A question about rebalancing

[Perryinva]

I read where a lot of people have already rebalanced to maintain their AA, maybe multiple times, especially when there are huge drops, such as just happened. I also read where a lot of people say they “do nothing” and ride it out. The premise is that when the market recovers, they either pick up where they left off, because they either had enough cash to ride it out to prevent selling low (FIRE people) or are still w*orking so their portfolio is still in accumulation mode, and are not using it for income.

For those that rebalanced while down, the assumption is that they will benefit more during the recovery with their larger actual number of shares from the rebalance and actually come out ahead. So at what point do those people rebalance again when they are equities heavy? And isn’t there any fear that if they rebalanced when down, not knowing if that really was a bottom, that they actually put their portfolio in more jeopardy because if that wasn’t the bottom, and it does drop again farther down, their (paper) losses will be even more than if they actually didn’t rebalance?

So would I be correct in assuming that this is all just part of the world of investing to them, and the roller coaster levels are just part of the long term faith in the markets?

The reason I ask, is that while I certainly agree with this method of investing when “this time, it isn’t different, just like before”, (which I basically followed for the last 20 years and had no trouble sleeping, pre FIRE) when it appeared to me that it clearly IS “different this time”, if you already had enough cash to weather, doesn’t a defensive position, even if taken on the way down, with a resumption after the way up after the true situation has been determined, make more sense, as in all likelihood you would still come out ahead? I base this on on the time tested “the market takes the stairs up and the elevator down” theory, so while there is less time to react down, there is more time to react up. This is primarily a question for senior FIREs, as I would think that seasoned investors (which I am not), would take that kind of course, rather than risk increased losses of possibly an extended period, which with their EOL horizon being shorter, may never happen.

Or maybe this just proves that I am not as comfortable with my AA, even though I have plenty of fixed income, and my nut is basically for additional discretionary funds. For some crazy reason, I always thought of rebalancing when equities heavy, as protection from drops, by locking in profits that convert to income, as the main “safe” position, while rebalancing when significantly down is the opposite, and is inherently more risky because you are betting on a gain from an eventual increase. While I understand this during accumulation, while retired, it seems like this is too risky.

 

[besa]

I got into the stock market again after this last crash. I am planning to invest about ~$100k which is 5% of our nest egg.

The rest is as safe as possible in CDs, money markets/savings accounts, annuities, cash, and treasury funds.

Low risk bonds are an option as the CDs mature.

Ftmp, i see people here saying wait it out, but since I wasn't in, now is the time for me to get in a bit.

One person so far here posted that it is time to stock up on bullets and gold. Scary thought. Mad max stuff.

I have some more cash standing by if there is another crash. I will start DCA as my favorite stocks drop towards a bottom. That way I am not guessing.

I am using the Buffett strategy since it is simple to understand vs crunching variables and variances. Too much work for me. It has already saved me from speculating on some tempting penny stocks. Those have been my biggest loss since I started in the market 30 years ago.

The previous crash hurt me harder than it should have because I listened to my Wells Fargo Advisor. He has since retired and a new talking head replaced him. I use him for things, but not advice.

Looking forward to any and all replies folks offer you.

There are a lot worse things in life than working/worrying/thinking towards FIRE.

Thanks.

 

[tdv2]

You are going to get a lot of feedback on this topic from do nothing to re-balance on a time table or with re-balance bands.

I never had a firm investment policy statement but now I do....it's not complete but it's getting there. I was discussing re-balancing in another thread and some say they do it quarterly, others yearly, while still others said they were fearful of losing by re-balancing. I came to the conclusion that all I want to do is maintain my exposure to my chosen asset classes.....period. So, If my AA gets out of whack by more than 5% (I picked that percentage arbitrarily) during the year, I re-balance. Otherwise I re-balance once a year in late December regardless...even if I'm only off 2%....true things up so to speak. This correction made me realize more than ever to have all this written down in a policy statement.

Another thing I realized recently....the value of Roth conversions when the equity market is in the toilet. I had not really considered it before since I was converting at year end in the past. I made a change this time and converted half my number in March. While my re-balance moves didn't catch the recent low point dead on, my Roth conversion did. I admit I did the Roth conversion on gut feeling but don't consider it market timing because I'm not selling or buying anything.

