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Rebalancing in a really down market, and long-term effects
Old 03-09-2009, 03:31 PM   #1
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Rebalancing in a really down market, and long-term effects

I'm E/R'd. My target AA is 60/40, and I decided some years ago to set the rebalancing threshold at 5 percentage points above or below the 60%, and when triggered, to rebalance all the way back to 60%, no half-hearted moves.

I had no problem sticking to the program, selling off a percentage of some winners when equities hit the 65% high trigger. And last fall, I think it was, I had no problem buying equities when they had dropped to hit the 55% of allocation trigger.

But over the weekend I re-ran all the numbers with Friday's close, and now equities are down to only about 50%. So to stick with the concept, I really should rebalance, I'm way past the trigger. I can rebal back up to ~56% just by using some dry powder (MM's in IRA, they got there via $ from a portion of previous equity sales). To go more than 56%, I would need to sell some bond fund(s) which are also down. I neglected to mention that my cash buffer is >6 years of recent year's expenses, and remains the same regardless.

But I'm a bit stalled on the decision to act. What if the downturn we are in gets worse, and is real real long? Then maybe I would rather have had the MM $ instead. Which sounds like in a really bad time, that I'm wavering on rebalancing... well...

Conversely, what if I don't act, and leave the AA at 50% equities now? Seems that could be a safe course of action, FOR NOW! But that could be the WRONG course for long-term. My thoughts are this: If I wimp out on rebalancing now, I have less total equities ---> maybe this present market is just another event in history ---> by not rebalancing, when the market turns up, I have less total $ ---> which in the future, in another downturn, I might not have enough $ to get over that hump. That wimping out now could setup a failure in the future.

In the past when I have looked at the FireCalc spreadsheet outputs and played around, there were times if you had just a relatively small amount of extra $ in your invested pot, you could have made it over a hump and survived to try others to come.

Future SS makes this not a life-or-death Walmart Greeter question.

And I just let another market close slip by...
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Old 03-09-2009, 03:38 PM   #2
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Welcome to the club -- it makes you human. It's hard to watch good money follow bad, and that's what rebalancing feels like. Assuming you are keeping this AA for the long term, I'd do it. Me, I'm reducing my AA to stocks so I'm not rebalancing -- just letting my current stock allocation ride until it hits my new reduced target allocation.
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Old 03-09-2009, 03:39 PM   #3
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What if the downturn we are in gets worse, and is real real long? Then maybe I would rather have had the MM $ instead.
The way I see it, the downturn is getting worse, there is no real end in sight and indications are it will last much longer than any downturn in our lifetime. Sure hope I'm wrong, but that's exactly why I've not done any rebalancing and am holding on to my cash.
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Old 03-09-2009, 03:55 PM   #4
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The way I see it, the downturn is getting worse, there is no real end in sight and indications are it will last much longer than any downturn in our lifetime. Sure hope I'm wrong, but that's exactly why I've not done any rebalancing and am holding on to my cash.
Bottom line, were scared $h1tless.
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Old 03-09-2009, 03:57 PM   #5
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Am I past the graveyard. I don't know. I do know full auto in Target Retirement takes the decision out of my hands unless I really panic and sell out my IRA.

I do know if I were back in the 80's with my multi asset(aka slice and dice) - overcoming fear and emotion(da hormones) would be extremely difficult for this ER - even though I 'knew' better.

heh heh heh - I suspect my chickenheartedness would have me rereading Ben Graham and divining tea leaves for a go at throttle up signal to increase equities from a psst Wellesley type level.

Now 16th year of ER - I suck it up and spend the money(after auto rebalance and auto deduct to MM) cause I'm not getting any younger. Having been thru a few dips since 1966 doesn't make them any more fun. Unpleasant is unpleasant - you just have to run the numbers as best you can and force yourself to party. .
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Old 03-09-2009, 03:58 PM   #6
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One thing I *am* doing, rather than adding to my stock allocation, is selling portions of my stock ETFs to start nibbling at some individual stocks which seem like compelling long term buys (and if their fundamentals eroded such that the dividends were cut, the index would be toast anyway).

There's a chance they won't pop as much in a recovery -- but many of these are household names in consumer staples yielding 3.5% to 5.5% or more, and it's hard to imagine them going away or seriously and permanently damaged by recession. But I am not putting ANY more money in stocks for the foreseeable future -- just shifting what's already there.
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Old 03-09-2009, 04:08 PM   #7
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The 2 most important pieces of a plan are the ability to stick to the plan and to secondly review unemotionally and verify the actual plan from time to time. Are you considering dropping your AA to stocks for the long term to reduce volatility? If so then you have a new revised plan and you should implement that.

If on the other hand you are convinced 60/40 is the way to go and rebalancing will occur at the predetermined percentages, then you should stick to your plan and rebalance. In otherwords if not revised REBALANCE as planned.
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Old 03-09-2009, 04:09 PM   #8
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If on the other hand you are convinced 60/40 is the way to go and rebalancing will occur at the predetermined percentages, then you should stick to your plan and rebalance. In otherwords if not revised REBALANCE as planned.
That sounds sooo easy...
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Old 03-09-2009, 05:10 PM   #9
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That sounds sooo easy...
Sooo - anyone been on the forum long enough to remember my 'skip the white underwear go Micheal Jordon's' in the 2000-2003 dip?

Well now they have Charlie Sheen in some of the ads.



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Old 03-09-2009, 05:19 PM   #10
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Sooo - anyone been on the forum long enough to remember my 'skip the white underwear go Micheal Jordon's' in the 2000-2003 dip?
Nope. But I've been around long enough to remember not to take you at your word:

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Old 03-09-2009, 05:49 PM   #11
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Rebalance. If stocks continue down, rebalance again. Repeat as necessary. I actually enjoy it, I get to actively participate once in a while.

To my mind, by not rebalancing you are market timing. You are betting that stocks will go down some more. Will you buy more stocks if they go down some more? How far down do they have to go before you buy? Or are you going to wait until stocks are higher than they are now before you buy? Why would you do that? How much higher do they have to be before it is safe to buy?

If you keep rebalancing, you will have bought some equities somewhat near the market low, without any thought or timing. You'll be selling those equities as the market recovers, and buying bonds. You'll have bought low and sold high. Your return will be higher than if you didn't rebalance on the way down.

One other thought exercise, if you were just starting your portfolio in today's market would you still be at 60/40? Or would you prefer 50/50 now? Probably better to wait to change AA when stocks/bonds are more neutral relative to each other. But if the answer is still 60/40, you need to rebalance. Will you stick to 50/50 when stocks are hot?
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Old 03-09-2009, 06:23 PM   #12
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Nope. But I've been around long enough to remember not to take you at your word:



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Hmmm - tenth place. I feel a tortise story coming on - or not. CFB still holds the lead.

I did get a new keyboard.

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Old 03-09-2009, 07:29 PM   #13
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But I'm a bit stalled on the decision to act. What if the downturn we are in gets worse, and is real real long? Then maybe I would rather have had the MM $ instead.
You aren't alone! Like the others who posted earlier, I have not rebalanced lately, and I am unbalanced past my "trigger" percentage. The last time I rebalanced was last October.

I thought about these possibilities for the next few years.

(1) The market recovers and does wonderfully. In this case, I would make a lot of money if I had rebalanced. But if I hadn't rebalanced, I would still be fine.

(2) The market sinks substantially and stays there. In this case, if I rebalanced repeatedly I might not have enough to live on until it recovers. But if I do not rebalance, I have enough in cash and fixed income to be fine for a long while.

(3) The market remains about the same as today. In this case, there is plenty of time to dig up enough courage to rebalance later on.

I really do think rebalancing is very advisable in more normal economic times, and I plan to return to regular rebalancing once we have started to emerge from the recession.
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Old 03-09-2009, 08:41 PM   #14
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I'm E/R'd. My target AA is 60/40, and I decided some years ago to set the rebalancing threshold at 5 percentage points above or below the 60%, and when triggered, to rebalance all the way back to 60%, no half-hearted moves.
I'm a big fan of sticking with a rules based approach and not letting emotions get in the way of investment decisions. However, I do think you can rebalance too frequently. A strict rule to rebalance every time your portfolio gets within 500bp of your target allocation would have you rebalancing with every 18% move in stocks. With this downturn, that could mean 3 rebalances already. Seems a bit excessive.

Some research suggests a less frequent rebalancing is actually better. So if you've already rebalanced and your rules are telling you its time to do it again, I might add a new rule that limits rebalancing to once every 12 or 18 months.
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Old 03-09-2009, 08:56 PM   #15
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Chalk me up as a rebalance believer who isn't rebalancing. I rationalize it with the idea that my stock allocation was a bit too high for my risk tolerance, and that's probably true. But when you get down to it, it's really a subtle market timing, sleep at night move.

The other factor is the unprecedented nature of the current environment. This really does look like it could be a "worse than history" event, so a bit of adjusting the plan might make sense.
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Old 03-09-2009, 10:04 PM   #16
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You aren't alone! Like the others who posted earlier, I have not rebalanced lately, and I am unbalanced past my "trigger" percentage. The last time I rebalanced was last October.

I thought about these possibilities for the next few years.

