Changes to AA vs market timing

[nun]

When do changes to your AA become market timing?

[traineeinvestor]

Like rebalancing, all changes to AA are a form of market timing.

This does not mean it isn't a bad idea to change AA for whatever reasons you consider appropriate - change in personal circumstances, unable to sleep at night or just getting older.....

[pb4uski]

When the motivation behind the changes in AA are an attempt to capitalize on perceeptions of markets being over or undervalued?

[REWahoo]

Quote:

Originally Posted by nun When do changes to your AA become market timing?

Where's dex when you need a good market timing/rebalancing discussion...

Going to 100% cash

[Animorph]

When the AA changes do not follow your investment plan. If you're deciding on the fly it's market timing.

[traineeinvestor]

Bogleheads • View topic - Rebalancing into Poverty

This thread at Bogleheads largely became a discussion on the potential risk of rebalancing "into oblivion". Some of the posters suggested that a different approach to asset allocation may be appropriate once people enter the withdrawl phase - rebalance away from equities when equities have had a good run but do not rebalance back into equities after they have fallen.

[LOL!]

I think too many people are afraid of being labelled a "market timer". So what?

How about this answer: Changes to your AA become market timing when --on a risk adjusted basis-- you lose money or miss out on gains by doing so.

[W2R]

Quote:

Originally Posted by Animorph When the AA changes do not follow your investment plan. If you're deciding on the fly it's market timing.

+1

[bizlady]

Out goal is 45-45-10 and that is where we were Jan 1. Now we are at 51-36-13. The 13 makes sense as we pulled for a big vacation and this year's expenses. But should we rebalance now mid-year?? Just completed first year of ER at 56 so in a quandry.... thoughts?

[Midpack]

Quote:

Originally Posted by nun When do changes to your AA become market timing?

When your equity target exposure fluctuates up and down periodically, especially if motivated by emotions (fear & greed). In general I don't see rebalancing to fixed targets as timing, nor would I see systematically reducing your equity exposure and increasing fixed/cash as you age as timing.

But like an earlier post stated, it's your money and your future life - time all you want and define timing as you wish...

[audreyh1]

Quote:

Originally Posted by Animorph When the AA changes do not follow your investment plan. If you're deciding on the fly it's market timing.

+2

Sometimes I see people change their AA because they think the market is "overvalued" - so they reduce their equity allocation. That would be timing.

Sometimes people get too afraid to rebalance (buy equities) when the market drops precipitously and decide to "hold on" to whatever their current allocation is rather than their planned one. If you get to your planned rebalance interval, and can't do the rebalancing, that is also timing. In other words, not rebalancing when you had planned to due to fears of the market, or greed if the market seems to be going great guns is also timing.

Some people have a planned allocation at retirement, and gradually shift from current to that allocation over several years. That is not timing.

Some people plan to reduce their equity exposure as they age - so each year they rebalance, they go to slightly lower equity % and slightly higher bond %, that also is not timing.

But, whatever, it's your money and you have to live with your decisions, so ultimately it doesn't matter how a strategy is labeled.

Audrey

[brewer12345]

I think as long as you are not fooling yourself that a change in allocation is not emotion-driven market timing, you are in the clear.

[audreyh1]

Quote:

Originally Posted by brewer12345 I think as long as you are not fooling yourself that a change in allocation is not emotion-driven market timing, you are in the clear.

Right.

The reason people warn against "timing" is that it is usually based on an emotional reaction to the current state of the markets and/or warnings/predictions about what might happen in the future. Many, many people get burned when they make investment changes based on these kinds of "gut feels". For this reason, many of us seek a dispassionate approach that requires no predicting of the future - since almost everyone knows predicting the near future in terms of market performance is impossible.

[easysurfer]

I view AA as rebalancing on a predetermined time (examples: once a year or each quarter, when allocations drift by 5% from targets). Whereas, market timing is reallocating when you think/guess the time is right.

[Animorph]

Quote:

Originally Posted by bizlady Out goal is 45-45-10 and that is where we were Jan 1. Now we are at 51-36-13. The 13 makes sense as we pulled for a big vacation and this year's expenses. But should we rebalance now mid-year?? Just completed first year of ER at 56 so in a quandry.... thoughts?

My nominal rebalance trigger is 15% out of balance. So 15% of 45% would be 6.75%, and a range of 38% to 52%. Yes, I'd go ahead and rebalance now. But if you normally rebalance at the end or start of the year, that's OK too. If you are withdrawing from your portfolio, you might want to sell whatever is above target. That way you should always be pretty close.

Did you meet your expenses by selling only bonds (or equities)? Seems pretty far out of whack.

[bizlady]

Quote:

Originally Posted by Animorph Did you meet your expenses by selling only bonds (or equities)? Seems pretty far out of whack.

We fund cash or short term to about 2 years expenses at the beginning of the year. We draw some from that along with my part time business, and DH pension to fund all expenses right now.

We lean towards the conservative side right now, as pension is non-cola, and we watched the market fall just before he retired. Will feel more comfortable I suppose as we get a few years under out belt and know what SS holds for sure. We are assuming we will get 75% and will not take until 70, but we lived on this plan for 3 years prior to pulling the plug- so it is comfortable- for now...

[pb4uski]

Quote:

Originally Posted by bizlady Out goal is 45-45-10 and that is where we were Jan 1. Now we are at 51-36-13. The 13 makes sense as we pulled for a big vacation and this year's expenses. But should we rebalance now mid-year?? Just completed first year of ER at 56 so in a quandry.... thoughts?

Assuming that 13 is your new/current liquidity target, I would rebalance the 51-36-13 to be 44-43-13 or 43-44-13. 51-36 is far enough from your target (even adjusted for the change in liquidity) that I think rebalancing is justifiable.

[Animorph]

Quote:

Originally Posted by bizlady We fund cash or short term to about 2 years expenses at the beginning of the year. We draw some from that along with my part time business, and DH pension to fund all expenses right now. We lean towards the conservative side right now, as pension is non-cola, and we watched the market fall just before he retired. Will feel more comfortable I suppose as we get a few years under out belt and know what SS holds for sure. We are assuming we will get 75% and will not take until 70, but we lived on this plan for 3 years prior to pulling the plug- so it is comfortable- for now...

I'll be spending down or reinvesting cash for the next two years or so, leaving equities alone I expect. Per my plan.

I was just surprised, if you started off at your target allocation a year ago, that they were off significantly in just a year. I didn't think the market had moved that much.

[nun]

I've held strong to a 45/45/10 allocation through the "Great Recession" and the last few years of market recovery. I rebalanced and ploughed my equity profits into my mortgage so that now it's paid off. I'm 4 years from ER so capital preservation is becoming more important to me. I know I need to have some growth in the portfolio and conventional wisdom says that's what equities are for. However, last week my nerve gave out and I market timed I looked at the European issues, the upcoming election and the stalling US recovery and decided to go 25/65/10 emphasising dividend stocks and US investment grade corporate bonds (psst and VFICX) along with a bigger allocation to bond market index . I also plan to move overseas in the next couple of years so I really want to reduce volatility. My plan would be to rebalance back to 45/45/10 when the swings in the market are not 1 or 2% every day.

[easysurfer]

I'm sticking to my rebalance once a year approach. Simply, that's my plan, and I'm stickin' to it (plus, I don't want to go rebalancing more than I really have to).

Though emotionally, looking back the past few months, a little voice inside says, maybe I should have rebalanced when hearing all the news about the indexes at their highs since the "Great Recession".