Debunking Rebalancing

I was flipping through the latest issue of Money Magazine and I came across an article about rebalancing. As seen in the graphic, they were illustrating that a portfolio that's annually rebalanced, 50% bonds and 50% S&P 500, would out perform a portfolio that started with the same 50%/50% mix, but was never rebalanced. Their take away message being, you should rebalance your portfolio.

There example shows, if you can't read the chart, even when it's enlarged, that a starting portfolio worth $100,000 in 1989 would be worth $444,699 with rebalancing and $439,465 without at the end of 2006. A whopping $5,234 more. That should buy at least twice as much Raman noodles in retirement!

That struck me as funny that they would highlight such a meager improvement and I got to wondering why they were investing so heavily in bonds. 50% seems like a pretty high number for an investment period of 18 years. I would think they would at least weight the portfolio heavier towards stocks at the beginning and shift more towards bonds at the end. So, I made a quick calculation on what a portfolio that invested 100% in the S&P 500 would be worth. It turns out that if you just invested in the S&P 500 over the same time frame it would be worth $510,694! That's $65,995 more than their rebalanced portfolio. No rebalancing required. My take away message being, I don't like rebalancing and I like making more money.

The same magazine had a helpful tax tip that saved me $50 on my return this year though. There was a 3% phone tax that was taken between 3/03 to 7/06 that is being repayed to tax payers. The standard amount is $30-60 based on exemptions. On a 1040, it's line 71.

1 Comment

I think the reason not to go with 100% S&P is because people investing for retirement and closer to it have less risk tolerance for stocks going down.

But good catch on the 1% difference between their rebalanced and non-rebalanced portfolios, I bet that $5,234 would probably be eaten up in brokers' fees from the rebalancing!



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