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Rebalancing - now or later?
Old 06-26-2008, 02:19 PM   #1
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Rebalancing - now or later?

With the market tanking so, I'm sure my AA is off track - but when do you do it? In the midst of this downward turmoil or wait til it stabilizes - and who knows when that will be. :confused:
I try not to pay too much attention to the markets decline but it's in your face all over.
Larry
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Old 06-26-2008, 02:27 PM   #2
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I rebalance every June and December.

In June I only adjust contributions.
In December I buy/sell and adjust contributions

If I do this right, in December the buying/selling is minimized.
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Old 06-26-2008, 02:27 PM   #3
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In my tax-deffered, I do it when I'm more than 5% out of wack in any asset class at the end of every quarter. your mileage may vary.
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Old 06-26-2008, 02:51 PM   #4
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Originally Posted by jIMOh View Post
I rebalance every June and December.

In June I only adjust contributions.
In December I buy/sell and adjust contributions

If I do this right, in December the buying/selling is minimized.
I'm just learning about all of this but I have been reading quite a bit. I've read in numerous places that perhaps buying in December isn't the best time due to some funds paying out capital gains in December...that could leave you with a short term gain right off the bat. Am I misunderstanding what I've read?
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Old 06-26-2008, 02:54 PM   #5
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IMO, whatever rebalancing mechanism you choose -- whether a fixed time interval or when a certain asset class gets more than a certain percentage out of whack -- the important thing is not to deviate from the mechanism. Otherwise you're adding guesswork as well as emotional feelings of greed and/or fear into your investment decisions, and more often than not that's a loser.
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Old 06-26-2008, 03:19 PM   #6
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Chaos: December is a particularly bad time to buy funds due to the possibility of them making distributions. Some funds also distribute gains in other months, so always try to check before buying. Your cost basis will go down too, so it's only a temporary loan to the IRS, for as long as you hold those shares. There is no need to be careful within non-taxable accounts.

Anyway, a time of turmoil is a great time to rebalance if some of your funds have been doing well and some have not. The more imbalance you can capture, the more your total return will benefit. I'm pretty close to trimming my energy funds back to size. I try to wait for +/-20% to act, but frequently jump the gun. The only real problem is trying to buy and sell all the shares at the same time. If you have to sell one day and buy the next you may gain or lose a little depending on how the market moved during the day you were out of the market with that money. Not a problem today! If you rebalance often enough, that will tend to average out a bit, so I wouldn't let it stop you.

It may also be a great time to rebalance while the market is down. Your taxable gains (if this is a taxable account) should be less than if you waited for the market to recover. I diversified out of my company stock during 2001-2002 and had things pretty well in place by 2003 when the big gains finally came. That probably saved at least 50% in taxes over waiting until after 2003.
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Old 06-26-2008, 04:38 PM   #7
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Ziggy said it well. For me, it's Jan 2.
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Old 06-26-2008, 04:54 PM   #8
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Re-balancing Asset Allocation during ER

FPA seems to have taken down their "Opportunistic Rebalancing" article, but it essentially recommended rebalancing when asset allocations are more than 20% out of whack.

We try to maintain four separate asset classes at 23% +/- 20% of our total portfolio, so we'd only rebalance them if they dipped below 18% or rose above 28%. The study claims that with this system, rebalancing happens roughly every 2-3 years.

We've been "lucky" in this market-- everything is dropping and our AA is rock-steady!
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Old 06-26-2008, 05:08 PM   #9
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We've been "lucky" in this market-- everything is dropping and our AA is rock-steady!
You must not own as much DVY as I thought. It's down roughly 25% this year.
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Old 06-26-2008, 05:26 PM   #10
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Originally Posted by Chaos Abounds View Post
I'm just learning about all of this but I have been reading quite a bit. I've read in numerous places that perhaps buying in December isn't the best time due to some funds paying out capital gains in December...that could leave you with a short term gain right off the bat. Am I misunderstanding what I've read?
98% of my retirement funds are tax deferred or tax free, so buying in December is not an issue. I buy on dec 29-30 anyways so I start the new year with the proper allocation, and most funds issue the dividends and capital gains well before that anyways.

