What are your rebalance triggers?

[Golden sunsets]

I know this smells a bit like market timing, but I’ll throw this out to the group anyway. What are your rebalance triggers for your asset categories? I’m sure it will be obvious to the stalwart AA “non market timers” of which I consider myself a charter member, that I may be deserting my “Investment Policy” but I had set my parameters for total equities at +/- 2.5%. As of today I’ve exceeded them. Ergo I should rebalance! Except that I last rebalanced on 1/3, twenty days ago. So my question to my fellow FI compatriots is, what are your triggers? And is anyone wavering (aka market timing) in disregarding rebalance triggers given this frothy market?

Perhaps this should be a poll, but I don’t know how to set that up. Mods is this something you could help with?

 

[Cessna152]

For what it's worth, Vanguard has a PDF on "Best practices for portfolio rebalancing".

 

[shortstop14]

+/- 5% for me, and I'm rebalancing now. But this is the first time in five years retired that I've actually moved outside the range. Usually just resetting my cash allocation after tapping it for living expenses gets the job done.

I'll admit to hesitating about taking gains off the table when the market still seems to be running up, but I want to stay consistent with my 60/33/7 allocation. Mostly so that when the bad times come, I'll sell fixed investments to buy equities in order to maintain consistency - stick to the plan.

At age 61, I'm still living off my taxable account, but it's getting harder to free up cash without taking capital gains. It looks like this year I won't have the headroom to use Roth conversions to hit my income target, capital gains will get me there. Four more years of keeping income low for ACA subsidy purposes. Guess there are worse problems to have than too much gain.

 

[audreyh1]

They were 5%, having me rebalance when say 55/45 went to 57.8/42.2.

Then 2008 happened, and I rebalanced twice during the year (after Jan) and had my hat handed to me as I pulled down fixed income a lot each time I rebalanced. I still rebalanced a final time in Jan 2009, because I was out of balance again.

So I widened my triggers to 8-10%. Now it takes a lot more to trigger a rebalance mid-year: 50/50 would have to get to 54/46 - 55/45 to require a rebalance during the year. I prefer less frequent rebalancing. And rebalancing is a taxable event for me.

In practical terms, my equity funds usually pay out large distributions in December in good market years, so by the end of the year most trimming is already done and I usually only have to add to bonds when I rebalance in January. If things are close to my target allocation I don't mess with things. But it does mean that I effectively rebalance each January already.

My rebalance triggers were never triggered in 2017. It was a little tough waiting for the December distributions, but they were big enough to get me very close to my target allocation in equities. And I just needed to bring my bonds up to allocation.

 

[SecondCor521]

My IPS says I must rebalance when I am 2% off of my target and I may rebalance to my target any time when I am within that 2%. My target AA is 90/10 so my rebalance limits are at 92/8 and 88/12.

I have rebalanced three times this month simply because it sure seems like we could see a correction at any time now and I want to be as close to my target AA when the market starts to retreat.

 

[REWahoo]

I'm not sure what triggers the Wellesley and Wellington fund computers to rebalance. Unclemick might know.

 

[audreyh1]

​

I'm not sure what triggers the Wellesley and Wellington fund computers to rebalance. Unclemick might know.

If they have regular fund inflows they can rebalance using those. Also with outflows.

 

[cooch96]

The calendar. I rebalance the week after the New Year. I try not to care if the funds get off by xx% amount. This has been a bit difficult, but so far so good. I am not a fiddler, I’ve been letting the stocks ride for the whole 52 weeks.

 

[LOL!]

Generally, I want my equities to be between 58% and 62% of my portfolio.

So if equities go above 62%, then I sell some equities to get back down under 62%. I don't sell to get down to 60%, but I am allowed to do that.

I buy equities whenever they drop quite a lot in a single day. So far, I have never had to buy equities when they dropped to 58% of my portfolio because they always drop quite a lot in a single day before the portfolio gets down to 58% equities.

So with the equity markets going up, my portfolio keeps hitting 62% and I keep selling back down to 62%. Thus, I am making no major selling moves and this is seen if you look at the math. For example, on a million dollar portfolio with 62% equities, that is $620,000 in equities, so exchanging $20,000 from equities to bonds is not a big deal.

 

[sengsational]

=VLOOKUP($B127&"Target Allocation",lookup,U$1,0)*1.1
=VLOOKUP($B127&"Target Allocation",lookup,AD$1,0)*0.9

That's what it says. But I rebalance whenever I feel like it, lol!

Usually, I'll see some comments on this forum about the market doing something. At that point, I'll download the current balances and see if anything is getting close or has crossed the line. Usually I do something long before it crosses the line because I have very little self control.

 

[ejman]

Being lazy 10% rebalance bands are required to disrupt my usual slumber - getting close to that alarm clock going off now. The question on a prior post as to when Wellesley/Wellington rebalance is intriguing as I have often wondered how they do it but I've never seen an explanation. (and I own a lot of those two)

 

[IQuit]

I'd been quite aggressively rebalancing in my tax deferred accounts until I saw some references on this forum that too frequent rebalancing hurts performance so I fired up Portfolio Visualizer and tested what options they have (none, monthly, quarterly, semi-annually, annually, and the 5% / 25% rule) with a total market 70/30 type portfolio. I tested different ranges of years across good times and bad. Sure enough, pretty consistently less turned out to be more. The 5% / 25% rule typically came out slightly ahead of the rest typically with no rebalancing last. It wasn't much of a performance difference but if we're in for a low return decade I'd like to get every edge I can ... I'm using wider bands now and stopped tinkering so much.

 

[audreyh1]

You need time for your asset allocations to diverge. According to studies, a year seems to be generally optimal, and 18 months for taxable accounts.

I generally do it annually simply because my most of mutual funds pay out distributions in Dec and I take them in cash.

But it seems like a lot of folks here are nervous, and frequent rebalancing is helping them deal with it. So it's kind of hard to argue against the sleep at night factor.

If the market were dropping 3% every month, would everyone be rebalancing as often on the way down?

 

[SecondCor521]

If the market were dropping 3% every month, would everyone be rebalancing as often on the way down?

Assuming stocks were dropping more than bonds, yes, my plan would be to rebalance from bonds to stocks on the way down. Every month, or every few weeks...whatever it took to keep me above 88/12.

 

[scrabbler1]

In my IRA, where I rebalance the most and a more fixed range of acceptability in my AA, I look to see if a move of at least ~$10k will get my AA back into my acceptable range. In my taxable account, I am also looking at realized cap gains to see if I will generate income which can endanger my ACA subsidy. I am also looking at the changes in income generation as a result of moves between my stock and bond holdings.

 

[sengsational]

One thing is for sure. If you come to this forum every day, it's hard to miss posts that convey the the message that "maybe it's time to take some funds off the table", given a a surge in pricing.

 

[audreyh1]

Assuming stocks were dropping more than bonds, yes, my plan would be to rebalance from bonds to stocks on the way down. Every month, or every few weeks...whatever it took to keep me above 88/12.

If stocks are dropping rapidly, and you are rebalancing often, your fixed income will shrink rapidly too. At some point you may face whether you have enough fixed income left to get you through a few years if things don’t recover quickly - unless you are employed in which case it doesn’t matter.

Maybe play the Oct 2007 to March 2009 scenario and see what happens with your rebalancing system.

 

[DEC-1982]

I thought a 5% change in 60/40 meant 60 had to go to 65% before re-balancing. Just my interpretation, possibly the conventional interpretation is 62.5/42.5 requires re-balancing. At any rate, my interpretation has kept me from re-balancing any time during the middle of the year for the last few years.

