Rebalancing?

[gcgang]

YTD S&P +21%; Long term Inv Grade corp -6%.
Assuming $2mm, and 50/50 allocation, you'd need to sell $130k stock and add to bond to get back to 50/50.
Is everyone rebalancing now?

 

[W2R]

I rebalanced in May so I don't need to now. My AA as of yesterday is very close to my planned AA.

I use written, pre-determined rebalancing criteria to try to keep subjective decisions at bay. Doesn't always work to the penny, but I try and usually meet these criteria pretty well. I also rebalance during the first week in January, whether the criteria are met or not, because I withdraw my year's spending money at that time.

 

[LOL!]

I rebalanced near the end of June by buying equities. See where I reported on this: http://www.early-retirement.org/forums/f44/lol-s-market-timing-newsletter-57042-7.html#post1332816 I also "rebalanced" after things popped.

My bonds are not long-term and are weighted towards short-term, so they have not really dropped much.

Anyways, don't forget to rebalance when stocks tank and not just when they go up.

 

[mickeyd]

YTD S&P +21%; Long term Inv Grade corp -6%.
Assuming $2mm, and 50/50 allocation, you'd need to sell $130k stock and add to bond to get back to 50/50.
Is everyone rebalancing now?

I only look to rebalance in December and only if my AA is off 5% or more. It's not December.

 

[nash031]

We looked at ours, and I have allowed my allocation to go from 75/25 to 80/20. Part of this is because I am probably going to end up 90/10 anyway, if I stay active duty and qualify for the pension.

We did sell $8k in bond funds and allocated to international, but I haven't sold domestic stock funds yet. Maybe in January, depending on how the rest of the year goes!

 

[frayne]

YTD S&P +21%; Long term Inv Grade corp -6%.
Assuming $2mm, and 50/50 allocation, you'd need to sell $130k stock and add to bond to get back to 50/50.
Is everyone rebalancing now?

I did just yesterday and usually wait until Jan. but with the market hitting on all cylinders, felt it was time.

 

[dtbach]

I can't bring myself to sell stocks now and buy ridiculously overpriced bonds. Normally one would buy bonds when stocks have done well recently, but bonds have been on a bull market for 30 years! Why doesn't anyone worry about that?? Is there something about bonds at all time highs that is different from stocks being at all time highs?? What am I missing?? I'll take stocks at an average P/E of 17 over bonds at the top of a 30 year run any day.

 

[audreyh1]

I rebalanced in May so I don't need to now. My AA as of yesterday is very close to my planned AA.

I use written, pre-determined rebalancing criteria to try to keep subjective decisions at bay. Doesn't always work to the penny, but I try and usually meet these criteria pretty well. I also rebalance during the first week in January, whether the criteria are met or not, because I withdraw my year's spending money at that time.

I also rebalanced in May as the equity markets had run up so far so fast by then. My AA still has stocks higher, as they have gained and bonds lost a bit since then, but still well within my trigger limits. I don't expect to take anymore action until Jan 2014.

(Although I notice my REIT allocation has dropped enough to need rebalancing already)

 

[Which Roger]

I can't bring myself to sell stocks now and buy ridiculously overpriced bonds. Normally one would buy bonds when stocks have done well recently, but bonds have been on a bull market for 30 years! Why doesn't anyone worry about that?? Is there something about bonds at all time highs that is different from stocks being at all time highs?? What am I missing?? I'll take stocks at an average P/E of 17 over bonds at the top of a 30 year run any day.

I rebalance on the same date every year, which was 4 weeks ago. This was when there were several "why would anyone buy bonds?" threads active on this site. Interest rates had just shot up, and everyone was sure they would continue to rise. To get my asset allocation back in line, I moved 5% of my portfolio from stocks to bonds. Since then, interest rates have gone lower, and the value of my bonds has increased about 1%. Stocks are up about 4%.

Regarding your question "what am I missing?", I think that it's this: Even after a 30-year bull market for bonds, they are still less risky than stocks. We've seen stocks lose half their value twice in this century. Bonds have never come close to losing that much.

 

[audreyh1]

I can't bring myself to sell stocks now and buy ridiculously overpriced bonds. Normally one would buy bonds when stocks have done well recently, but bonds have been on a bull market for 30 years! Why doesn't anyone worry about that?? Is there something about bonds at all time highs that is different from stocks being at all time highs?? What am I missing?? I'll take stocks at an average P/E of 17 over bonds at the top of a 30 year run any day.