Again, I have no idea where the market is headed, all I want to do is maintain my exposure both in good times and bad. You can look at it this way, what's the point of having an AA if you don't stick to it. One more point, If you have a glide path allocation strategy, it may be best to make that change on a calendar time table.

Of course, I goes without say, you should always try to avoid taxes when making moves....for me I have enough head room in my IRA's to make changes there.

 

[Closet_Gamer]

I've always maintained the position that I will rebalance when I'm 3% out of whack on an asset class. This almost never happens because I'm constantly using new cash to nudge back towards my AA during my routine investing.

The virtue of active rebalancing isn't just the "buy low" side, but also the "sell high" side. Skimming off the top of bonds that are up in order to fund buying equities that are down (for example).

For the first time in many years, I did an active rebalance last week.

I didn't move it all at once. It will take about two more months to fully actively rebalance at current price levels. I've always kept bonds tucked in my IRAs so I can do this rebalance with no tax consequences. I'm using new cash to nudge towards my AA in my after-tax account.

My $0.02.

 

[LOL!]

It seems that the OP has laid out all the issues clearly and there really is no more to discuss.

For myself, I rebalance on the way down into equities when my allocation to equities gets too low and I rebalance on the way up out of equities when my allocation to equities gets too high. I don't care what makes equities "too low" nor what makes equities "too high" and I don't care when that happens or how often it happens.


That is, I am very comfortable with the asset allocation that I have selected for myself.

 

[VanWinkle]

It seems that the OP has laid out all the issues clearly and there really is no more to discuss.

For myself, I rebalance on the way down into equities when my allocation to equities gets too low and I rebalance on the way up out of equities when my allocation to equities gets too high. I don't care what makes equities "too low" nor what makes equities "too high" and I don't care when that happens or how often it happens.


That is, I am very comfortable with the asset allocation that I have selected for myself.

+1 Exactly what I do!!

 

[mrfeh]

Or maybe this just proves that I am not as comfortable with my AA,

That's what it sounds like to me.

Rebalancing needs to happen in both directions. And it isn't for increased returns, but to control risk.

 

[pb4uski]

...So would I be correct in assuming that this is all just part of the world of investing to them, and the roller coaster levels are just part of the long term faith in the markets?

The reason I ask, is that while I certainly agree with this method of investing when “this time, it isn’t different, just like before”, (which I basically followed for the last 20 years and had no trouble sleeping, pre FIRE) when it appeared to me that it clearly IS “different this time”, if you already had enough cash to weather, doesn’t a defensive position, even if taken on the way down, with a resumption after the way up after the true situation has been determined, make more sense, as in all likelihood you would still come out ahead? I base this on on the time tested “the market takes the stairs up and the elevator down” theory, so while there is less time to react down, there is more time to react up. This is primarily a question for senior FIREs, as I would think that seasoned investors (which I am not), would take that kind of course, rather than risk increased losses of possibly an extended period, which with their EOL horizon being shorter, may never happen.

Or maybe this just proves that I am not as comfortable with my AA, even though I have plenty of fixed income, and my nut is basically for additional discretionary funds. For some crazy reason, I always thought of rebalancing when equities heavy, as protection from drops, by locking in profits that convert to income, as the main “safe” position, while rebalancing when significantly down is the opposite, and is inherently more risky because you are betting on a gain from an eventual increase. While I understand this during accumulation, while retired, it seems like this is too risky.

+1 You got it. Rebalancing in a down market is based a lot on faith in the markets in the long run... and like you, something I have done for the last 20+ years.

I was still working during the Great Recession and close to retiring so I was periodically adding to my nestegg. I found the courage to stay the course and not sell but I could not find the courage to rebalance and sell fixed income and buy stocks. However, the velocity of the decline in March 2020 was unprecedented and spooked me out of stocks for now.

But you are correct that in theory a couple weeks ago one should be selling bond and buying stocks.... in the long run the folks who did that will probably turn out looking good but the path to that goodness may be very rocky. I'm bearish short-term and bullish long-term.

 

[Rianne]

+1 Y
But you are correct that in theory a couple weeks ago one should be selling bond and buying stocks.... in the long run the folks who did that will probably turn out looking good but the path to that goodness may be very rocky. I'm bearish short-term and bullish long-term.

