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
Cheers,
Big-Papa