Stock P/Es are closer to 19.5, and bonds have already taken a hit. And who is to say bonds are going to go down in a straight line, or stocks go up in a straight line? It's more likely to be a gradual process with ups and downs for both asset classes. Hopefully, over time, rebalancing lets you take advantage of the dips in either asset class as they occur.

 

[dtbach]

I'd rebalance into cash vs bonds at this point. In fact I have raised my cash position but am staying at the same bond level that I've had since around 2010. When 10 year treasuries get back to 4% I might start to move into bonds again. Until then, I will raise cash.

 

[Which Roger]

I'd rebalance into cash vs bonds at this point. In fact I have raised my cash position but am staying at the same bond level that I've had since around 2010. When 10 year treasuries get back to 4% I might start to move into bonds again. Until then, I will raise cash.

Just remember that a lot of talking heads have been warning about the "bond bubble" bursting for at least the past 2 or 3 years, and those who got on the sidelines and into cash when that talk started have missed out on some decent returns. No guarantee that the bubble will burst anytime soon, or it could burst tomorrow.

 

[gcgang]

I can't bring myself to sell stocks now and buy ridiculously overpriced bonds. Normally one would buy bonds when stocks have done well recently, but bonds have been on a bull market for 30 years! Why doesn't anyone worry about that?? Is there something about bonds at all time highs that is different from stocks being at all time highs?? What am I missing?? I'll take stocks at an average P/E of 17 over bonds at the top of a 30 year run any day.

When "everyone knows" something is going to happen, and "it's obvious", it usually pays to go the other way.

Everyone knows bonds are overpriced, obviously rates will go up. Therefore, buy bonds. Or at least continue to rebalance. Lol.

 

[NW-Bound]

I have recently sold some stocks and instead of buying bonds, keep the proceeds in cash for now.

Talk of the market already building in prices for bonds hence the price is always right reminds me of the housing bubble in 2000-2006. Here's in Phoenix, it was not as bad as in CA, but people were coming in from out of state to gobble up houses, and left them vacant in hope of flipping them in a couple of months for a nice profit. Results: foreclosure galore.

In early 2011, I helped my daughter buy her nice town home at a short sale for 38% of what the previous owner paid (the owner did live in it until losing her job). Now, homes in her neighborhood are listed for from 60% to 100% higher than what she paid. Of course, 2X what she paid is still a lot less than what it was in 2006.

I wonder how market efficiency theorists explain that.

 

[Which Roger]

I have recently sold some stocks and instead of buying bonds, keep the proceeds in cash for now.

Talk of the market already building in prices for bonds hence the price is always right reminds me of the housing bubble in 2000-2006. Here's in Phoenix, it was not as bad as in CA, but people were coming in from out of state to gobble up houses, and left them vacant in hope of flipping them in a couple of months for a nice profit. Results: foreclosure galore.

In early 2011, I helped my daughter buy her nice town home at a short sale for 38% of what the previous owner paid (the owner did live in it until losing her job). Now, homes in her neighborhood are listed for from 60% to 100% higher than what she paid. Of course, 2X what she paid is still a lot less than what it was in 2006.

I wonder how market efficiency theorists explain that.

Believing that markets are efficient does not mean "the price is always right". It means that the current price is the best estimate of the current value, because it takes into account everything that is presently known or expected. Future price fluctuations incorporate new information and changed expectations.

Real estate is different from stocks and bonds, because it's not as liquid and you cannot easily rebalance into and out of real estate. With stocks and bonds, you "buy low" and "sell high" via rebalancing. With houses, one person's gain is usually another person's loss. Anybody who bought in 2000 and sold in 2006 made a lot of money. Anybody who bought in 2006 and sold in 2011 lost a lot. Anybody who bought in 2011 and sells today will make some money. Somebody like me who bought a house more than 20 years ago and still lives in the same house is like a long-term investor who can tune out all the real estate noise.

 

[Which Roger]

When "everyone knows" something is going to happen, and "it's obvious", it usually pays to go the other way.

Everyone knows bonds are overpriced, obviously rates will go up. Therefore, buy bonds. Or at least continue to rebalance. Lol.

+1

It's also somewhat ironic, that even though stocks are up 120% or thereabouts in the past 4 years, investors seem to be more concerned a bond bubble than a stock bubble. I understand that stock valuations seem reasonable right now, etc., but when stocks crash, they fall a lot harder than bonds ever could.

 

[Which Roger]

YTD S&P +21%; Long term Inv Grade corp -6%.
Assuming $2mm, and 50/50 allocation, you'd need to sell $130k stock and add to bond to get back to 50/50.
Is everyone rebalancing now?

