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Portfolio Rebalancing
Old 11-10-2008, 07:12 PM   #1
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Portfolio Rebalancing

The end of the year is a time when many of us rebalance our portfolios if they've gotten out of whack during the year. I've done so in the past, but most years it's just involved minor tweaks. (My objective is to keep about 5% in cash and the rest divided evenly between equities and fixed income. For me, equities means exclusively mutual funds, the overwhelming majority of them indexes. Fixed income means a combination of bond MF's, individually owned Treasuries, I-Bonds and CD's.)

Along with everyone else, my portfolio is seriously out of balance now due to the crash in the markets. I'm torn between sticking to the discipline of rebalancing, even though it would involve moving a big (for me) amount of money from fixed to equities and playing it "safe" by sticking with the higher allocation of less volatile investments.

Just wondering how others are dealing with this as we approach year's end.
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Old 11-10-2008, 08:22 PM   #2
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Because my portfolio got so far from my intended AA, I decided that I needed to rebalance before the end of the year. I did so in three little steps in October since I could not bear to do it all at once. I will probably have to rebalance more before the end of the year.

Logically I happen to think rebalancing is a good thing to do, wise, rational, and so on. Emotionally it is very difficult for me to do.
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Old 11-10-2008, 08:44 PM   #3
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Like W2R, I am rebalancing in small steps.
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Old 11-10-2008, 08:44 PM   #4
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My 401(k) auto-rebalanced in October - I have it set to re-balance every 6 months. I'll rebalance the rest of my accounts in January, however it is only currently slightly out of balance (39% equities instead of 40%).
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Old 11-10-2008, 08:48 PM   #5
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Like W2R, I am rebalancing in small steps.
Same here. I don't have the courage to do more than 1/3 or so at a time.
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Old 11-10-2008, 09:00 PM   #6
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The rules are designed to help you take the emotion out of investing . . . follow the rules.

I rebalanced in February and again a couple of weeks ago in the middle of the vertical sell off.
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Old 11-10-2008, 09:06 PM   #7
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The end of the year is a time when many of us rebalance our portfolios if they've gotten out of whack during the year. I've done so in the past, but most years it's just involved minor tweaks. (My objective is to keep about 5% in cash and the rest divided evenly between equities and fixed income. For me, equities means exclusively mutual funds, the overwhelming majority of them indexes. Fixed income means a combination of bond MF's, individually owned Treasuries, I-Bonds and CD's.)

Along with everyone else, my portfolio is seriously out of balance now due to the crash in the markets. I'm torn between sticking to the discipline of rebalancing, even though it would involve moving a big (for me) amount of money from fixed to equities and playing it "safe" by sticking with the higher allocation of less volatile investments.

Just wondering how others are dealing with this as we approach year's end.
Are you still accumulating or retired? I'm retired and staying put for now.
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Old 11-10-2008, 09:09 PM   #8
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Quote:
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Like W2R, I am rebalancing in small steps.
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Same here. I don't have the courage to do more than 1/3 or so at a time.
You are making me feel better about being so reluctant to do it all at once. I thought I was probably the only one. Small steps seem to work for me. I rebalanced 1/3 of the way, and told myself that after that, if it didn't feel right, then I wouldn't continue. But eventually I got it all done.

I think that the reason it was so daunting, was the HUGE drop during the first week or two in October. Too much, too fast.
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Old 11-10-2008, 09:10 PM   #9
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however it is only currently slightly out of balance (39% equities instead of 40%).
Gee, you sound like you want it finely tuned like a turbine spinning at 20,000 rpm! Mine jumped +-3 % within a week.

From my usual AA of 70% equity, I sold enough to reduce it to 50% in August. Then, the stock drop plus the additional selling due to stop-loss orders brought my equity position down to 30%.

I am definitely going to force myself to "buy low" by rebalancing. However, being an active investor (though not as much as Ha), I also need to decide what stocks to buy. Decision, decision...

I want to be back to 50% equity around New Year, and will spread my purchase out.
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Old 11-10-2008, 09:46 PM   #10
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You are making me feel better about being so reluctant to do it all at once. I thought I was probably the only one.

Nope, the market is too unsettled to try and do it all at once. I've rebalanced a part of my portfolio, but will wait until after Thanksgiving to look at where I am for the rest.

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Old 11-11-2008, 06:20 AM   #11
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Originally Posted by friar1610 View Post
Just wondering how others are dealing with this as we approach year's end.
See, for example:

