No. of Recommendations: 4
I apologize for the length of this post in advance and SINCERELY appreciate the knowledge, time and effort this forum has offered throughout the years!

I have been lurking on this and the FW board for sometime...must say AMAZING work and contributions by all! I have just started scaling into the MI models--something I highly recommend for all those looking to get their feet wet but a little timid about jumping straight into the pool.

My questions pertain to portfolio rebalancing. I have read various posts (as far back as 1998 in the #10000 range.) It seems I have noticed two methods of rebalancing a "standard" and a "let winners run." Let me give some brief examples of what I understand to be the difference with a $10,000 5 stock portfolio.

Period #1
Initial Purchase
Stock $
ABC 2000
DEF 2000
GHI 2000
JKL 2000
MNO 2000

Period #2
Current Holdings - adjusted for their performance since Period #1.
Stock $
ABC 3200
DEF 2700
GHI 2100
JKL 1900
MNO 1100


Rebalancing - Assume MNO has dropped from the list and PQR has been added.

Standard - My understanding of "standard" rebalancing is all holdings are rebalanced to an equal percentage of the portfolio; for a 5 stock portfolio 20%. $11,000 is the current portfolio total. Thus, each holding should be roughly $2,200.
Action Stock $
Sell MNO 1100
Sell ABC 1000
Sell DEF 500
Buy GHI 100
Buy JKL 300
Buy PQR 2200

Let Winners Run - My understanding of "let winners run" rebalancing is the holdings are NOT rebalanced to an equal percentage of the portfolio; instead, just the stocks that have dropped from the list are sold and the new additions to the list purchased with the proceeds.
Action Stock $
Sell MNO 1100
Buy PQR 1100


Can anyone speak to the utilization or back-testing of the Let Winners Run Rebalancing (LWRR) method, e.g. RCarr's models appear to utilize this method and have done very well.
1. It appears the returns of LWRR outpace that of the standard rebalancing method. Is this true?

2. Is it also true that the returns come at the price of higher volatility?

3. The problem I see with LWRR is that it makes it hard to turn a previous loser into a current winner, e.g. the example above let's say for Period #2 PQR goes on to have an ROI of 100% well that stock now has netted you 10% from Period #1 instead of 100% because it was penalized for MNO's prior performance. Can anyone speak to the logic/illogic of this?

4. I would like to get people's opinions on "standard" rebalancing. In particular, how much "wiggle room" they give when rebalancing. For instance, it seems counterproductive to be ultra-strict in the example above to rebalance GHI as even a small $10 commission would chew up 10% of the $100 to be rebalanced. How do most people who use this rebalancing method decide on the minimum amount to rebalance? It seems it should be based on a percentage of the amount to be rebalanced divided by the commission--the smaller %age the better. However, with a $10,000 portfolio it seems you would need approximately a 50% differential, $1000, to keep a $10 commission at a somewhat reasonable 1%.

Once again, thank-you.

--NP
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