Long term bonds are risky. I don't go near them, since I use bonds for safety. I recently rebalanced into Total Bond Market, which has medium duration and is down just a couple percent YTD.

 

[Midpack]

I review my AA quarterly and rebalance if I'm outside the 5/25 rule * - though I also consider the tax implications of waiting, especially if I'm just outside the bands. Right or wrong, I don't let the market highs/lows dictate when I rebalance.

*

Mr. Swedroe [and others] advocates what he calls the 5/25 rule. When a major asset moves more than 5% off target, it’s time to rebalance. Example: Your asset allocation is 70% stock/30% bond. If equities grow to be 75%, then it’s time to rebalance.

If an equity asset is 25% or less than total equity, then you use the 25% trigger. For instance, if you have 10% REIT, then the rebalance points would be plus or minus 25% of 10, which = 12.5% and 7.5%. Rebalancing at this level would not be critical for bond holdings.

 

[pb4uski]

I rebalanced in early July so I'm pretty close to my target AA for now.

I tend to rebalance opportunistically based on a gut feeling as to whether the market is overvalued or not but would rebalance irrespective of that gut feeling if my AA gets significantly out of whack (but whether or not my AA is out of whack is more of a judgement call rather than based on time or defined percentages).

So I guess, bottom line, I've just a dirty ol' market timer.

 

[NW-Bound]

Believing that markets are efficient does not mean "the price is always right". It means that the current price is the best estimate of the current value, because it takes into account everything that is presently known or expected. Future price fluctuations incorporate new information and changed expectations.

That expectation can be unrealistic, such as those of dotcoms in 2000. People who did not share such expectations and sidestepped these stocks did better. Examples include many conservative MFs who did not believe they had to own the entire market.

Admittedly, it may be difficult to see when one looks at the aggregate of stocks and bonds. Hence, I prefer to be a slicer-and-dicer. For example, even among bonds, long-term treasury funds have been hit the hardest (-10% YTD). Most posters here said they have shortened the duration of their bonds. I agreed with that.

Many people tend to be slicer-and-dicers or market timers while denying it. It is as if it were a sin and they would be sacrificed before the altar of the market-efficiency god.

 

[shasta]

This is my first year - but I look forward to rebalancing in August 2014.

I personally wouldn't want to do it < 1 year and pay short term gains taxes. (or am I missing something there)

 

[Which Roger]

This is my first year - but I look forward to rebalancing in August 2014.

I personally wouldn't want to do it < 1 year and pay short term gains taxes. (or am I missing something there)

I use my tax-deferred accounts to rebalance, so your concern doesn't apply to me. I've never rebalanced in a taxable account, but I'm sure others on this forum can shed some light on the best ways to do that.

 

[Midpack]

This is my first year - but I look forward to rebalancing in August 2014.

I personally wouldn't want to do it < 1 year and pay short term gains taxes. (or am I missing something there)

Capital gains are an expense of rebalancing, so an investor should be mindful of those costs, especially at year end when you might be able to decide which year you want gains/losses (ie, late Dec or early Jan). Goes for long term and short term gains/losses.

Sheltered accounts help considerably, but not everyone has an "excess" of sheltered holdings to avoid taxes (like me at about 2/3rds taxable).

 

[shasta]

Im all cash right now with no tax free accounts.

Portfolio is 70/30 investments where 5% each year is cash with a 3.5% or 95% of previous years spend target $.

Over the next 18 months I will be getting another 400K or so in income so the cash will surely be balancing back into the stocks/bonds so likely just selling overgrown stocks and balancing cash back in from my personal banking.

 

[scrabbler1]

I use my tax-deferred accounts to rebalance, so your concern doesn't apply to me. I've never rebalanced in a taxable account, but I'm sure others on this forum can shed some light on the best ways to do that.

Most of the rebalancing takes place in my IRA, not in my taxable accounts. I have rebalanced 4 times in 2013 already although one time was when I changed my AA slightly because I was about to turn 50. I have a smaller acceptable AA range in my IRA than I do in my taxable account. The last time I did any rebalancing in my taxable account was in 2010 when the stock fund price was low and the bond fund price was relatively high, so I bought shares of the stock fund.

I am actually trying to preserve a possible tax-loss harvesting situation in case I need to reduce my income to qualify for an ACA subsidy. I use FIFO for cost basis so if I sell stock fund shares they would be shares I bought in the late 1990s when the price was high. As you appear to be alluding to, rebalancing in a taxable account is more complicated.