Testing Forward Looking Asset Allocation - Seeking Alpha

Rebalancing Can Be Hazardous to Your Portfolio - Seeking Alpha

One of the most often cited issues in portfolio management is the importance of rebalancing. Rebalancing is perhaps the most basic form of strategic asset allocation (other than buy-and-hold). Let’s start by comparing an annual rebalancing strategy to a simple buy-and-hold, starting with the equal weight portfolio among the components listed above. The re-balancing is performed once at the end of each 12-month period, and takes the portfolio back to equal weights. We will be looking at the period from July of 1999 through August of 2008 using end-of-day adjusted closing prices, inclusive of dividends. This was the longest period for which we have all of these funds available, allowing for three years of lead time (prior to July of 1999). We will be using this lead time to drive some forward looking models in a later section.
...
Several points are immediately apparent. First, the equally-weighted buy-and-hold portfolio diversified among these funds has done quite well over the 9.2 years of this study, with an average annual return of 10.6% and a standard deviation of 9.3%. Annual rebalancing of this portfolio decreases both risk and return—a phenomenon that has been documented in a range of studies. Simple calendar rebalancing reduces risk, but it also reduces return. Both the buy-and-hold and annually rebalanced portfolios have done well over this period, despite the fact that the cumulative gain in the S&P 500 over this entire period is 8%--i.e. less than 1% per year.
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Old 11-11-2008, 10:13 AM   #12
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Just wondering how others are dealing with this as we approach year's end.
We started with our four main ETFs each at 23% of our portfolio's total, and we rebalance when one of them exceeds 28% or drops below 18%.

A research paper (FPA, I think? Can't find the link here right now Yet still another rebalancing thread: spreadsheet or website?) concluded that mechanical bands around 20% of the target AA afforded enough rebalancing during bull/bear markets without generating additional taxes.
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Old 11-11-2008, 11:16 AM   #13
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We're going to "rebalance" this year by directing new money to lagging AA categories. So we won't be selling anything, just buying low.

This works for us because we're still in the accumulation phase and most of our assets are in equities, which have all tanked.

We rebalance once a year, in February.
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Old 11-11-2008, 01:25 PM   #14
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I'm looking forward to rebalancing on Jan 2. I'm the kind of investor who gets the urge to invest when the stock market goes down, so I've been champing at the bit.

I think I'll do it all at once, but we'll see.
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Old 11-11-2008, 03:03 PM   #15
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Are you still accumulating or retired? I'm retired and staying put for now.
I'm retired and pretty much don't need to hit the portfolio up very often due to a pension and SS.
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Old 11-11-2008, 03:07 PM   #16
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I prefer to not sell anything which has lost 40%... so I will rebalance with contributions only. I have not even looked at the account recently (since July) because it might be too painful. I will take a quick look in December (when I also calculate my annual return) and redirect contributions to the lowest performers relative to my allocation.
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Rebalancing
Old 11-11-2008, 04:41 PM   #17
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Rebalancing

Well been doing this for awhile and I found from others:

1. I rebalanced after I re-evaluate what my New Bal SB for the comming Yr.
2. This will depend on several factors from How much $ it made vs what my Goals are to How much I really need in each type ( Bonds or Equity) .

3. In 07' I made more than estimated and thus didn't need as Much in Equites this yr and thus Rebalanced and Reduced my Equities and Increased my Bond Side to adding More Bond Funds to my Balanced Funds that I have mostly of..to get a 50/50 mix. Then I figured from experience that things look stormy ahead in 08' and thus Moved another 10% from equites into the bonds to have a 40/60 mix. Guess I should have done 99% in Bonds...LOL

4. Fortunately, It's a nice Problem when you make more than you need and estimate to make, but none the less, is still a problem to contend with.

5. Most of the past 5 yrs has been this way and just Moving more into The Bond Side and the same remaining in the equity side..

6. Ultimate goal? More than enough in the Bond Side to more than provide enough $ for me to Infinity and Beyond and leave a Max of 20% in equities to build more for My Charitible Trust...

7. It's alot easier to Gamble more into the equities when you have plenty in the Bond Side of course and that is were I've been for quite awhile..

8. What kind of added Bonds? Just like my Balanced Funds have> Treasuries..Short and Intermediate.. VFITX and VFISX..

9. If Boggles Allocation method appeals to you? Then stick with that.. but for those HNW that done' need more than say 20% in equities may provide, More Bond Allocation maybe better for you, regardless of your age..

10. If I still want to Gamble and try to Beat the Market and Win a Trifecta? I Take out what Extra $ I want to play with and go play with that ..but no more or until you have at least 2-3x as much in your Retirement Plan Portfolio.. ( I now use about 5% of extra $ And Played the Bear Funds earlier this yr and now am moving that into Bull Funds )

and If you are Retired? I surely hope your keeping 3 yrs of COH in MMkt, Short term Treas like FISX or VSGBX or like kind..It sure makes things alot eaiser to deal with in times like these..

So far, so good!

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Old 11-12-2008, 11:45 AM   #18
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I have been throwing money from the sidelines (cash) into this market all the way down. This had not been a good feeling......
I re-balanced a few weeks ago when the DOW was at about 8200 - I still have 4-5 years in cash and then a good slug of Wellesley to get us through this mess...hopefully.
I have either set us up for a nice increase in wealth - or will have to update my resume - time will tell! these are exciting times - still way less stressing than my job was though.
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Old 11-12-2008, 11:52 AM   #19
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Asset Allocation begins with an appreciation of your own risk tolerance. There are several sites with risk tolerance questionnaires. One might want to go through this process again. If you have lost 50% of your equity value, are you prepared to lose 50% of your rebalanced portfolio again? If the answer is no, then you must adjust your AA before rebalancing!
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Old 11-12-2008, 12:42 PM   #20
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.... time will tell! these are exciting times - still way less stressing than my job was though.
Yes! I'd rather live retired in tough times than as I did while working: I was totally obliviously to the fact that that market then was in steep assent. Really.
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