Daily rebalancing

At our most recent Yale reunion in 2018, which a bit of quick thinking tells me was my 30th, Yale's Chief Investment Officer David Swensen gave a talk. It was very well attended, as you might imagine, because for one it wasn't just the class of '88 that was reuning, but some mix of '83,'93, '98, '03, '68 etc. A lot of people in finance were there, no doubt. And since taking over the endowment in '86 Swensen had pretty much revolutionized institutional asset management. He was like the old EF Hutton commercial: when he talked, people listened.

I was sitting next to a guy from my class and residential college who -- in a hedge fund with his dad -- manages $25-$30 billion. Apparently he has become well known and there was some younger guy from another class who was trying to suck up to him pretty shamelessly. He and I have never been close and he's always been a little arch but as the years have gone on he's seemed nice enough.

So Swensen's up there in front of the class talking -- already a little frail with the cancer that would eventually kill him -- and he says that by now he has his team rebalancing (i.e. adjusting asset classes -- stocks, bonds, what have you) to their target balance (say, 60% stocks/ 40% bonds) on a daily basis. The guy sitting next to me was astounded. I was marginally less so, because I had read that daily rebalancing (as opposed to annual or quarterly rebalancing), but only if an asset class has broken its allocation band by 20% (so if bonds in the example above have gone to 48% or 32%, they should be sold or bought). So one should be monitoring portfolios daily and adjusting ones portfolio when that happens.

Of course, allocations don't break their bands on a daily basis, indeed it's hard to imagine how Swensen had crafted a rule-based framework guiding trading that could have made sense. It would have been nice to have drilled into that and understood better. In general it doesn't sound in keeping with the atmosphere of Yale's Endowment. After Swensen died, Ted Seides (who was a few years behind me and had worked at the Endowment) interviewed Charlie Ellis, who was on its Board. Ellis said that the remarkable thing about the Endowment is that when you went in it was like being in a monastery: everyone was sitting and reading quietly. There was no hubbub. Daily trading evokes the image of a loud and boisterous trading floor, a time-honored Wall Street tradition which is as it is for good reason: it allows for the rapid interchange of ideas between groups of people focused on different corners of the markets.

In general, it seems pretty clear that any practice of making changes to anything on a daily basis is likely to be counterproductive because the act of changing presumes that one's knowledge of the world and situation has somehow improved dramatically since the day before. That rarely happens. Most fruitful efforts are very long-range in nature and focus and wisdom comes slowly. If we think we've learned something dramatic over a given short period of time, most often we're best off trying to figure out how we are deluding ourselves.