Rebalancing in a really down market, and long-term effects

[TromboneAl]

To summarize: It's probably best to rebalance based using an objective formula, but it's hard to do and maybe it's different this time, but it probably always feels "different this time," but this time it REALLY feels different this time.

[Lsbcal]

A few comments that may not have been mentioned:

1) If you are spending from fixed income while retired then you will slowly be rebalancing by default. So you could perhaps justify doing nothing.

2) I've decided to rebalance to some extent based on a market timing methodology. That way, I will not be doing things based on my feelings about the market. It is completely mechanical based on past market history. It's an approach that is fairly complex and I would not recommend it to anyone else. A fairly simple approach is to pick a buy in point based on something like a 50-200 day exponential moving average or even a 200 day moving average. Yahoo charts make this pretty easy to do.

3) Even mechanical trend following approaches can be wrong for some time. In 1932 there was a big up move in the market for around 2 months and then a major fall back to previous lows. At that point the market moved up big time until the next recession in 1937.

3) Coming out of previous major downturns (1933, 1975) small value stocks did better then the general market and even large value.

4) I'll be value tilting my portfolio but only when the trend starts up as measured by past fairly reliable price indicators.

5) There is some comfort in having a plan which has worked in the past.
It could all be different this time, of course.

[W2R]

Quote:

Originally Posted by TromboneAl To summarize: It's probably best to rebalance based using an objective formula, but it's hard to do and maybe it's different this time, but it probably always feels "different this time," but this time it REALLY feels different this time.

By George, I think we have a winnah!! T-Al has captured the essence.

[Bikerdude]

Quote:

Originally Posted by DblDoc My 2 cents on rebalancing having followed numerous discussions at Bogleheads and looking at various studies that show minimal increases/decreases depending on strategy is that it is a risk management tool only. It is not a method for significantly increasing your portfolio returns - you would be better off spending your time reducing your fees and expenses. I am rebalancing but I am putting in new $. If I was retired I would be more focused on making sure I had sufficient fixed income to last through this downturn and sacrifice rebalancing to be sure I could sleep at night. DD

William Bernstein in his book "The Intelligent Asset Allocator" discusses re-balancing in chapter 8. He mentions its a complicated matter that is best done on longer intervals due to market "trends" that usually persist for long periods of time. The old "the trend is your friend" saying...or not.

[Telly]

As Tuesday's close of market approached, I thought "hmmm, maybe Monday WAS the day to rebalance, after all". Well, maybe Friday...

It's a drag to go through the day with one eye on the clock to check the S&P as the closing hour approaches. I only do that if I'm in a rebalancing mode of thought, but it just sort of pollutes the ER day. It's sort of like.....working.... ACK!

Then again, it could be a sucker rally, and even better times to rebalance may lie ahead. See how this starts?

[Dennis]

Rebalance? Not really.they do it for me.. owing 4 Balanced Funds that is and the seperate bonds Ylds pay the Bills only needed 3% from them..
for past 9 yrs and counting? Not doing too bad.. and saved me alot of work playing around with that stuff..now..used to play with over a dozen Index and other funds for yrs.. never got much anywhere with them.. 1 stepFwd, 2 back.. LOL

Glad I had most of my Money invested in 2 homes.. 1 Lived in and other Rental for yrs.. Sold the 1st one and downsized in 03', that $500k tax Free was very nice, the other rental is long paid for and still cranking it out.. will probably sell it in next Bubble, it's getting pretty old and small for the neighborhood it's in now... Rich Kids in their McMansions all around don't like Poor -Middle class Folk living on their Street now...LOL

[Dennis]

If it helps? Like someothers have said> Go more into Small & Mid caps , playing the recovery period.. Hold for about 12-18 mos and then Rebalance it back into your Conservative Port..Probably best to load up Bonds with those gains..

That's what my Investment Firm did with my Port In the Last Bear for 03'and 04' and worked outvery well..

After 05'? We really converted over to a very conservative port ( 25/75) and it's still paying out too much and loading up the bond side now to a +80% level ( I know, nice problem) but the taxes will be pretty big this time...on all those Treasuriy Bonds from last yr..Sold them now and back into the usual stuff..

[harley]

Quote:

Originally Posted by Dennis Glad I had most of my Money invested in 2 homes.. 1 Lived in and other Rental for yrs.. Sold the 1st one and downsized in 03', that $500k tax Free was very nice, the other rental is long paid for and still cranking it out.. will probably sell it in next Bubble, it's getting pretty old and small for the neighborhood it's in now... Rich Kids in their McMansions all around don't like Poor -Middle class Folk living on their Street now...LOL

I don't know, seems like you have a great deal going there. The rich kids may not like your middle class renters, but it should be easy to keep tenants living in a relatively low cost nice neighborhood. Unless, of course, you're going to have to spend big bucks on maintenance. But still, sounds good.

[ERD50]

Interesting subject and comments. Let me catch up...

Quote:

Originally Posted by haha Good point. Obviously the less rebalancing you did between the end of the 1991 recession and the beginning of the 2000 market drop the better. Ditto from Oct 2002 to Oct 2007. Again true from Oct 2007 to present. So maybe it is not the wonder drug that it is supposed to be. Ha

Exactly, and that is the conclusion I came to in my less-than-perfect but probably-pretty-close study.

Quote:

Originally Posted by kiki Which leads to a scary thought: it's actually times like this that you need to rebalance. Rebalancing when equities are increasing year after year lowers your overall return. But if you rebalance when equities are signficantly decreasing, then you are setting yourself up for a big rebound at some point, historically speaking at least. It looks like now is the time to act...

Yes, but if you didn't rebalance at the peak, the market rebalanced for you in the trough. But I agree. BAsed on history, if you are low on equities, now *should* be the time to act (crosses fingers).

Quote:

Originally Posted by DblDoc My 2 cents on rebalancing having followed numerous discussions at Bogleheads and looking at various studies that show minimal increases/decreases depending on strategy is that it is a risk management tool only. It is not a method for significantly increasing your portfolio returns - you would be better off spending your time reducing your fees and expenses. DD

Quote:

Originally Posted by TromboneAl To summarize: It's probably best to rebalance based using an objective formula, but it's hard to do and maybe it's different this time, but it probably always feels "different this time," but this time it REALLY feels different this time.

DD & T-Al - Yes, in my view, one of the great things about AA and rebalancing (and DCA on the other side) is that it makes it an easy, mechanical thing to do, and removes emotion from the decision. But, with this wild of market swing, emotion comes back into play. Kinda hard to ignore it. And it has value for that reason, but I don't think it really makes a whole heck of a lot of difference to your portfolio in the long run.

Quote:

Originally Posted by Bikerdude William Bernstein in his book "The Intelligent Asset Allocator" discusses re-balancing in chapter 8. He mentions its a complicated matter that is best done on longer intervals due to market "trends" that usually persist for long periods of time. The old "the trend is your friend" saying...or not.

I remember that. And it struck me as wimping out. How long an interval? That is all getting back to TA and market timing and as you say, trend analysis.

So does Bernstien believe in TA or not? IIRC he does not, until it seems to suit him. That didn't sit too well with me.


-ERD50