One reason I readjust contributions in June is to prevent buying/selling as much as possible- and that has worked real well for me the last 2 years (I contribute enough that my last 6 months of contributions more than offsets the market behavior the first 6 months of the year).
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Old 06-26-2008, 06:58 PM   #11
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Thanks for the input. All of my portfolio is in tax deferred and I have not had to rebalance much in most of the years I have had my AA plan. I'll wait til the end of the year unless things gets seriousy out of whack 10+% or more.
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Old 06-26-2008, 06:58 PM   #12
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You must not own as much DVY as I thought. It's down roughly 25% this year.
Last July & August I brilliantly timed several DVY purchases between $67-$69/share. I bought another big slug in March as part of our rebalancing, when the $58.75/share price couldn't possibly get any better. That got us to the top of our asset-allocation band.

But we started buying in 2004 at $55.08/share and we've reinvested a lot of dividends since then for an overall $61.60 basis. And when I question that reinvestment wisdom I reach for a well-thumbed copy of Siegel's "The Future For Investors", so that I can remember why the market should continue to suck for another 5-10 years of reinvested dividends.

I'd put the money into international funds, but we're already above our AA there. If I bought more then the dollar would undoubtedly shock the world with a record-breaking turnaround. Our small caps have actually done better than DVY. So, for now, DVY seems to be the place to shop.

All those who've been kicking themselves for not buying Berkshire Hathaway might want to go take another look there, too. Or for the strong of heart, (*choke*) regional-banking ETF KRE.

If we don't have to sell (too many) shares, then we should be praying for a replay of 1966-82 with reinvested dividends... right?
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Old 06-27-2008, 08:31 AM   #13
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I'm still using 10% bands for most of my port, but I had to broaden the bands for IGR, PCRIX, and VWO to 15%. The volatility was killing me. PCRIX is now telling me to rebalance.
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Old 06-27-2008, 08:43 AM   #14
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If we don't have to sell (too many) shares, then we should be praying for a replay of 1966-82 with reinvested dividends... right?
Depends on your perspective and your age. That would be absolutely fantastic for young folks who just started investing in 1966. It would be horrible for folks preparing to retire in 1966.
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Old 06-27-2008, 12:52 PM   #15
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In our retirement accounts I rebalance whenever an asset class deviates by more than 5% (I check once or twice a month when I make new contributions). I rebalanced 2 weeks ago and already one asset class has deviated more than 3%, so in choppy markets like these I may rebalance several times a year. In our taxable account I use value cost averaging, so technically speaking I rebalance every time I add money to the account, that is twice a month.
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Old 06-27-2008, 05:59 PM   #16
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I can't understand what a calendar has to do with rebalancing.

You are saying that you will only rebalance if BOTH conditions are met, you are outside your range AND it happens on a specific date. I don't get it.

Rebalancing is all about bringing your AA in balance when it gets out of whack. Seems like the balance should drive the decision, not what month/day it is (except for tax issues).

