How much is rebalancing worth?

May 18, 2009

A couple of weeks ago, Lance Knobel asked me what I thought of MarketRiders after reading Erick Schonfeld’s write-up. I kept on meaning to get around to it — you know how these things are — but before I could, Ron Lieber beat me to the punch. Ron says he likes the service, which basically keeps track of your ETF portfolio and tells you when it looks like it’s in need of a rebalancing.

I agree that it’s a useful service, but I’m not sure that it’s really worth $120 a year. For most of the people who will be using this service, the base-case scenario is that they simply buy up a bunch of index funds and then forget about them until the next point at which they have some money to invest, when they’ll probably throw that money into whatever pot looks most underweight at the time. Call it poor man’s rebalancing.

So the question is, how much value does active rebalancing add? I asked this a year ago, when three ETFs were launched which have a built-in rebalancing function, for which they charge 25bp per year. That seemed steep to me — but if you have less than $50,000 to invest, then you’d actually be better off paying 25bp a year than you would paying $9.99 a month.

I certainly don’t think that the rebalancing advice is worth more than 25bp a year, which means that I wouldn’t recommend MarketRiders to anybody with less than $50,000 in investable assets. But more generally I’d love to see some empirical data on the value of rebalancing, in basis points per year. Unless and until it becomes clear how much value it adds, I’d be hesitant to pay good money for the service.


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