SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

The Benefits of Rebalancing


A portfolio with multiple funds will drift away from the original allocation over time if it is not rebalanced. In this article I’ll show how rebalancing can be implemented and how it can be beneficial. It's called buy, hold, and rebalance.

Historical Data, May 1998 – August 2021

Vanguard Total Stock Market Index Fund (VTSMX)

  • CAGR: 8.4%
  • Standard Deviation: 15.8%
  • Sharpe Ratio: 0.48
  • Growth of $100,000: $658,251

 

FTSE US Inflation-Linked Securities Index 20+ Years (TIPS)

  • CAGR: 7.6%
  • Standard Deviation: 11.1%
  • Sharpe Ratio: 0.56
  • Growth of $100,000: $553,590

 

TIPS had a correlation of 0.01 to VTSMX over this period creating diversification and a great opportunity to illustrate the benefits of systematic rebalancing even when considering it had a lower return.

 

50/50 VTSMX/TIPS allocation with rebalancing

  • CAGR: 8.6%
  • Standard Deviation: 9.6%
  • Sharpe Ratio: 0.72
  • Growth of $100,000: $692,119

 

image.png

 

Systematic rebalancing is bringing the portfolio back to a 50/50 allocation when it drifts by more than 5% in either direction at the end of any month. For example, if VTSMX would outperform TIPS by enough to cause the portfolio to eventually drift to 56/44, it would be rebalanced back to 50/50 by selling VTSMX and buying TIPS. The same would be done during periods where TIPS outperform VTSMX. Human nature often makes us want to do the opposite and buy more VTSMX (TIPS) when it has outperformed and sell TIPS (VTSMX). This is known as recency bias where we extrapolate the recent past into the future. Systematic rebalancing automates good “buy low, sell high” behavior.  Since 1998 a total of 19 rebalancing trades were required, which is less than once per year on average.

 

Summary

Buy and hold investing is often stigmatized as unsophisticated because of its passive nature, but when done right it should instead be described as buy, hold, and rebalance. Many research papers have been written drawing similar conclusions that systematic rebalancing often leads to outcomes where the portfolio return is greater than the sum of its parts. Some describe this effect as “the rebalancing premium”, where 1+1 can sometime equal 3 in investing.

Before evaluating different funds and asset classes on a standalone basis it’s important to consider the impact a particular fund or asset class may have on a total portfolio. Without this insight in mind someone might decide to go all in with VTSMX because it’s had a higher historical return, unaware that a portfolio combining VTSMX and TIPS would have had a higher return and less risk. In my next article, I’ll show how this can impact a retiree taking monthly withdrawals.

 

Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University.

Related articles

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Option Settlement: The Basics

    At their core, options involve buying and selling the rights to transact in a specific asset. When you buy a call option on AAPL, you're paying for the right to buy AAPL at a special price before a particular date. But all options expire, and at expiration, the two parties of the contract need to settle up with each other. This process is called settlement.

    By Pat Crawley,

    • 0 comments
    • 77 views
  • Pros and Cons of Weekly Options

    Weekly options used to be a niche product only reserved for gamblers and last-minute hedgers. However, weekly options are now listed on most major stocks and account for a significant portion of overall options trading.

    By Pat Crawley,

    • 0 comments
    • 137 views
  • Iron Condor Vs. Short Strangle

    The journey of an options trader's development typically has several stops along the way. The first is generally related to using options to leverage their directional bets using outright calls, puts, or vertical spreads. Somewhere along the way, a novice options trader begins to understand volatility's importance to the options market.

    By Pat Crawley,

    • 0 comments
    • 210 views
  • Short Gamma vs. Long Gamma

    Gamma is one of the primary Options Greeks, which measure an option's sensitivity to specific factors that could affect an option price. Despite traders hyping up several different Greeks and second-order Greeks like "Vanna" and "charm," there are only four primary Greeks that you need to be familiar with to understand options trading.

     

    By Pat Crawley,

    • 0 comments
    • 239 views
  • 7 Steps To Take Your Investments To The Next Level

    Investing is one of the most important activities you can do for yourself. In today's world, it's becoming increasingly important for individuals to take control of their financial future and ensure that their investments are working in their favor. So if you're looking to take your investment strategy up a notch, there are seven essential steps you should take.

    By Kim,

    • 0 comments
    • 1,090 views
  • SteadyOptions 2022 - Year In Review

    2022 marks our 11th year as a public trading service. We closed 147winners out of 215 trades (68.4% winning ratio). Our model portfolio produced 90.5% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month in 2022. 

    By Kim,

    • 2 comments
    • 1,175 views
  • Steady PutWrite 2022 Year In Review

    The Steady PutWrite service consists of two separate strategies available to subscribers known as Steady PutWrite and ETF BuyWrite. Steady PutWrite sells monthly at the money puts on equity indices targeting total notional exposure of 125% and then invests collateral in bond ETF’s.

    By Jesse,

    • 1 comment
    • 633 views
  • How Much Do You Need to Start Trading Options?

    Theoretically, anyone can trade options. After all, there are listed options that you can buy for as cheap as $1.00. So what is the right amount of money you need before you can officially dip your toe in the water and give yourself a fair shot at becoming a profitable options trader

    By Pat Crawley,

    • 0 comments
    • 1,020 views
  • Options Strategies for Small Accounts

    Ask a handful of traders what they deem a “small account” to be and you’ll get probably get a few different answers. For the sake of this article, we classify a small account as having less than $5,000. There’s a number of obstacles you run into trading a small account, like the options in certain underlyings being too expensive for you to trade, as one example.

     

    By Pat Crawley,

    • 0 comments
    • 1,008 views
  • 7 Things I Wish I Knew When I Started Trading

    Options Trading can be very exciting and rewarding. But you should not be trading options before learning at least some basic facts about options. Options are very different from stocks.  This article presents 7 basic options trading facts that every options trader should know. Don't start trading of you don't understand them.

    By Pat Crawley,

    • 0 comments
    • 998 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido