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Old 08-24-2010, 09:18 PM   #141
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Are you sure? There has been a lot of chatter that he times the market behind your back and he is using a wiji board!
He certainly market times with AAPL stock in his SEP-IRA where he makes no pretense of managing risk and likes to put all his eggs in one basket at times. He hasn't done too badly since 1995. That is the only stock he trades.

He very happily "delegates" running the rest of the investments to me.

Ouiji board? DH? No way - LOL!

Audrey
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Old 08-24-2010, 09:28 PM   #142
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I think that stocks are likely to wildly outperform cash and bonds over the next 5-10 years.

I will continue to hold my asset allocation at 95% stocks.

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Old 08-24-2010, 09:32 PM   #143
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Personally I think it is pretty clear that although rebalancing to a set formula is very different from changing allocations based on ad hoc expectations of future market movements, it is still a form of market timing. In brief, rebalancing is simply saying that when the relative values of two or more asset classes diverge by a sufficiently large margin, it is time to sell one and buy the other(s) - it's pretty hard to understand why this is not market timing. The fact that the rebalancing decision is made well in advance does not change anything.
I don't see how you can call something market timing if you are not using predictions to change your investment strategy. Predictions of which asset class will outperform in the near-term and therefore changing your investments to favor those asset classes is the essence of market timing.

If you are not acting based on near-term predictions, then you aren't market timing. If you are maintaining the same asset allocation across all market conditions, and consistently rebalancing according to a pre-determined formula, then you are not market timing.

Many AA investors have chosen their AA to target a certain short-term volatility versus potential long-term growth tradeoff. Occasional rebalancing is necessary in order to stay within that volatility/long-term performance range. Rebalancing is really about managing volatility.

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Old 08-24-2010, 09:49 PM   #144
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I think some of the confusion in AA may be that when a portfolio is out of balance from the target AA, some take that to mean that one class is "overvalued" while another is "undervalued" and take that as some kind of judgement call on the markets.

But that is not correct. There is no judgement call about relative valuations, hard as that may be to believe. It is simply that once the portfolio is significantly out of balance, the investor has deviated from his original volatility target, and needs to rebalance to return to that goal. AA truly does not care about valuations. Even about relative valuations.

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Old 08-24-2010, 09:49 PM   #145
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Hmmm...

I'm in the "AA rebalancing is not market timing" camp.

Currently 40% stock index funds, 40% bond index funds, 5% REIT, 5% CCF fund, 10% cash. Rebalancing bands at 5/25%. Not likely to change soon, but never say never...

Watch CNBC to ogle Becky Quick, but take all talking heads, newsletters, pundits, soothsayers, naysayers, gurus, palm readers, and politicians with a grain of salt...

Is that a real poncho, or is that a Sears poncho?

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Old 08-24-2010, 09:59 PM   #146
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Hmmm...


Is that a real poncho, or is that a Sears poncho?
Wow. Wish Frank was still round. Miss that guy.
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Old 08-24-2010, 10:12 PM   #147
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Rebalancing to a predetermined AA is not market timing. At all. Even the poorly-written ""Incidental Economist" site referenced by TraineeInvestor implies this:

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(Example 3) You have an investment plan that says you will rebalance on January 1 each year to maintain your planned asset allocation. Hangover or not, you do so faithfully each year. Ruling: not market timing.
Can there really be a difference whether the rebalancing is done on a particular calendar date or when the %s get sufficiently out of whack?

Market Timing: "Based to my analysis of future market conditions, XX asset will soon be going up in value, while YY asset will soon be going down in value. I'll sell my YY and buy some XX."

AA: "Based on my analysis of the historic individual performance of XX and YY and the historical correlation of their values and performance, I will attempt to keep my portfolio with set percentages of each. When the percentages get unbalanced from these desired ratios, I will rebalance them. (I might check every day, or once per year--it makes no difference for the purposes of this discussion). I will make no attempt to guess what the market will do next."
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Old 08-24-2010, 10:20 PM   #148
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I think rebalancing with AA is more a passive approach and not market timing. An analogy, it's like re-tuning the dial on the radio for stations that drift. Whereas, non AA is more like actively searching the radio for a favorite station.
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Old 08-24-2010, 10:34 PM   #149
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Rebalancing is a risk management strategy, It is NOT market timing. For those that believe it is post so on the Bogleheads board...and then duck.

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Old 08-24-2010, 10:34 PM   #150
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I am a market timer! There, I have said it. However, I use AA to make sure that I do not risk too much, in case I turn out to be wrong.

Some pundits like Abby Cohen would advise people to vary the AA, based on her prediction of the market movement. For many, their reason is based more on the fundamental arguments, rather than on the technical side. Are they market timers? Of course they are. Are they right all the time? Of course not.
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Old 08-24-2010, 11:16 PM   #151
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Rebalancing is a risk management strategy, It is NOT market timing. For those that believe it is post so on the Bogleheads board...and then duck.

DD
Thanks for the invitation but I'm feeling bruised enough already

A thread from the Bogleheads Forum: Bogleheads :: View topic - Rebalancing = market timing strategy based on tech analysis

So if I sell (say) some or even all of my equities because I feel that they are over priced and the risk at that time outweighs the potential rewards, am I adopting a risk management strategy to preserve my capital or am I market timing?