(1) The market recovers and does wonderfully. In this case, I would make a lot of money if I had rebalanced. But if I hadn't rebalanced, I would still be fine.

(2) The market sinks substantially and stays there. In this case, if I rebalanced repeatedly I might not have enough to live on until it recovers. But if I do not rebalance, I have enough in cash and fixed income to be fine for a long while.

(3) The market remains about the same as today. In this case, there is plenty of time to dig up enough courage to rebalance later on.

I really do think rebalancing is very advisable in more normal economic times, and I plan to return to regular rebalancing once we have started to emerge from the recession.

WTR...another option to consider even now. Over the past 9 months I have followed the multitude of posts as to what to do in this economic downturn. It's been interesting to follow the changes, however slight, in folk's strategies to cope in these trying times. I think we have all been shaken to the boots by this economic downturn. It appears, as we continue to spiral downward and consumer confidence has tanked, many folks are seriously questioning the logic of "riding the market to zero" and keeping a balanced LT AA.

I guess my biggest concern with the "staying the course" strategy is whether or not you are you committing financial suicide. Given the uncertainty and utter lack of consumer confidence that's currently driving this economy for the foreseeable future, is it wise to follow a strategy based on a long term timeframe? IMO wouldn't it be more prudent given the current market instability now rampant on a global scale, to get out of the stock market completely and park your money in more stable investments such as a MM and hold tight until some semblance of market stability returns? Sure you might miss the initial upward market movement when it rebounds but unless it is a VERY sharp V rebound, I don't see how someone riding the market down to the upturn could ever come out better financially.

It would seem to me that someone who got out and parks their money in a MM, will do a whole lot better getting back into the market when it rebounds than someone who stays the course. All indications are this is going to be a prolonged recession taking many years to recover the market's losses (not a V recovery). If the majority of economists believe this is the case, there should be adequate time for an investor to recognize the market has stabalized and get back into equities under a long term AA. Whereas, someone who stays the course, keeps a LT AA, and rides the market down is going to lose a significant portion of their investment portfolio needed to invest when the rebound occurs. I realize alot of folks are going to argue that this is market timing but I would submit that given the current market conditions you are better off on the sidelines waiting this out rather than to loose a significant portion of your LT savings staying the course. THOUGHTS?
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Old 03-09-2009, 10:06 PM   #17
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Freddy, what are you planning on doing?
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Old 03-09-2009, 10:43 PM   #18
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Freddy, what are you planning on doing?
I dedided to get out when DOW dropped under 8000. That was my pain threshold point. I wish I had pulled the trigger sooner when DOW was at 11000 as that was when I began to rethink my investment strategy given this market but who knew?

Don't know how this is all going to turn out but I sleep better at nights since I pulled the trigger. Definitely getting back to traditional AA when market turns and moves north.
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Old 03-09-2009, 11:29 PM   #19
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I dedided to get out when DOW dropped under 8000. That was my pain threshold point. I wish I had pulled the trigger sooner when DOW was at 11000 as that was when I began to rethink my investment strategy given this market but who knew?

Don't know how this is all going to turn out but I sleep better at nights since I pulled the trigger. Definitely getting back to traditional AA when market turns and moves north.
This brings up a question that I've been pondering. If you reallocate when the market turns and moves north, who says it will continue to move north or even remain in that vicinity? How do you know whether or not it's a bear rally and will soon turn south again?

I know that some technical analysts claim to have charts and other magic to figure such things out. But so far they haven't done well predicting how far the market would go down.
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Old 03-10-2009, 02:31 AM   #20
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It would seem to me that someone who got out and parks their money in a MM, will do a whole lot better getting back into the market when it rebounds than someone who stays the course. All indications are this is going to be a prolonged recession taking many years to recover the market's losses (not a V recovery). If the majority of economists believe this is the case, there should be adequate time for an investor to recognize the market has stabalized and get back into equities under a long term AA. Whereas, someone who stays the course, keeps a LT AA, and rides the market down is going to lose a significant portion of their investment portfolio needed to invest when the rebound occurs. I realize alot of folks are going to argue that this is market timing but I would submit that given the current market conditions you are better off on the sidelines waiting this out rather than to loose a significant portion of your LT savings staying the course. THOUGHTS?
Well, it's not that a lot of people will argue that this is market timing, it is market timing. This is how market timing is defined. You decide, based on some facts or feelings or whatever, that the market environment is or is not safe, and you act accordingly. Buy high, sell higher. Or in your case, sell low, buy lower.

If you are good at it, that has to be be the best approach. Kind of like betting only on football teams who are destined to beat the spread.

I can't see any flaws, other than a botched execution.

Good luck!
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