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When to rebalance?
Old 09-29-2008, 08:13 PM   #1
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When to rebalance?

We're still in the accumulation phase, and maintaining our asset allocation through what we're putting in. So at the moment I'm not concerned about rebalancing within the portfolio. But I've noticed a few posts in other threads that mention rebalancing as a result of the recent market drops.

I had assumed that once we get to the point of having everything allocated according to plan, I'd go in once per year and do any rebalancing that's necessary. Whatever happens in between my yearly rebalance, happens.

Are people using another rule, like if things get some % out of whack, you start moving things around? I didn't plan on monitoring that closely. Or is this just an extreme situation that warrants the extra attention?
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Old 09-29-2008, 09:39 PM   #2
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Quote:
Originally Posted by WM View Post
We're still in the accumulation phase, and maintaining our asset allocation through what we're putting in. So at the moment I'm not concerned about rebalancing within the portfolio. But I've noticed a few posts in other threads that mention rebalancing as a result of the recent market drops.

I had assumed that once we get to the point of having everything allocated according to plan, I'd go in once per year and do any rebalancing that's necessary. Whatever happens in between my yearly rebalance, happens.

Are people using another rule, like if things get some % out of whack, you start moving things around? I didn't plan on monitoring that closely. Or is this just an extreme situation that warrants the extra attention?
Some people rebalance on a time schedule, some do it when things get out of whack by a certain percent. Technically, if ypu are trying to make sure that your portfolio stays within the allocations you have previously set, then it would be best to do it based on %ages, not based on time.

But we are people, not machines. I rebalance only once a year (when do my taxes, I add everything up and redistribute as needed). This suits me fine. It also allows me to save money on taxes, since I send the "distributions" (dividends, mostly) from my taxable funds to a money market "holding" account. I first use this money to add to accounts that are low, since I've alredy paid taxes on it. If I rebalanced monthly or even when the percentages exceedd a window, I'd have to sell stock (generating captial gains taxes). Hey, maybe in another week those stocks will ahve dropped down again and I could have avoided those taxes.

Also, there are studies that show that frequent rebalancing actually reduces your overall returns. This isn't too surprising, since the primary reason to rebalance is to lower your risk (by redistributing to assets classes that are "down") and not necessarily to increase return.

Finaly, I don't want to start tracking my assets to the degree necessary to rebalance when they get a certain % out of whack. I've got other things to do with my time, and tracking assets is only a tiny step removed from tinkering with them--a step which I know will cost me money.
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Old 09-30-2008, 07:06 PM   #3
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Thanks, samclem, that sounds like what I was thinking, but better articulated

It seems like if you went with %, it would be too easy to mess with it too often. But I guess it seems that way partly because things have been gyrating lately.

Mainly I am lazy and would rather take the "less often" approach so I am happy for a second opinion that once a year is adequate, even if it might not always be optimal
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Old 09-30-2008, 08:05 PM   #4
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If I were still in the accumulating stage, I would direct incoming money towards whichever fund(s) were down the most.

I do the % deviation to my rebalancing. But I still don't like to rebalance too often - preferring no more than once a year. I may make an exception this year. If things are still out of whack in Jan, I'll probably go ahead and rebalance.

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Old 09-30-2008, 09:19 PM   #5
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Give more detail and get a better response.

How early in accumulation phase? If one deposit would unbalance you, then just make sure all deposits are in line with allocation. Meaning if you are 80-20 stocks-bonds and stocks are going down, then maybe a couple of deposits which are 100% stocks gets you back to 80-20. If large caps drop further, just deposit extra into the large caps fund.

If one or two deposits does not put you back in line, will one year's worth of deposits? Meaning if you contribute 20k/year to retirement accounts, will that 20k align you? If so, just send 100% of all contributions to the fund or funds needed.

If one year's deposits don't realign you, then I would advise you want to time rebalancing based on a 10% market correction or once per year.

I rebalance my Roth IRA with deposits Jan-August- I am maxed after 8 months and the large deposits help rebalance month to month (for example I need to contribute all 5k in 2009 to large caps because my allocation is currently heavy in small and foreign stocks). The 5k gets me back to my desired allocation, so I am not selling anything.

In my 401k I just buy/sell on Dec 31 to start year off with proper allocation, then in June I adjust contribution percentages to buy more of what is lagging. Usually I don't have to sell much in December if I did June correctly.
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Old 09-30-2008, 09:29 PM   #6
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Most people who answered a poll on rebalancing do their rebalancing only when their asset allocations goes out of whack by a give excess. That is say they want US stocks to be 40% of their assets, then they might only rebalance when their portfolio has less than 35% of US stocks or more than 45% of US stocks.

It turns out you can look often to see if you need rebalancing, but if you use these "bands" or "ranges", then you probably only need to rebalance once every year or two, if that. You can also reduce the need for rebalancing by directing distributions and new money to the asset class that is underweighted.

See: Bogleheads :: View topic - What's your rebalancing timing strategy? for the poll.

See this on rebalancing in the asset allocation tutorial thread:
Asset allocation tutorial?
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Old 10-02-2008, 06:38 PM   #7
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Thanks for the additional comments. We're 7 years out from FIRE (and will mostly be living off DH's pension at that point). I just this year got more sophisticated with our asset allocation, and added some categories. It will take a couple years of new contributions to get up to where we want to be with those, which I feel fine about.

So I wasn't so much asking for advice to use immediately, just wondering if I was missing something. I guess I was thinking that with the market swinging around so much, does it really make sense to rebalance in the middle of that when tomorrow things might look a lot different, and be back to where you wanted anyway. But really, it's not like that happens very often so I guess it's not a big issue.
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Old 10-02-2008, 10:25 PM   #8
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Rebalancing seems like the weak link in the chain of modern portfolio theory, asset allocation, and buy-and-hold investing. I don't detect any real consensus about how to do it. Even canonical books like Four Pillars waffle on the issue, in my opinion. And when there is no system for it, rebalancing can become the smoke screen for a wide array of market-timing, wealth-deflating maneuvers.

My own experience in this area grows mostly from the school of hard knocks. DO use new money to rebalance (rather than selling and buying), as much as possible. DON'T ignore your asset allocation for months at a time or assume that 20% returns in one asset class will go on forever. DO rebalance before there is a regression to mean, or beyond. DON'T rebalance all at once, for the same reason that DCA is less risky.

For what it's worth, I lean to a system of rebalancing when the AA has drifted by 5% or more, rather than at some set time interval. (But I can't justify this with theory, or point to any conclusive argument, other than some smart people doing it that way.....)
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