Larry Swedroe 5/25 Rule

16 Mar 2023

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Larry Swedroe states an interesting strategy for rebalancing the portfolio. It states that rebalancing between assets should occur only if an asset or category has drifted from its original target by an absolute percentage of 5% or a relative of 25% whichever is less.

How it works

Assume you have a portfolio of 10 lacs with an asset allocation of 70% in equity i.e INR 7 Lacs & 30 % in fixed income that is INR 3 Lacs

On account of Market Movement, when stocks falls to 65% i.e. INR 6, 50,000 the bonds will be INR 3, 50,000. AT this point you sell 50,000 worth of bonds and buy stocks worth 50,000 to get back to the 70/30 portfolio mix and thereby rebalancing the portfolio.

The strategy reinstates a popular belief of selling high and buying low in the market.

Taking the same example, out of Rs 7 Lacs allocated to equity, if your allocation to international equity is 10% (i.e. Rs 70,000). Here the range of rebalancing would be 25 % of Rs 70,000 which means you should invest in this sub segment proportionately if the value goes down to Rs 52,500 and sell if the value goes above Rs 87,000.

The 5/25 Rule has THREE key features for investors:

  • Useful for managing portfolios with limited funds /assets
  • Rebalancing made possible with minimal tracking
  • Fosters the ‘buy low – sell high’ strategy
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