Bonus question: does it matter?
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Old 08-24-2010, 11:36 PM   #152
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Agree with Audreyh1 and others that rebalancing to AA is not market timing. The key difference is that market timing is based on a prediction of the future whereas rebalancing completely ignores future expectations.

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If 'market timing' means trying to achieve higher returns by purchasing low/selling high, then AA is market timing because this is the goal albeit without making predictions.
The goal of rebalancing is not to maximize returns but rather to maintain a consistent risk profile. You do not need to know whether prices are high or low in order to rebalance.

In fact, I think rebalancing may actually lower returns over long time periods because (1) you lose the momentum effect and (2) with a portfolio of bonds and stocks rebalancing will lead you to a lower stock allocation over time. Since stocks have higher returns on average, rebalancing may lower your portfolio return compared to letting everything just ride.

Consider the bull market of the 90s (or any bull market) where you had multiple years of double digit growth. Rebalancing in this case will lower your returns because you reduce the stock allocation in comparison to letting them grow.

John Bogle argues that rebalancing is just noise (in terms of expected returns):

"We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind. Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually. That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary."
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Old 08-24-2010, 11:46 PM   #153
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So if I sell (say) some or even all of my equities because I feel that they are over priced and the risk at that time outweighs the potential rewards, am I adopting a risk management strategy to preserve my capital or am I market timing?

Bonus question: does it matter?
You apparently don't understand. This has nothing to do with efficacy. Market timing, according to this board, is categorically bad.

Ha
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Old 08-24-2010, 11:48 PM   #154
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At the risk of picking at a scab, heck, I am picking at a scab, I am bringing back up the topic of Market Efficiency.

One of the premises of the Market Efficiency is that because there are so many players in the market, all trying to look for values, there is really no good deal to be found. One can just buy the entire market and do well.

Now, I can make the same argument about the Political Efficiency. I think I can claim to invent this term, because I have not heard of it elsewhere. Now, what is Political Efficiency?

My premise is that due to the constant struggle between the conservatives and the liberals, the Dems vs. the Reps, our political system is the best it can be. There is no need for me to vote, really, because my vote does not carry any weight, and does not impact the results any. It really does not matter what my political beliefs are. Independent of my judgements and correspondingly cast votes, the system will seek its own equilibrium point, which is the optimum under the present condition. It's "the wisdom of the crowd" thing.

So, should I not bother to vote in the future? I am seriously considering that. It may be just a waste of my time. I simply cannot vote against the majority, no matter how small its lead is over the minority. I don't know beforehand whether I am in the majority or not before the election outcome, same as the argument that one cannot tell whether the market will go up or down with any certainty.

But there is a difference between the political system and the financial system. One cannot escape from the tyranny of the majority rule. But on the other hand, a person can go against the financial market if he has a reason to believe that it is wrong and he is right. If he feels the market is overvalued, why shouldn't he sell? And if he believes that the market will rise, why should he be afraid to buy?

A voter who turns out to be in the minority after the election outcome cannot opt to be out of the system (I am not talking about people who threatened to leave the country if things do not turn out their way). That minority still has to honor the rules passed by the majority. On the other hand, in the financial market, a person can go against the crowd, and if he turns out to be right, will do very well.

Hence, it is more worthwhile for an individual to tackle the quixotic job of forecasting the market movement than it is to affect where the political system is heading.

I am ready for your flames...
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Old 08-25-2010, 12:07 AM   #155
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I am ready for your flames...
Sorry no flames here, you are basically right.
Other than to point out that our system is not the best that it can be, albeit perhaps the best we should expect.

A better system would be to appoint me an absolute monarch and let me rule.
You could be one of my top advisers.
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Old 08-25-2010, 12:16 AM   #156
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Market timing, according to this board, is categorically bad.
If market timing worked (i.e., had positive expected returns over buy and hold and the additional transactional/tax costs), I'd be all for it. However, I've seen no objective evidence that is the case.
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Old 08-25-2010, 12:37 AM   #157
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There is no need for me to vote, really, because my vote does not carry any weight, and does not impact the results any.
This is off topic, but the American political system is extremely well designed from the point of view of your vote determining who the president is going to be.

The electoral collage and winner take all design means that you are far more likely to cast a decisive vote than in a simple majority/popular vote system. Consider the super close Bush-Kerry election where winner came down to who won ohio (which bush carried by only 100,000 votes).
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Old 08-25-2010, 12:39 AM   #158
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Wow. Wish Frank was still round. Miss that guy.
Saw him in concert in Austin in 1981. Awesome!!!!

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Old 08-25-2010, 12:42 AM   #159
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So if I sell (say) some or even all of my equities because I feel that they are over priced and the risk at that time outweighs the potential rewards, am I adopting a risk management strategy to preserve my capital or am I market timing?
Both

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Old 08-25-2010, 12:50 AM   #160
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John Bogle argues that rebalancing is just noise (in terms of expected returns):

"We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind. Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually. That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary."
Yeah - he kind of forgot about managing short-term volatility. Which is the whole point of rebalancing! It's not about absolute return, it's about risk-adjusted return - how you get a pretty good long-term return with less volatility.

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