Rebalancing

[ripper1]

Has anyone hit their rebalancing bands lately. I use a 5% threshold. I am currently at 4% but I am a little anxious because of the powerful rally we've had so far this year. I am considering doing it now. What are others doing here?

 

[LOL!]

My trades are posted over in the LOL!'s Market Timing Newsletter thread. I have rebalanced earlier this year.

But I wanted to ask about that 5%? I have thrown 5% around myself, but it can mean quite a different threshold for various folks.

For example, if one has 30% equities, it might mean rebalancing when equities get to 35% which would mean a 17% increase. Of if one has 80% equities, then 85% would be a 6.3% increase.

Or maybe one has 30% US equities and 30% foreign equities and 40% bonds. Does that mean 35% for any of those or is it really 60% equities?

I guess my point is that 5% is so arbitrary, that going at 4% would not be a problem for me.

 

[W2R]

Has anyone hit their rebalancing bands lately.

Not yet, but it's "killing me". What goes up, must come down some day.

 

[heeyy_joe]

I seem to be tinkering with mine frequently lately. During this bull market I have elected on many equity issues to get cash dividends instead of share reinvestment. Since I enjoy researching (companies, etf's and mfunds) this cash might be put back into a current or a new investment choice.

 

[LOL!]

http://www.nytimes.com/2013/04/28/your-money/the-stock-and-bond-mix-is-tough-to-rebalance.html has a bit of equivocating from experts in it or so it seems.

 

[audreyh1]

My bonds are 7.2% under allocation target - getting close to trigger. My "out-of-balance" calcs are relative to each asset class percent - not the total. For example, if an asset class went from 30 to 35%, that would be 14% out of balance.

I don't worry about buying more "expensive" bonds. The future could go either way. If the economy stalls and/or deflation continues, bonds will maintain their value or go higher. If the economy takes off and interest rates go back up, I'll be buying more bonds.

It doesn't do any good IMO to have a target asset allocation and then fret over whether any one asset class is overvalued (which is what that article is doing, IMO, just to make investors fret so they'll read more articles).

BTW - the future can go one way for the rest of this year, and then a different way the next, and then yet a different way the next, which is why period rebalancing when things get out of whack seems prudent.

 

[scrabbler1]

Has anyone hit their rebalancing bands lately. I use a 5% threshold. I am currently at 4% but I am a little anxious because of the powerful rally we've had so far this year. I am considering doing it now. What are others doing here?

I have a ~4% threshold to trigger a rebalancing move (in my IRA only; I have different rebalancing criteria for my taxable accounts because they have to generate income for my ER expenses). I have hit that limit twice this year but because I also changed my IRA's AA from 55/45 to 50/50 at the start of the year I did a third rebalancing move. Each rebalancing move is about 2.5% of the total in the IRA, taken to a nice, round number although one time in early 2012 the market gains were so fast I had to move more money to rebalance.

 

[scrabbler1]

My trades are posted over in the LOL!'s Market Timing Newsletter thread. I have rebalanced earlier this year.

But I wanted to ask about that 5%? I have thrown 5% around myself, but it can mean quite a different threshold for various folks.

For example, if one has 30% equities, it might mean rebalancing when equities get to 35% which would mean a 17% increase. Of if one has 80% equities, then 85% would be a 6.3% increase.

Or maybe one has 30% US equities and 30% foreign equities and 40% bonds. Does that mean 35% for any of those or is it really 60% equities?

I guess my point is that 5% is so arbitrary, that going at 4% would not be a problem for me.

To answer your question about "x% of what?" I use x% of the total amount in that type of account. So when I am at 54/46 compared to my current 50/50 target AA, that is 4% off because it is 4% of the entire account (100%).

 

[ejman]

My trades are posted over in the LOL!'s Market Timing Newsletter thread. I have rebalanced earlier this year.

But I wanted to ask about that 5%? I have thrown 5% around myself, but it can mean quite a different threshold for various folks.

For example, if one has 30% equities, it might mean rebalancing when equities get to 35% which would mean a 17% increase. Of if one has 80% equities, then 85% would be a 6.3% increase.

Or maybe one has 30% US equities and 30% foreign equities and 40% bonds. Does that mean 35% for any of those or is it really 60% equities?