What do you consider long-term? 3,5,10 years? If it's 5 years, we're on the same page.

Did you sell your stock position and go to bonds, CD's, cash?

 

[Perryinva]

He has stated in another thread he is 100% cash, CDs etc. I still have a small, maybe $100k NASDAQ Fido MF, but am otherwise fully in HY cash, MM and bond funds. I am comfortable with this for the time being since I am up 6% YTD. Long term for me is 5 +years @ age 62, retired.

I definitely fall under more fear of loss than FOMO category.

When economic or man made reasons caused turmoil, then it made sense to me for sticking to an AA, but events like this....well, we will see, I guess.

 

[pb4uski]

Perry is right... as of right now I'm 47% CDs, 13% preferreds and 40% cash. Hence, the "target 65/35/0 AA TBD" in my signature line.

I am bullish 5-10 years.... bearish 1-2 year and 3-5 years is really hard to assess right now until we get some more clarity on the way forward. But at the same time I recognize that I "don't know nothing".... and could be totally wrong.

 

[N02L84ER]

It seems that the OP has laid out all the issues clearly and there really is no more to discuss.

For myself, I rebalance on the way down into equities when my allocation to equities gets too low and I rebalance on the way up out of equities when my allocation to equities gets too high. I don't care what makes equities "too low" nor what makes equities "too high" and I don't care when that happens or how often it happens.


That is, I am very comfortable with the asset allocation that I have selected for myself.

+1

 

[Animorph]

True rebalancing, just resetting your portfolio back to its target AA, is just barely more risky than buy and hold. You're not going to 100% cash on a whim. You're not trying for for life-changing gains.

I do change my AA in a bear market. I'm normally 25% bonds now. When the broad market hit 20% down I changed that to 20% bonds. At 30% down I changed to 15% bonds, which is where we are now. This may be riskier than just holding, but is still a measured and mechanical response, with no dependence on how I'm feeling about the market's prospects today.

If the market continues down, I sell more bonds and buy more equities. Great, buy low! If the market goes back up, I've already bought some extra equities to ride it back up and make a little extra. That's the best I can do without knowing what the market will do in the short term. In the long term, I'm definitely thinking it will return to its previous levels within a few years.

Ideally I make at most 10% more by doing this instead of simply holding tight through downturn and recovery. Again, not a life changing deal, but it gives me something to do. If I don't feel like fussing with it the next recession I wouldn't lose any sleep over just holding at 25% bonds, or whatever your AA is. That's a good strategy for those who don't want to spend time interacting with their portfolio, and works nearly as well.

I'm a little less algorithmic on the upside. Once the market is back to previous levels my AA reverts to 25% bonds. I'll start raising cash for expenses by selling only equities. If the there is a sudden market rise I might sell stocks and buy bonds. I only need to return to 25% bonds before the next bear market. Probably no rush.

I was actually all-in 100% equities at 50% down in the 2008 recession. If it had gone down another 5% I was planning to shift into equities that had dropped further than normal and out of equities that hadn't dropped as much. But my metrics didn't quite hit that level, so I never had a chance to do that. Anyway, it did work out well, it just could have been a little better. I always hate when it just misses a trigger point.

So do you feel worse about (temporarily?) losing money or missing a chance to make more?

 

[Perryinva]

I hope it was realized this was not a criticism, but more. 5 in the morning couldn’t sleep pondering. Since I am not as well versed in investing as many here, I was just sort of wondering reasons. Most answers I have found in other threads since. I am surprised at the number of que cera cera answers. Steel constitutions. As well surprised at the number that admit they have no idea where anything is heading except confident it will go up to previous levels and normalcy soon enough. I hope they are all correct.

For myself, I fully admit that I am fear of loss more than FOMO. The logic being, its harder to miss what you never had, than to lose what you actually did. I owned AMD in the early 2000’s and made decent gains taking some profits but finally sold when I was nearing break even. I maintained tracking it all the time and when it was $3/share I bought 1000 shares and when it hit around $15 I sold and thought I made a killing. When it hit 60, I was laughing at my stupidity but I wasn’t depressed about the gains I didn’t make.