Make your own free website on

Omega vs. Rebalancing
Home Up


TIPS and I-Bonds
Omega vs. Rebalancing

One relevant question is "is there a significant difference between rebalancing to a fixed asset allocation and the Omega strategy". They have similar characteristics in that they both tend to have you selling equities when equities are doing well and selling fixed income instruments when equities aren't doing well. But they really aren't the same. For simplicity lets take the case where you are starting with a 50/50 fixed income/equity split and look at a year where fixed income returns were 5% and equities returned -25% (and a withdrawal of $50,000).

For a starting portfolio of $1,000,000 you enter the year with your $50,000 in cash, $475,000 in fixed income instruments and $475,000 in equities. At the end of the year your fixed income instruments are worth $498,750 and your equities are worth $375,000. Assuming another $50,000 withdrawal the following year, you have to do the following.

Sell $50,000 in fixed income instruments for your annual withdrawal
Sell another $46,250 in fixed income instruments for an equity purchase to restore your balance to 50/50.
You end up with $402,500 in equities and $402,500 in fixed income instruments for a total portfolio value of $805,000.

In the Omega strategy, given the same market conditions and withdrawal requirements you would do the following.

Sell $50,000 in fixed income instruments
You end up with $356,250 in equities and $448,750 in fixed income instruments for the same portfolio value of $805,000.

It is pretty clear that going into the second year the Omega strategy has put you in a less aggressive position than the rebalancing strategy. It also is pretty clear that, if you have another crummy equity year, Omega is the place to be. If equities rebound in the second year then rebalancing is a better place to be. But as a simple sanity test, a strategy that positions you to better handle multi-year bear markets seems promising, assuming that this more conservative position doesn't create a 'drag' (relative to the re-balancing strategy). And, of course, that is what the simulation work in this chapter is all about.