I guess my point is that 5% is so arbitrary, that going at 4% would not be a problem for me.

I'm in awe of the level of sophistication of many ER posters. I simply use wide 10% rebalancing band (45-55 % equities ) and when it exceeds that level (It's never varied to the underside although it was close in 2009) I simply sell an equal percentage of my equity funds and buy the corresponding amount in bond funds following the same approach.

 

[dtbach]

I thought this was an interesting quote from Bogle:

But Mr. Bogle says that over very long periods, rebalancing doesn’t necessarily pay off, because investors are constantly selling out of higher-performing assets.

From my experience things always seem to go farther and longer than expected. I'm going to ride this bull for awhile.

 

[FIREd]

I have been slowly rebalancing lately via new contributions and dividend/interest reinvestment. My AA is pretty much where I want it to be.

 

[ejman]

I thought this was an interesting quote from Bogle:

But Mr. Bogle says that over very long periods, rebalancing doesn’t necessarily pay off, because investors are constantly selling out of higher-performing assets.

From my experience things always seem to go farther and longer than expected. I'm going to ride this bull for awhile.

Yes, it is tempting. I've often wondered why do I have a symmetrical balancing band (nominal 50% equities band is 45-55) why not have a 45-60 band instead? (nominal 50 midpoint but allow equities to run up to 60)

 

[Animorph]

Another 2% up and I can start selling equities for cash once again. Just about at my target portfolio level.

 

[audreyh1]

Well, I went ahead and rebalanced. I decided I was close enough and I've got better things to do than track the allocation over the next month. Now I can ignore it until Jan 2014.

One helluva market run! Wow! [Retirement fund is up over 9% YTD after our Jan withdrawal - mind boggling!]

 

[audreyh1]

I thought this was an interesting quote from Bogle:

But Mr. Bogle says that over very long periods, rebalancing doesn’t necessarily pay off, because investors are constantly selling out of higher-performing assets.

From my experience things always seem to go farther and longer than expected. I'm going to ride this bull for awhile.

He's the consummate buy-and-holder, which, over the long-term does maximize return. He always ignores the purpose of maintaining an AA - which is to lower volatility in the short term (at the expense of maximizing long-term gain). It's a different strategy.

And I don't think anyone rebalancing in Jan 2000 or 2008 ended up "selling out of higher-performing assets".

It's fine to hold on and let things run - especially during accumulation phase. Just don't try to "combine" that with maintaining an AA.

 

[LOL!]

It seems to be easy to rebalance out of equities, but much harder to rebalance into equities like in say March 2009.

 

[W2R]

Well, I went ahead and rebalanced. I decided I was close enough and I've got better things to do than track the allocation over the next month. Now I can ignore it until Jan 2014.

One helluva market run! Wow! [Retirement fund is up over 9% YTD after our Jan withdrawal - mind boggling!]

Isn't it! Wow.

Coincidently, I went ahead and rebalanced today, too.

 

[gauss]

I have been moving into balanced funds since last year.
No guilt, no worry. Balancing is automatic!

-gauss (relaxed)

 

[Animorph]

He's the consummate buy-and-holder, which, over the long-term does maximize return. He always ignores the purpose of maintaining an AA - which is to lower volatility in the short term (at the expense of maximizing long-term gain). It's a different strategy.

And I don't think anyone rebalancing in Jan 2000 or 2008 ended up "selling out of higher-performing assets".

It's fine to hold on and let things run - especially during accumulation phase. Just don't try to "combine" that with maintaining an AA.

Setting rebalance triggers of +/-15% or so was supposed to pick up some of that momentum gain while still keeping the AA close enough. Same thing with rebalancing once a year or less, as opposed to daily or quarterly. Though of course rebalancing into lower average gain assets like cash or bonds from equities does, on average, lose value compared to just letting the cash or bonds run out. But then you might not like the volatility. Studies I read long ago were showing rebalancing gains of about 1% per year, but that was probably just among equities.

 

[audreyh1]

Setting rebalance triggers of +/-15% or so was supposed to pick up some of that momentum gain while still keeping the AA close enough. Same thing with rebalancing once a year or less, as opposed to daily or quarterly. Though of course rebalancing into lower average gain assets like cash or bonds from equities does, on average, lose value compared to just letting the cash or bonds run out. But then you might not like the volatility. Studies I read long ago were showing rebalancing gains of about 1% per year, but that was probably just among equities.

