Rebalancing your AA

[DawgMan]

So my AA rebalancing strategy has been to basically review my holdings in early January by looking at both the individual performance of individual funds/ETFs and overall AA relative to my target (in my case 70/30). I generally make my buy/sell orders with a limit basically at the last traded price that day as opposed to market orders... probably just to appease my need to employ may "market skills". However, it doesn't always pan out as the market may not cooperate (Good or bad) in the GTC order time. In my case this year, about 7% of my equity buys did not occur because the market just kept running up and I kept my limit order in place... of course thinking the market would dip which it never did. So fast forward to today and I am sitting with roughly 7% (maybe slightly less now due to current equity valuations) earmarked for equities in cash now afraid to employ because the market feels over frothy (my inner market timing skills say don't be a fool and put it in NOW!!). In the past when I have completed my rebalancing, I would general set & forget occasionally taking a peak at overall performance, but letting it ride until the end of the year.

Questions...

How often do you rebalance and what are your triggers?

If you were me, would you just invest the 7% now regardless of current market pricing or would you feel the urge to hold in cash for a dip and play market timer?

With continued high probability of multiple interest rate increases are you allocating more of your bond allocation in cash or staying in short/medium bonds/funds/ETFs?

I'm not RE yet, still 3 - 4 yrs out so still in accumulation mode in case that is relevant to a specific response.

[pb4uski]

I rebalance at least annually... usually in December. I also rebalance during the year "opportunistically"... for example, when the markets dropped after the Brexit vote last year I rebalanced. No particular triggers... it is judgmental other than in December.

7% is quite a bit... I would value average in over x months but reserve the ability to plunk the rest of it in if there is a sharp drop for a stupid reason.

I mitigate interest rate risk by using CDs and target maturity bond funds... technically, the target maturity bond funds had the same interest rate risk as a similarly dated bond, but mine are 2020 maturity so any interest rate decline would be recovered by 2020.

Since you're still accumulating, you can use new money to get to your desired AA... for example, if you target your contributions to equities then it will systematically fill the current equity gap you have. Similarly, when I was in my early/mid 40s I was all equities and realized that I wanted to have about 40% fixed income by the time I retired in my mid 50s, so I diverted new money to fixed income towards that end.

[W2R]

I put my answers to your questions in blue, and hope they help somehow.

Quote:

Originally Posted by DawgMan Questions... How often do you rebalance and what are your triggers? I rebalance to my 45:55 (equities:fixed) AA, during the first week in January every year. In addition, if the equities portion goes below 42.5% or above 47.5%, I rebalance at other times during the year. That almost never happens. If you were me, would you just invest the 7% now regardless of current market pricing or would you feel the urge to hold in cash for a dip and play market timer? I don't like market timing. I do like investing a small amount each month sometimes, like maybe 2% each month (whether I want to or not) until it was all invested. With continued high probability of multiple interest rate increases are you allocating more of your bond allocation in cash or staying in short/medium bonds/funds/ETFs? Same bond allocation as always. I'm not RE yet, still 3 - 4 yrs out so still in accumulation mode in case that is relevant to a specific response.

[LOL!]

Quote:

Originally Posted by DawgMan How often do you rebalance and what are your triggers? I rebalance often because my triggers tell me to. Generally, (but not always!), if my equities get above 62% of my portfolio, I will sell equities so that they are under 62%. For the low trigger point, I don't use a percentage of portfolio. Instead, I use one-day changes in the stock market or individual sector. So if something drops by more than a proprietary percentage that I am able to calculate in advance, then I am buying equities. There is no guesswork involved. The above is for rebalancing, but if I have new money to invest (say from dividends or a 401(k) contribution), then I can choose whether to buy equities or bonds because my portfolio is usually within "balance" already and a small amount of money is not going to make it out-of-balance. I will make an ad hoc decision on what to buy, but I will buy something within a week of getting the cash -- no matter what. If you were me, would you just invest the 7% now regardless of current market pricing or would you feel the urge to hold in cash for a dip and play market timer? I would find something to buy now. Bonds are down. REITs are down. There is always something. I would wait until the FOMC announcement though. If you can't invest 7% all-at-once, then write down that you will invest 3% now, 2% next month, and the rest after that. Of course, if there is a drop before that, write down that you will invest on the drop. You won't know that it is a dip because a dip is a drop plus a pop. You want to invest before the pop half. With continued high probability of multiple interest rate increases are you allocating more of your bond allocation in cash or staying in short/medium bonds/funds/ETFs? I am allocating more of my bond allocation to short-term corporate bond index. I have said as much in LOL!'s Market Timing Newsletter thread.

If you care to take a look, my market timing thread says exactly what I do with my real portfolio.

[DrRoy]

Quote:

7% is quite a bit... I would value average in over x months but reserve the ability to plunk the rest of it in if there is a sharp drop for a stupid reason.

+1. This is exactly what I would have said. Also, skip the limit orders going forward.