John Bogle on Rebalancing and a Suggested Portfolio

John Bogle, the founder of Vanguard, has a blog on which he occasionally answers reader's questions. A reader recently asked about rebalancing his portfolio. Here's Bogle's answer (my emphasis in bold):

"We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind. Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually. That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary."

"We also did an earlier study of all 25-year periods beginning in 1826 (!), using a 50/50 US stock/bond portfolio, and found that annual rebalancing won in 52% of the 179 periods. Also, it seems to me, noise. Interestingly, failing to rebalance never cost more than about 50 basis points, but when that failure added return, the gains were often in the 200-300 basis point range; i.e., doing nothing has lost small but it has won big."

"My personal conclusion. Rebalancing is a personal choice, not a choice that statistics can validate. There’s certainly nothing the matter with doing it (although I don’t do it myself), but also no reason to slavishly worry about small changes in the equity ratio. Maybe, for example, if your 50% equity position grew to, say, 55% or 60%."

What to take away from this
Bogle doesn't rebalance!
He believes statistics don't validate the need for rebalancing.
Balancing the stock/bond ratio seems more important than balancing within the stock or bond portions.
Not rebalancing can hurt you by as much as 1.5% in a particular year - but it can HELP you by as much as 2% or 3%.

Bogle suggested a portfolio, and I'll add that to the portfolio page. Note that he suggested Vanguard's new All World ex-US index. Right now I'm tracking the appropriate ETFs, but I may change that to the appropriate Vanguard funds.