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Old 01-20-2013, 09:13 AM   #21
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Originally Posted by NW-Bound View Post
Isn't the intention always either to have more money, or less volatility?
Well, the way I view it is whether the intent is to exceed market returns because I have a prediction of how they will behave. In Dec. if I believe the market will go up in Jan because the fiscal cliff will be resolved and I delay selling equities to bonds -- I would say this is market timing.

I think you can be a market timer even if you use completely mechanical rules. E.g., buy $X of equities when the 50 day moving average is above the 200 day moving average. The 'intent' of rules like this is to capture trends in the market which hopefully extend into the future.

In my view, rebalancing is about maintaining a constant risk portfolio as set out in your asset allocation. E.g., for a 60-40 portfolio a 50% market decline results in a 30% portfolio drop. If equities do well for a number of years and you don't rebalance, you will face potentially larger worst case portfolio declines. In this case I think rebalancing would actually lower future returns as equities have higher expected returns.
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Old 01-20-2013, 09:14 AM   #22
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So my strategy really is a hybrid. It looks a lot like market timing during periods when the market is seeing swings both up and down, but when the direction is almost exclusively either up or down, I act like a rebalancer.
I admire your ability to admit that your strategy is a hybrid.......and I can see that for some, a little added excitement gives life some extra zest
I'm not a serious student of rebalancing so I don't know the academic theories,etc. It is intuitively obvious (and hopefully also correct) to me that if you have a large decline and then rebalance, that you will gain on the recovery. It is not so obvious to me that if you rebalance every 3% on the way down that the same is true.........
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Old 01-20-2013, 10:28 AM   #23
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Wouldn't get too hung up on specific rebalancing deadlines. Prob for lor logistical reasons, most balanced funds have some flexibility in timing of trades. OTOH if you are motivated by predicted market swings.....
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Old 01-20-2013, 11:05 AM   #24
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Well, the way I view it is whether the intent is to exceed market returns because I have a prediction of how they will behave...
Some people who rebalance based on a predetermined threshold can indeed do well. They claim that they make no prediction of the future market, but they really do. Implicit in the rebalancing act is the belief that "what asset class goes up relative to another will come back down, and vice versa".

Seriously, I think the "dirty market timers" are derided because they are so cocky sure of their prediction of the short-term market movements, and go "all in" or "all out". Such drastic movements do not pay out over time. The exact timing is too difficult to predict.

On the other hand, even rebalancers who claim to be pure are still interested in and talk about economic cycles, secular and cyclical market bear/bull cycles, how the bond market has been enjoying such a long bull cycle which may not last, etc...

They say that it is only for talk, and they do not trade based on it. Fine, but I find it curious. For example, I do not care about spectator sports, and as I do not concern myself with which team will prevail, I do not follow any news about which players have joined which team, etc... I do not even know which team is playing against whom. Why should I?

All this is to suggest that there is some "market timing" in all of us. It's just a matter of degree. Although I have repeatedly admitted claimed to be a market timer, I can never be that sure about my predictions. Hence, I only varied my AA a bit based on what I perceive as where we are in the economic cycle. And I found out that that is called "Tactical AA". Whatever...

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If equities do well for a number of years and you don't rebalance, you will face potentially larger worst case portfolio declines. In this case I think rebalancing would actually lower future returns as equities have higher expected returns.
Yes, during the bull period of 1980-2000, rebalancing out of a long rise of the market would reduce one's return. By the way, Bogle, in a recent interview, said that he was not much of a rebalancer, because that meant selling out of a good rising asset.

And even if one does not rebalance because "equities have higher expected returns" as is commonly believed, that's still a bet that the future will be like the past. You see, one is always making a prediction, and the difference is simply about the time scale. The dirty market timer tries to predict the short-term movements, while the clean rebalancers are betting that stocks and bonds will return to their historical returns in the long run (how long though?). What do the latter base their belief on, other than faith?

And then, there are people who look much further ahead and think of the rise/fall of economic empires, while the others say that nah, the US is special and will not suffer the same fate as the Spanish and British Empires. We are all making bets about the future here.
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Old 01-20-2013, 02:21 PM   #25
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All this is to suggest that there is some "market timing" in all of us. It's just a matter of degree. Although I have repeatedly admitted claimed to be a market timer, I can never be that sure about my predictions. Hence, I only varied my AA a bit based on what I perceive as where we are in the economic cycle. And I found out that that is called "Tactical AA". Whatever...
I have to admit that recently I hit my bounds for REITs in my allocation (target=10% actual=12.5% which is at the trigger threshold) . I delayed rebalancing because I was lazy and maybe I succumbed to the magical thinking that hey there's a momentum effect so I should let it ride a bit. If I had rebalanced, I would have moved from reits to international (this was before the runup in the last few months).

