Rebalancing triggers

[Dd852]

I'm curious about how religiously you all rebalance. I sat down this morning about to enter a bunch of orders and then decided I had no real desire to tinker. In the event I simply got out of VWO because I'm worried about emerging markets particularly with the strong US$. I was going to just put it to cash, but Dw pointed out that we are already sitting on 1.7 years worth of expenses in cash and there wasn't much point to doing yet more. So I switched into building on an existing position in VIG.

That leaves me (in my active portfolio, not in 401k) 56% equities, 5% reit fund (vgslx), 36% bonds and 3% excess cash (which I define as more than one year's expenses),

The 401k is very passive - it is all in a vanguard age targeted portfolio. Even though I'm retired already, it is tagged to the year I turn 65, 2025.

I have to say I'm quite worried about the height of the markets, but having never been a timer I don't think I should start now - and even if I were to start, I'm not sure how I'd actually play it!


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[papadad111]

A couple times per year is probably more than adequate to get back to asset allocation base percentages. Any more and it could be too tempting to play market timing.

As an aside- everyone seems to be piling into the stuff that worked in 2014. As a contrarian I guess I have had better luck not following the herd.

 

[foxfirev5]

Getting close to ER I only rebalance when I get above my 45% equity allocation. I also take a look at the few segments I have left beyond a total market index approach. Last week I got out of my Vanguard REIT fund which I've had through thick and thin. The very high NAV and low income combined with high volatility aren't too appealing for my situation.

With few funds I can rebalance my retirement accounts in less than 5 minutes. Simple is good.

 

[audreyh1]

I'm curious about how religiously you all rebalance. I sat down this morning about to enter a bunch of orders and then decided I had no real desire to tinker. In the event I simply got out of VWO because I'm worried about emerging markets particularly with the strong US$. I was going to just put it to cash, but Dw pointed out that we are already sitting on 1.7 years worth of expenses in cash and there wasn't much point to doing yet more. So I switched into building on an existing position in VIG.

That leaves me (in my active portfolio, not in 401k) 56% equities, 5% reit fund (vgslx), 36% bonds and 3% excess cash (which I define as more than one year's expenses),

The 401k is very passive - it is all in a vanguard age targeted portfolio. Even though I'm retired already, it is tagged to the year I turn 65, 2025.

I have to say I'm quite worried about the height of the markets, but having never been a timer I don't think I should start now - and even if I were to start, I'm not sure how I'd actually play it!


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That is not really rebalancing. That is changing your target allocation because you have concerns about how certain asset classes will perform in the near future, also known as tactical asset allocation.

It sounds to me like you are not really comfortable with your current allocation and should consider reducing your 61% equity exposure (since you are retired)?

On rebalancing frequency or triggers: One should not rebalance often. Annually at most unless there is some huge sudden market change which a trigger can signal. Asset classes need time to diverge for one to have the chance to sell high and buy low.

 

[audreyh1]

As an aside- everyone seems to be piling into the stuff that worked in 2014. As a contrarian I guess I have had better luck not following the herd.

I notice this too. It's very common at the end/beginning of each year. Yet my biggest winners in 2014 were the losers in 2014. And the screamers in 2013 seriously lagged in 2014.

The Callan Periodic table of investment returns is a good illustration of how asset classes change in relative performance from year to year. https://www.callan.com/research/files/757.pdf

 

[easysurfer]

Scheduled my annual rebalancing for today

 

[LOL!]

My rebalancing activities are noted in my marketing timing newsletter:
http://www.early-retirement.org/forums/f44/lol-s-market-timing-newsletter-57042.html

Trading VWO was very profitable in 2014 because it went down, then up. It finished around 0%, but we had a big return over 20% because we bought low and sold high.

As for rebalancing, I have an asset allocation plan and 3 kinds of triggers for rebalancing:
1. An asset class gets too high by a certain percentage, say 2%.
2. An asset class gets too low by a different percentage, say 3%.
3. An asset class has a big one-day drop, then its a buy almost no matter what in order to create slight overweight. The idea is to sell it within a few weeks or sooner. Note I used the word "almost" because sometimes a drop is caused by a dividend or something obvious.

The percentages triggers are a little tighter than some folks recommend, but I like to fiddle with the portfolio and this gives me a plan to do so. But note that 3% is total portfolio value, so an asset class that is 30% of portfolio has to go up 6% or more since 2% of portfolio is more than 6% of 30%.