 

[Golden sunsets]

My IPS says I must rebalance when I am 2% off of my target and I may rebalance to my target any time when I am within that 2%. My target AA is 90/10 so my rebalance limits are at 92/8 and 88/12.

I have rebalanced three times this month simply because it sure seems like we could see a correction at any time now and I want to be as close to my target AA when the market starts to retreat.

Three times this month already-Wow. I guess I shouldn't be concerned if I have to do it twice this month then.


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[LOL!]

One can look back just 2 years to see what happened when markets were down about 20% and more from their highs. Does anybody even remember? I suppose we could look back at discussions we had back then to see who was buying equities in acts of rebalancing.

 

[audreyh1]

I thought a 5% change in 60/40 meant 60 had to go to 65% before re-balancing. Just my interpretation, possibly the conventional interpretation is 62.5/42.5 requires re-balancing. At any rate, my interpretation has kept me from re-balancing any time during the middle of the year for the last few years.

A 5% increase in 60% allocation would mean it goes up to 63%. Fixed income would drop to 37% in that case by definition. That’s actually a bigger drop in fixed income in that case -7.5%. 38% would have been a 5% drop in bond allocation.

I think most people use this definition or subtract the changes in the two allocations which is close: 60/40 goes to 62.5/37.5 so that the change in spread hit 5%. Or the average of the increase in stocks plus decrease in bonds was 5%.

It’s easier to do the math on a target equal 50/50 allocation. 52.5/47.5 means a 5% increase in equity allocation and a 5% drop in bond allocation. Going from 50/50 to 55/45 means the equity allocation increased 10%, bond allocation dropped 10%.

I use 8 to 10% which by my definition would mean 54/46 to 55/45 would trigger rebalancing back to 50/50. I multiply because I have some small allocations within the larger allocations, such as REITs, at 5% of the equity allocation, and it would be out of balance if it dropped below say 4.4%-4.5% or above 5.4%-5.5%.

 

[GravitySucks]

If stocks are dropping rapidly, and you are rebalancing often, your fixed income will shrink rapidly too. At some point you may face whether you have enough fixed income left to get you through a few years if things don’t recover quickly - unless you are employed in which case it doesn’t matter.

Maybe play the Oct 2007 to March 2009 scenario and see what happens with your rebalancing system.

Good question.
I've happily been buying another year wrung on the bond ladder this last couple of years whenever the equities portion went up enough to fund a year. Now the ladder is complete I'm thinking of rebalancing to a shorter term bond fund.
I've not sold bonds to fund equity buys yet and I've been living off investments only for 4 years. I have sold fixed income to fund living expenses at times though.
I have a feeling it's going to be tough to sell bonds to by stocks in a crashing market.

 

[REWahoo]

I have a feeling it's going to be tough to sell bonds to by stocks in a crashing market.

It most definitely was in late 08 and early 09. I outsourced my bravery by having a large chunk of the portfolio in balanced funds. Saved me from trying to work up the courage to rebalance - I just had to hang on for the ride.

 

[audreyh1]

I have a feeling it's going to be tough to sell bonds to buy stocks in a crashing market.

It’s incredibly psychologically difficult to do when facing the carnage after 2008.

I think some folks didn’t rebalance so lost out on a big opportunity to buy low, although you didn’t know it at the time. And others, unfortunately, sold at or near the bottom and couldn’t bring themselves to get back in.

In Jan of 2009 there was no obvious stop to the bleeding. We didn’t know if the stock market would continue to drop during 2009 (it did for the first few months). We didn’t know whether recovery would take years - at the time it seemed like it would. You are facing a great unknown.

I had a floor on my fixed income that I was not willing to drop below. That’s the only way I was able to get myself to rebalance in Jan 2009 after rebalancing three times in 2008.

 

[SecondCor521]

Three times this month already-Wow. I guess I shouldn't be concerned if I have to do it twice this month then.


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They all have been very small "true-up" rebalancing...on the order of basis points, not percentage points, of movement.