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And even if one does not rebalance because "equities have higher expected returns" as is commonly believed, that's still a bet that the future will be like the past. You see, one is always making a prediction, and the difference is simply about the time scale. The dirty market timer tries to predict the short-term movements, while the clean rebalancers are betting that stocks and bonds will return to their historical returns in the long run (how long though?). What do the latter base their belief on, other than faith?
For me, it would be results from about the last hundred years. I know that the data points are not strictly speaking "independent" and the US may be susceptible to survivorship bias. But this belief is also supported by a logical mechanism (risk reward story, efficient information transmission, etc.) which lends strength to the data (or maybe it is the other way around and the data supports the theory).
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Old 01-21-2013, 03:57 PM   #26
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I don't know exactly where the boundary is. I think it has to do with trying to keep risk under control rather than maximizing your returns... but in any case, your delays are clearly market timing IMO. It does not mean it's "bad" in the sense that if you are happy with it, go for it.

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Today I sold about $18,000 worth of stock mutual funds to get back within my target asset range. Routine rebalancing, right? Well, not quite. It was a delayed implementation of the rebalancing I normally would have done at the end of December in order to start the New Year fresh. I intentionally held off on my year end rebalancing because it was looking as if there would be a resolution to the fiscal cliff negotiations, and I didn't want to miss out on a potential relief rally.

[...]

If I guess wrong and the market continues to go up after I sell, I've accomplished my goal of reducing risk and getting back to my target asset allocation. If I'm lucky enough to guess the market's direction correctly, I get to make a little money by repurchasing shares at a lower price.
Now, I wanted to comment about your bets. You make it sound at the end (where I bolded the text above) like there is no possible way to lose because in the worst case you'd be "rebalancing" and in best case, you make some money... But there are two parts to your bets here. Only because your first bet worked out, now you can try to bet again and in worst case end up with nothing or win again... Imagine for a second your first bet did not work out and there were no deal and we'd be re-living 2008-2009 now... So, in this scenario, your first bet would not have worked out, and because you had decided to not control your risk as much as your plan would have warranted otherwise, you'd have higher losses as a result today. Now, your choices would be to accept that loss and rebalance late with lesser overall portforlio value, or keep waiting / hoping for recovery with out-of-balance portfolio...

In other words, there is no free lunch here. Just a bet that did well but could have done equally bad.
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Old 01-22-2013, 11:39 AM   #27
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Now, I wanted to comment about your bets. You make it sound at the end (where I bolded the text above) like there is no possible way to lose because in the worst case you'd be "rebalancing" and in best case, you make some money... But there are two parts to your bets here. Only because your first bet worked out, now you can try to bet again and in worst case end up with nothing or win again... Imagine for a second your first bet did not work out and there were no deal and we'd be re-living 2008-2009 now... So, in this scenario, your first bet would not have worked out, and because you had decided to not control your risk as much as your plan would have warranted otherwise, you'd have higher losses as a result today. Now, your choices would be to accept that loss and rebalance late with lesser overall portforlio value, or keep waiting / hoping for recovery with out-of-balance portfolio...

In other words, there is no free lunch here. Just a bet that did well but could have done equally bad.
I see your point. If the market had taken a dive in January, I would now be worse off for not having rebalanced in December.

Nevertheless, I don't agree with your conclusion that I am now a "winner" because my first "bet" worked in my favor. I don't believe in comparing the results of the actual buys and sells I've made with hypothetical buys and sells that I might have made, but didn't. The appropriate baseline for comparison, it seems to me, is a comparison of how my actual buys and sells perform compared to a buy-and-hold strategy.

From this perspective, the only "bet" I've made in the last couple of months is the one I made on Friday. I am basically now on record saying that I think that now is not only a good time to rebalance for the purpose of minimizing volatility, but that it is also a good time to rebalance in the hope of repurchasing similar stocks later at a reduced price. The outcome of that bet is still unknown.

I always keep detailed records of my buys and sells to know how I'm doing when compared with buy-and-hold. It's nice that I've sold after a significant market uptick, but that doesn't make me a "winner". Whether I gain or lose money on Friday's sale will be determined by how the stock market performs in the coming days, weeks, months and years. If I lose money, I still have the consolation of knowing that I accomplished the traditional goal of rebalancing to reduce risk, but I will have still lost money compared to buy-and-hold.
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