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I should rebalance but..................
Old 12-12-2018, 05:25 AM   #1
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I should rebalance but..................

Since the market drop off starting in Oct. my AA has shifted from 50/50

(equities/fixed income) to 46/54. I know I should rebalance to get back to 50/50 but have not yet.


It was so much easier to rebalance the past 7 years from equities to fixed income during this bull market run up.....but doing the reverse seems so much harder! A little bit of market timing perhaps as I am trying to wait for a bottom? Of course who knows when or where that is?


Anyone else have the same issue?
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Old 12-12-2018, 05:41 AM   #2
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You should have a fixed time interval or a fixed AA interval when you rebalance. Then only but always do it at the trigger. Then you are not timing.
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Old 12-12-2018, 06:03 AM   #3
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Quote:
Originally Posted by MrLoco View Post
Since the market drop off starting in Oct. my AA has shifted from 50/50

(equities/fixed income) to 46/54. I know I should rebalance to get back to 50/50 but have not yet.


It was so much easier to rebalance the past 7 years from equities to fixed income during this bull market run up.....but doing the reverse seems so much harder! A little bit of market timing perhaps as I am trying to wait for a bottom? Of course who knows when or where that is?


Anyone else have the same issue?
What a lot of people over on the bogleheads forum do is write an IPS (Investment Policy Statement). Think of it as a contract to yourself. It includes your rebalance policy.

Most common rebalancing policy:
1. Do it on a fixed calendar interval: once per quarter, once per year, etc.
2. Do it based on bands. For example, if you have a 2 fund 60/40 portfolio, you might want to balance if equities are >65% or <55% if using 5% bands, which is common
3. Direct all new money to whichever asset is below target. This can include redirecting any dividends/capital gains from your funds that way. This can be done in combination with #1 or #2.


There are many variations on #2 including
1. Most common is to use 5% absolute bands for larger holdings and 25% relative bands for smaller holdings. For example, if your 60% equity consists of 50% TSM and 10% SCV, you might want to rebalance TSM at <45% or >55%. But SCV would be rebalanced at >12.5% or <7.5%
2. A variation on any of this might be to only rebalance out of equities, but never into equities. Over the long run, equities will have higher returns than bonds, so you would expect the % of equities to drift higher over time. On the other hand, if a 2008-type of situation arises and you have 5% bands you might find yourself rebalancing frequently out of bonds into stocks as stocks continue to drop. Some people can't stomach that. Or you can have asymmetrical bands (for example -20%, +5%).
3. Ad Hoc: "once in a while - measured in years", "just before a presidential election", etc..

The variations are endless. A resource:
Reading Room - Articles/Papers

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Old 12-12-2018, 06:13 AM   #4
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One doesn't really know where the bottom is. If you have an written or non written IPS, you should try to stick to it.
If you wait and the market happens to go up, then you might regret psychologically not rebalancing.
I use something similar to @big-papa's rebalancing suggestion except it is 5% overall/10% individual.
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Old 12-12-2018, 06:20 AM   #5
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For my 60/40 allocation I would re-balance

1) either when the equity reached 65 or 55
2) or Jan 1 or Jan 2 (markets closed Jan 1)

whichever came first

Regarding 1, I believe some people re-balance at 62.5 or 57.5. It depends upon how you look at the 5% band. And I suppose it doesn't HAVE to be a 5% band.
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Old 12-12-2018, 07:41 AM   #6
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I'm about 4% short on equities. I rebalance at the start of the year, after distributions, and when I can buy more Primecap ($25K limit each year). I look forward to putting more equities in my Roth.
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Old 12-12-2018, 08:25 AM   #7
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No issues here. As noted in the market timing thread, I am forced to buy when things drop big-time. With the run-ups over the past few days, I am overweight by about 5% in equities, so I probably should sell some.

Essentially, I have taken the emotions out of all this and have mechanical triggers for when to buy. An easy was to do all this is only own a target-retirement fund which will do all this for you and hide the market volatility.
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Old 12-12-2018, 08:52 AM   #8
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Quote:
Originally Posted by MrLoco View Post
Since the market drop off starting in Oct. my AA has shifted from 50/50

(equities/fixed income) to 46/54. I know I should rebalance to get back to 50/50 but have not yet.


It was so much easier to rebalance the past 7 years from equities to fixed income during this bull market run up.....but doing the reverse seems so much harder! A little bit of market timing perhaps as I am trying to wait for a bottom? Of course who knows when or where that is?


Anyone else have the same issue?
I concede to a little fear of buying into a declining market... (I just put in a buy order a couple minutes ago)... a fear of the inverse of the trend is your friend.... but at the same time you need to believe in your AA (believe in the Force, Luke).

If the inverse were true... you were 54/46 and your AA was telling you to sell stocks and invest the proceeds in bonds you wouldn't flinch... so why should the inverse have you tied up in knots?
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Old 12-12-2018, 08:56 AM   #9
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Originally Posted by pb4uski View Post
I concede to a little fear of buying into a declining market... (I just put in a buy order a couple minutes ago)... a fear of the inverse of the trend is your friend.... but at the same time you need to believe in your AA (believe in the Force, Luke).

