Automatic Rebalancing Examples

If you have ever doubted the folly of automatic rebalancing, look at these retirement portfolio examples.

Conditions

I ran the following conditions on the “Simp Ret Tr w Rebalancing E” conceptual prototype of the future Scenario Surfer. It is available as a free download from my Yahoo Briefcase. It is in the “Retirement Trainers” folder.

Yahoo Briefcase

In all cases I started with an initial balance of $1000000. I withdrew $45000 (inflation adjusted dollars) each year. I assigned an interest rate of 2.20% to the TIPS portion of each portfolio. The calculator automatically generated the results when rebalancing to maintain stock percentages of 20%, 50% and 80%. Stock returns were generated based on S&P500 data. I used the same calculations as in my earlier Simplified Retirement Trainers.

My conceptual prototype failed to generate conditions a2, a6 and a7. This will not be a limitation of the Scenario Surfer.

For additional background material, see these notes:

Notes starting September 16, 2006

Results

Initial Balance: $1000000
Withdrawal Amount: $45000

Condition: a1
20% Stocks and Rebalancing: $100481
50% Stocks and Rebalancing: $211980
80% Stocks and Rebalancing: $171804
Manual inputs: $775880

Condition: a2
Not Available.

Condition: a3
20% Stocks and Rebalancing: $116835
50% Stocks and Rebalancing: $209665
80% Stocks and Rebalancing: $33240
Manual inputs: $1584537 (earlier), $1489519 (latest)

Condition: a4
20% Stocks and Rebalancing: $(5108)
50% Stocks and Rebalancing: $(105402)
80% Stocks and Rebalancing: $(378903)
Manual inputs: $1237655

Condition: a5
20% Stocks and Rebalancing: $132605
50% Stocks and Rebalancing: $264718
80% Stocks and Rebalancing: $192008
Manual inputs: $1014236

Condition: a6
Not Available.

Condition: a7
Not Available.

Condition: a8
20% Stocks and Rebalancing: $64098
50% Stocks and Rebalancing: $116516
80% Stocks and Rebalancing: $70502
Manual inputs: $1301688

Conclusions

Training leaves automatic rebalancing in the dust. The best that automatic rebalancing could do was $264718 at Year 30 (condition a5). It went bankrupt in condition a4.

In contrast, the worst result using manual inputs was $775880 in Year 30. All of the other balances were greater than $1.0 million.

Automatic rebalancing is folly. A retiree does much better with training. He needs to keep valuations in mind.

Have fun.

John Walter Russell
May 10, 2007