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Old 06-27-2008, 07:14 PM   #17
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Thanks ERD50. I have been confused about rebalancing and for reasons i do not understand, I have had to do very little rebalancing in the past 5 yrs since I established my AA. I guess I will rephrase the original question. In either tumultous periods where there have been great swings in both directions or when there is a downward spiral like we are seeing now, should I continuously be rebalancing like FIREDreamer or once or twice a year like Jimho? My portfolio is all tax deferred so no tax consequences. However, Vanguard allows exchanges etc online or by phone once every 60 days. If I send in written instructions, by the time it's executed, it may be wrong.
Up until now, since 2003, it's been a no brainer. I am not sure what to do in these crazy times and will appreciate all input.
Thanks again
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Old 06-27-2008, 07:16 PM   #18
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I haven't thought a lot about rebalancing as my AA is only a few percent off of ideal right now. But I kind of liked Larry Swedroe's 5/25 rule. It's written up in his book The Only Guide to a Winning Investment Strategy You'll Ever Need (I try to ignore the silly title of this book). He also posted this at the Morningstar Vanguard Diehards site back in 2003 and I'll include his post here:
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THE 5%/25% RULE
Rebalancing generally incurs transaction fees, and it may have tax implications. Therefore, it should only be done either when new funds are available for investment or when your asset allocation has shifted substantially out of alignment. I suggest using a 5%/25% rule in an asset class's allocation before rebalancing would be implemented. That is, rebalancing should only occur if the change in an asset class's allocation is greater than either an absolute 5% or 25% of the original percentage allocation.
For example, an asset class was given an allocation of 10%, applying the 5% rule, one would not rebalance unless that asset class's allocation had either risen to 15% (10% + 5%) or fallen to 5% (10%-5%) . Using the 25% rule one would, however, reallocate if it had risen or fallen by just 2.5% (10% x 25%) to either 12.5% (10%+2.5%) or 7.5% (10%-2.5%). In this case, the 25% figure was the governing factor. If one had a 50% asset class allocation, the 5%/25% rule would cause the 5% figure to be the governing factor, since 5% is less than 25% of 50%, which is 12.5%. In other words, one rebalances if either the 5% or the 25% test indicates the need to do so.
The portfolio should undergo the 5%/25% test on a quarterly basis, and the test should be applied at three levels:
· At the broad level of equities and fixed income;
· At the level of domestic and international asset classes;
·At the more narrowly defined individual asset class level (such as emerging markets, real estate, small-cap, value, and so on.)
For example, suppose one had 6 equity asset classes, each with an allocation of 10%, resulting in an equity allocation of 60%. If each equity class appreciated so that it then constituted 11% of the portfolio, no rebalancing would be required if one only looked at the individual asset class level (the 5%/25% rule was not triggered). However, looking at the broader equity class level, one sees that rebalancing is required. With 6 equity asset classes each constituting 11% of the portfolio, the equity asset class as a whole is now at 66%. The equity allocation increasing from 60% to 66% would trigger the 5%/25% rule. The reverse situation may occur, where the broad asset classes remain within guidelines but the individual classes do not. Once again, the 5%/25% test is just a guideline. You can create your own guideline for rebalancing for risk. The discipline that the process provides is far more important than the ratios used.
In summary, rebalancing offers many advantages and is an important part of the investment process.
· It should be performed regularly, using a disciplined approach, such as the 5%/25% rule.
· It should be done whenever new investment dollars are available.
· It adds discipline to the investment process and maintains control of the most important investment decision, asset allocation.
· It allows investors to avoid style drift.
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Huh?
Old 06-27-2008, 07:32 PM   #19
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Huh?

Isbcal - have never done well in math throughout my life, I just don't get the 25% part of Swedroe's plan. Could you explain it as if you were to do so to a 10 yr old.
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Old 06-27-2008, 07:48 PM   #20
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...Could you explain it as if you were to do so to a 10 yr old.
I admit this rule stuff is a little obscure. You just want to apply the most restrictive number to the item you are trying to rebalance. Swedroe's 2nd paragraph contains an example. I'll just say a few things here and hope it helps. Suppose you have a 60% stock, 40% bond AA but it's now out of wack and is 53/47. The 5% rule would have you rebalance if stocks got below 55% (that is, 60% target - 5% = 55% rebalance point). Since you have 53% stocks you would sell bonds and buy stocks to get to 60/40. The 25% rule would have you rebalance if stocks fell to 45% (that is, 60% target X (100 - 25%) = 60 X .75 = 45%). Since the 55% rebalance point using the 5% rule is the most restrictive (first triggered) we use it and ignore the 25% rule.

Disclaimer -- I'd never subject a 10yr old to this kind of math torture .
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