I believe the gains due to rebalancing were in portfolios that included fixed income - but that was during secular bear markets, I think. During secular bulls, rebalancing reduces the gain - like during the 80s and 90s. Not so sure about those studies, as during the 2000s, I was richly rewarded the times i rebalanced after a spectacular market crash. But anyway - it's really about managing volatility to keep it at a more "comfortable" level.

It does little good to rebalance frequently - daily, quarterly. It's better to let the assets classes get sufficiently out of balance first. No more than once a year is usually recommended, but if you have a sudden run-up or crash, that will usually get things well out of balance. That's why some of us use triggers.

The width of the triggers is entirely a matter of personal preference.

 

[racy]

I've collected what various experts recommend; some use time others use percent. Some are very specific, some advise ranges:

1-3 yrs. Bob Clyatt, Work Less, Live More
4 yrs. Jim Otar (in Dec of presidential election years)
2-5 yrs. Wm. Bernstein
6.25 yrs Wm. Bengen
+/- 10% Harry Browne
+/- 5% Vanguard Research
+/- 10-15% Burton Malkiel
+/- 10% or never. Jack Bogle, "Re-balancing is a personal choice, not one that can be validated by statistics".

 

[audreyh1]

This recent rebalance brings my cash+bonds holdings up to 21 years of current (after tax) budget. I don't think I'm willing to go above that - looks like I just discovered a "ceiling".

So - either bonds sell off some soon, or, if after withdrawals equity is still above target, I may have to let my equity allocation creep higher. I was implementing a very gradual increase in bond allocation as we get older, but I'm putting that on hold for now - basta!

[In early 2009, rebalancing brought cash+bonds holdings down to 12 years budget - I discovered that as my "floor" - I wasn't willing to draw down further to buy more equities.]

Hope I didn't just jinx anything! knock on wood

 

[dtbach]

This recent rebalance brings my cash+bonds holdings up to 21 years of current (after tax) budget. I don't think I'm willing to go above that - looks like I just discovered a "ceiling".

So - either bonds sell off some soon, or, if after withdrawals equity is still above target, I may have to let my equity allocation creep higher. I was implementing a very gradual increase in bond allocation as we get older, but I'm putting that on hold for now - basta!

[In early 2009, rebalancing brought cash+bonds holdings down to 12 years budget - I discovered that as my "floor" - I wasn't willing to draw down further to buy more equities.]

Hope I didn't just jinx anything! knock on wood

I'm thinking along the same lines with bonds right now. Bonds are expensive by almost any standard now, while stocks are still at least at moderate levels. Sometimes you just have to look at the big picture and say "why would I buy something expensive when the other alternative is at average cost?" I just can't bring myself to buy bonds at this point.

 

[audreyh1]

I'm thinking along the same lines with bonds right now. Bonds are expensive by almost any standard now, while stocks are still at least at moderate levels. Sometimes you just have to look at the big picture and say "why would I buy something expensive when the other alternative is at average cost?" I just can't bring myself to buy bonds at this point.

Whether "bonds are expensive right now" isn't a concern of mine at all. I will be holding bond funds for decades (I hope), and if/when/as they correct, I will simply buy more, assuming equities haven't corrected worse. I am quite OK with this scenario.

It's rather that once I have X years of expenses in "steadyish" fixed income (including cash BTW), do I really need more? Seems like with 21 years expenses covered, I should be able to handle a little more stock market volatility in exchange for a bit more long-term growth.

And, again, the above sure sounds like tempting fate.

 

[dtbach]

Whether "bonds are expensive right now" isn't a concern of mine at all. I will be holding bond funds for decades (I hope), and if/when/as they correct, I will simply buy more, assuming equities haven't corrected worse. I am quite OK with this scenario.

It's rather that once I have X years of expenses in "steadyish" fixed income (including cash BTW), do I really need more? Seems like with 21 years expenses covered, I should be able to handle a little more stock market volatility in exchange for a bit more long-term growth.

And, again, the above sure sounds like tempting fate.

Buying bonds which had a 30 year bull run and are excessively expensive sounds more like tempting fate. To each his own.