If the inverse were true... you were 54/46 and your AA was telling you to sell stocks and invest the proceeds in bonds you wouldn't flinch... so why should the inverse have you tied up in knots?
I'm more the opposite. When stocks have been making money, I have a little trouble selling them to buy slower growing bonds, CDs, and/or MMs. I still do it, but it's harder.
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Old 12-12-2018, 09:13 AM   #10
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With both stock funds and bond funds having gone down so far in 2018, isn't hard to sell a bond fund at a loss and use the money to buy equity funds?
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Old 12-12-2018, 09:26 AM   #11
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Originally Posted by DEC-1982 View Post
For my 60/40 allocation I would re-balance

1) either when the equity reached 65 or 55
2) or Jan 1 or Jan 2 (markets closed Jan 1)

whichever came first

Regarding 1, I believe some people re-balance at 62.5 or 57.5. It depends upon how you look at the 5% band. And I suppose it doesn't HAVE to be a 5% band.
The 62.5/57.5 is an example of the relative bands I mentioned in my post above. And the bands can be anything you want them to be, of course.

Main thing is to make a plan and stick to it.
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Old 12-12-2018, 09:55 AM   #12
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If your equities are in mutual funds and you don't re-invest dividends, you could wait till they distribute year-end dividends - you may be closer to your AA at that point.
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Old 12-12-2018, 10:01 AM   #13
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I re-balance every year, usually in January, but if the market had a good year I may take some profits off the table in November or December by re-balancing earlier. That's about as close as I get to timing the market.

Years ago I read some studies that indicated that balancing more often than once a year yielded no significant benefits when using ordinary index funds like Total US Stock Mkt, Total US Bond Mkt, and a bit of Total Intl Stock Mkt.

I suppose I should do more research on that and see if the conclusion is still valid.
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Old 12-12-2018, 10:06 AM   #14
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Originally Posted by LOL! View Post
With both stock funds and bond funds having gone down so far in 2018, isn't hard to sell a bond fund at a loss and use the money to buy equity funds?
Not really when the stock funds are down way more than the bond funds. Plus my rebalancing into equities is also coming from cash where I let distributions accumulate.

Recently my bond funds have a appreciated a bit as stocks have dropped anyway. Most of my bond funds are closer to even YTD, some even slightly positive.
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Old 12-12-2018, 10:07 AM   #15
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I re-balance every year, usually in January, but if the market had a good year I may take some profits off the table in November or December by re-balancing earlier. That's about as close as I get to timing the market.

Years ago I read some studies that indicated that balancing more often than once a year yielded no significant benefits when using ordinary index funds like Total US Stock Mkt, Total US Bond Mkt, and a bit of Total Intl Stock Mkt.

I suppose I should do more research on that and see if the conclusion is still valid.
I have so many distributions paid out in December, that it's too complicated to rebalance. I just wait until my January withdrawal to take care of it.
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Old 12-12-2018, 10:10 AM   #16
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I only rebalance once a year (early Jan) and only if allocation drifts more than 5%.

Been aware of, but really haven't paid that much attention to the recent ups and more downs.
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Old 12-12-2018, 11:11 AM   #17
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With both stock funds and bond funds having gone down so far in 2018, isn't hard to sell a bond fund at a loss and use the money to buy equity funds?
At this point, we need Richard Thaler or Daniel Kahneman to come leaping out and explain the "endowment effect." https://en.wikipedia.org/wiki/Endowment_effect

I have said this before: Thaler's "Misbehaving" and Kahneman's "Thinking Fast and Slow" are important reads for investors who want to understand their own behavior and motivations. Do Thaler first as he sets you up for Kahneman. (The books are far less boring than the Wikipedia article.)
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Old 12-12-2018, 11:22 AM   #18
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Quote:
Originally Posted by MrLoco View Post
Since the market drop off starting in Oct. my AA has shifted from 50/50

(equities/fixed income) to 46/54. I know I should rebalance to get back to 50/50 but have not yet.

It was so much easier to rebalance the past 7 years from equities to fixed income during this bull market run up.....but doing the reverse seems so much harder! A little bit of market timing perhaps as I am trying to wait for a bottom? Of course who knows when or where that is?

Anyone else have the same issue?
To me this is the advantage of having created a written financial plan for retirement, and following it to the letter. I never have to really decide about rebalancing. I just follow the rules that I wrote years ago. There it is, in black and white (on the "plan" spreadsheet in my financial Excel file).

That said, it's only 19 days until the new year and I am getting closer and closer to meeting my requirements for rebalancing. I'm not quite there yet. If my AA strays enough to trigger rebalancing in the next 19 days, I'll do it on January 1st for tax reasons.
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I have so many distributions paid out in December, that it's too complicated to rebalance. I just wait until my January withdrawal to take care of it.
Good point! That applies to me too, but I hadn't considered it and should. I always do my annual withdrawal and then rebalance during the first week in January.
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Old 12-12-2018, 11:33 AM   #19
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I've always used the 5/25 rule. Since there are tax consequences whenever you rebalance, the idea of doing it on a monthly, quarterly, annual, or another frequency no matter how slight the amounts never made sense to me. I don't want to pay taxes when the AA might correct itself with the next swing up or down, so having some threshold to guide when to rebalance only makes sense to me.

The spreadsheet I use to track our portfolio shows me when we're outside 5% or 25%, so it's highlighted automatically.

AA changes daily, why apply a scalpel where an axe is the right tool IMO.

https://awealthofcommonsense.com/201...alancing-rule/
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Old 12-12-2018, 11:40 AM   #20
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Iíve been making withdrawals in mid-Dec and rebalancing in January (those two combined are pieces of the overall rebalance).

I keep real estate (REITs) as a separate asset class, I think influenced by Malkielís classic book. Iím surprised that they seem to have held up this year in my accounts, so will be candidates for withdrawal.
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