The following post details my experiences in getting VIAC, a Swiss provider of third pillar retirement portfolios, to do weekly rebalancing. It’s a repost of what I’d already contributed to Reddit and LinkedIn, so it’s written for a wider audience and you find it a bit too detailed in parts.
Over the past few years I’ve been digesting a number of books and academic papers on investing, with a particular interest in ideas originally rooted in sports betting and later applied to financial markets - particularly Shannon’s Demon, the Kelly Criterion, and Parrondo’s paradox. Some of you might be reminded of Poundstone’s great book “Fortune’s Formula”, and you wouldn’t be far off.
The long and short of these is that it should be possible to 1) generate returns in otherwise flat markets, 2) there exists an asset allocation so as to maximize the expected log returns of wealth (in other words, maximize wealth growth over time) and that 3) returns can be extracted not just in flat / sideways markets, but also with negative expectation trades, e.g. in environments where both stocks and bonds are expected to sink in the near term
A good definition comes from the EDHEC Business School:
The potential source of additional performance because of the simple act of resetting portfolio weights back to the original weights is referred as the rebalancing premium. It is also sometimes known as the volatility pumping effect or diversification bonus because volatility and diversification turn out to be key components of the rebalancing premium
VIAC doesn’t exactly let you click a button to do weekly rebalancing. What can be done instead is setting up a weekly recurring standing order to invest into your portfolios (you have more than one, right?).
I’m currently filling up #3 of 4, maybe 5, and have been sending money in on a weekly basis ever since Q1/2022 into that third portfolio. As such, the first two portfolios did not see active contributions for most of the year.
Until I realized I could just get my bank to transfer 1,00 CHF into each of them - as any inflow is enough to trigger a rebalance free of charge.
And as the current market environment is somewhat volatile - both for stock, real estate and foreign exchange markets - this should be as good a time as any.
I’ve since created a reporting for the Sunday before the start of this, and the Monday before initially writing up these experiences.
- With the filled-up and otherwise inactive portfolios, the “rebalancing premium” is about 1.45% and 1.72%, respectively. I calculate this by multiplying the difference in fund counts with the current fund price and dividing by the portfolio sum.
- Typically, an inflow of 1 CHF triggers rebalancing transactions of between 66 and 150 CHF. Those are free of charge, as VIAC pools and nets all internal transactions between its customers - so the effective volume of funds traded is orders of magnitude lower than the gross volumes.
- With the third portfolio that’s currently being filled, there’s a slight loss (-0.05%) versus contributions. I chalk that up to 2022 being a “down market” (-20% at its worst), which I’m using to “average down” - one of the few instances where Dollar-Cost Averaging excels.
One caveat: fund counts shown in the manual reporting may or may not be as precise as their internal weights. So some of the slippage detailed above might just arise from differences in rounding.
With that, I’m hoping to inspires more of you to try out exotic strategies in the Third Pillar investment scheme.