0.51. This shows that rebalancing can help you mitigate your risk while spreading out rebalancing events over time.

Vanguard Personal Advisor Services (my review) is an add-on service where they actually manage your portfolio and perform the trades on your behalf. The cost is 0.30% of assets annually. Their paid service performs a quarterly check-in, and rebalances if a 5% threshold band is exceeded. I think this is a good rule to save as a “default” and then adjust as needed for your own circumstances.

For our portfolio, I also perform quarterly check-ins and then rebalance with the free cash from dividends and interest. If possible, investments from work income are also directed in a manner to help rebalance. I only rebalance further if a 5% threshold has still been exceeded after all that for at least two quarterly check-ins.

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Comments

  1. Thanks for this post – could you clarify the 5% threshold – is it 5% points or 5% of a factor? For example, if your 60/40 split moves to 66/34 or if the 40 moves by 5%, which would be 2%.

    • I believe it is 5% in absolute terms so if the 60/40 stock/bond split would have to move enough and reach 55/45 or 65/35 to trigger a rebalance. This often requires a pretty significant cumulative move in stocks (roughly on the order of 20%) when you consider that bonds don’t usually move that much.

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