 

[M Paquette]

Heh. From my personal official Investment Policy Statement:

... and allowing for a shift in value before needing rebalancing of up to 25%. I have the following allocations worked out. Holding limits as minimum to maximum values are in parenthesis.

• Cash - Vanguard Prime Money market Account 5%
• Vanguard Intermediate Term Bond Fund (VBILX) 20% (15% - 25%)
• Vanguard Inflation-Protected Securities (VAIPX) 20% (15% - 25%)
• Vanguard Total Stock Market Fund (VTSAX) 30.8% (23.1% - 38.5%)
• Vanguard Small-Cap Value ETF (VBR) 7.7% (5.78% - 9.63%)
• Vanguard FTSE All-World Ex-US ETF (VEU) 16.5% (12.38% - 20.63%)

Rebalancing

The percentage weighting to each asset class within the investment portfolio will vary. The percentage weighting within each asset class will be allowed to vary within a reasonable range of plus or minus 25 percent of the original allocation amount. To minimize taxable events when rebalancing is required, dividends and net cash inflows will be used to meet the strategic asset allocation targets. If cash flow is not sufficient to meet the target allocation for an asset class, I will decide whether to effect transactions in order to rebalance the asset allocation.

Holdings are checked against the holding limits as shown above in mid-February of each year. We will consider selling off holdings above the limit to raise cash for the next year and to purchase additional shares of any holding which is below the lower limit. In general, we will sell and buy just enough to bring the holding within limits, rather than try to re-center the holding, and otherwise let the holdings drift within limits.

Precise management of the sub allocations is not nearly as important as maintaining the overall 55% / 45% stock to fixed investment ratio.

I like to keep things as simple as possible, but no simpler.

 

[N02L84ER]

I have been retired almost 3 years. When I withdraw my expenses (less anticipated declared divs and cap gains for the upcoming year), I sell from the funds that have exceeded their targets by the most. So far, this has been the extent of my "rebalancing". This past Dec was the first time I actually got a rebalance trigger notice in my spreadsheet, but I ignored it because I knew that within 2 weeks the fund was paying out enough divs and cap gains to put it back in balance and it did.

 

[W2R]

My AA is 45:55 (equities:fixed).

I make my annual withdrawal and rebalance once each year during the first week in January.

Other than that, I rebalance if my overall equity allocation is either less than 42.5% or over 47.5%. This much imbalance doesn't occur very often.

On rebalancing frequency or triggers: One should not rebalance often. Annually at most unless there is some huge sudden market change which a trigger can signal.

+1

 

[mickeyd]

Current AA is about 50/50. I scan my account balances each December and if they are 5% or more off target, I make the appropriate exchange on line. The entire process takes about 30 minutes or so.

If my account's AA are not off by 5%, I'm finished for the year...except if the accounts are close to 5% (once they were off 4.8%). I give it another quarter (until 3/30) to make it to 5%. If my AA is off 5% by 3/30 I take action and rebalance. If not, no action.

Ease and simplicity now direct my AA.

 

[growing_older]

I like to set wide bands and rebalance infrequently. I do keep an occasional eye on the asset allocation and since I am still accumulating will redirect new investments into an asset class if it is underrepresented. I plan to do the reverse once I draw on the portfolio and take distributions from whatever asset class is overrepresented. Otherwise I generally don't act unless some allocation is off by 5% or more. Rare. Otherwise I try to rebalance less than annually. About 18-20 months is nice.

 

[Dd852]

Audreyh1- yes I think I'm betraying some nervousness at being 60+ % equities and yet I'm unwilling to put more into cash and bonds are unappealing at the moment beyond where I am with them. So - maybe just sit tight!


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[audreyh1]

Audreyh1- yes I think I'm betraying some nervousness at being 60+ % equities and yet I'm unwilling to put more into cash and bonds are unappealing at the moment beyond where I am with them. So - maybe just sit tight!


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This may be a good signal to go to a lower equity percentage.

Other than that, maintaining an asset allocation means you ignore things like whether you think an asset class is appealing. You just buy more if it goes down after a year, or sell some of it goes up after a year, and each year you get another chance to buy low and sell high by rebalancing.

 

[Options]

My AA is 45:55 (equities:fixed).

I make my annual withdrawal and rebalance once each year during the first week in January.

Other than that, I rebalance if my overall equity allocation is either less than 42.5% or over 47.5%. This much imbalance doesn't occur very often.



+1

+2
My plan as well.