rebalance bands

[Dtail]

Judging from futures tonight, be ready to start sniffing tomorrow

Another dead cat bounce??

 

[audreyh1]

Rebalancing doesn't mean trying to chase tops and bottoms. That's why you set up some criteria and let it be more mechanical. And you can take your time about it too.

Personally, I don't care if I miss a sudden two day plunge and recovery. But if things are definitely still way down at the end of a quarter or whatever and meet my criteria, I'll rebalance.

 

[Finance Dave]

I have been buying "chunks" of equities every week. I will continue to do so. My equity position was below 10% when the drop started...I'm now about 18%.

Like my dad said years ago, "you only have to become rich once". I have no desire to lose it all in the stock market, so I have a tolerance threshold of 40% max equity position. I figure at that level, a 40% drop means I lose only 16%, which I can live with.

You might say I gave up a lot of gains over the past 3 years by not being in the market, and you'd be right about that. We have enough money to live life the way we like at our low AA equity position. Instead of "needing" to stay heavily in equities to beat inflation, we decided to simply "oversave"....so we w*rked an extra 2 years and padded our accounts...and now we are happy with a "real" return of about 1-2%.

Those 3% CDs I bought over the past year are looking really good right now.

 

[Out_the_Door]

I haven't been retired long enough (about 7 weeks) to have to rebalance but at this (early) stage of the game my asset allocation is: money I cannot afford to lose is in bonds, MMF and CDs and everything else in stocks. I don't see that changing anytime soon.

 

[Out-to-Lunch]

My IPS says to rebalance yearly (October) and then 5% bands in between. I will freely admit that I didn't know at the time that I made my IPS just how much market movement was required to hit a 5% band. (t's a lot.) I will also admit that I occasionally rebalanced over the past decades when I was "only" a few percent up or down.

Today, I legit hit my 5% rebalancing band, I think for the first time in my life. I went ahead and rebalanced; I know that I could benefit from a dead-cat bounce, or I could get cut by the falling knife, or something in between that could last for years. But now I don't have to think about it and strategize.

 

[ziggy29]

Rebalancing doesn't mean trying to chase tops and bottoms. That's why you set up some criteria and let it be more mechanical. And you can take your time about it too.

Personally, I don't care if I miss a sudden two day plunge and recovery. But if things are definitely still way down at the end of a quarter or whatever and meet my criteria, I'll rebalance.

Right. I use a somewhat modified rebalancing, considering both time and variance from my target AA.

When I am 5% off from my target (currently 55/45), I will rebalance, but ONLY if it's been at least 6 months from my last rebalancing. That's because in the short term, hot asset classes tend to stay hot and falling knives tend to keep falling. Rebalancing more than that, I think, minimizes the benefit of momentum.

But I will always rebalance at least once every 18 months, recognizing that over a longer term, "hot" asset classes tend to revert to the mean. I am using research from Bill Bernstein and others that suggest 12-18 months as the optimal rebalancing period, though that came out two decades ago and maybe things have changed a bit now. But it has worked well for me.

 

[BeachOrCity]

At 50/50 AA it takes a about 20% shift in stocks (assuming bonds are flat) to trigger a 5% +/- band.

This seems pretty sound to me. Not adjusting for corrections or Normal up years too quickly, but also adjusting when we hit a bear market (20% decline).

Example
100k. Of which 50 is bonds and 50 is stocks.

20% decline in equities. You have 40k in stocks and 50k in bonds. ....and you are a bit more than 5% off where your ips says you should be 45k in each.

So +/- 5% bands means very infrequent rebalancing

 

[big-papa]

Rebalancing doesn't mean trying to chase tops and bottoms. That's why you set up some criteria and let it be more mechanical. And you can take your time about it too.

Personally, I don't care if I miss a sudden two day plunge and recovery. But if things are definitely still way down at the end of a quarter or whatever and meet my criteria, I'll rebalance.

Lots of ways to do this. What I do:
- New money goes to whichever asset(s) are below target.
- Dividends/Cap gains go to a cash account and are redistributed to move things close to the target AA.
- If I were retired, I would withdraw proportionally, again, to move things back towards my desired AA.
- To prevent a bunch of back-to-back rebalancing when markets are volatile day-to-day, I only look at whether my AA has crossed my bands once per month. Not perfect, but it also has the added potential benefit of avoiding wash sales and avoiding frequent trading policy violations that mutual fund companies have. An alternative might be to mark when AA crosses a band and then require that it stays crossed for X number of days. Haven't backtested anything like that, but it's sort of "momentum-like".

Speaking of rebalancing. Some of my sub-accounts have push-button rebalancing, but with differing results.
1. My HSA. Seems incapable of getting it all done in a single day which means by the time it's done there can be a lot of drift from where you wanted things to be. Last time I did it, there was a straggler that I had to take care of manually. Probably won't use that feature again. This is HealthEquity
2. My deferred compensation account. This account allows for daily changes in your AA any way you want. The last time I did push-button rebalancing everything was correct to the penny after closing. This is at Prudential.
3. My current 401K. Last time I did it, when it completed after business hours, things were off by around 2.5% or so, but still within my bands. Since they prohibit doing it more than once per 30 days, I'd prefer that they get a lot closer than that and don't quite understand why they can't nail it like a previous 401K I had at Fidelity did. This one is at Vanguard.

 

[big-papa]

At 50/50 AA it takes a about 20% shift in stocks (assuming bonds are flat) to trigger a 5% +/- band.

This seems pretty sound to me. Not adjusting for corrections or Normal up years too quickly, but also adjusting when we hit a bear market (20% decline).

Example
100k. Of which 50 is bonds and 50 is stocks.

20% decline in equities. You have 40k in stocks and 50k in bonds. ....and you are a bit more than 5% off where your ips says you should be 45k in each.

So +/- 5% bands means very infrequent rebalancing

The premise is still true in that 5% bands tend to have relatively infrequent rebalancing events over the long term. However oftentimes when stocks take a dive, bonds go in the opposite direction (fortunately), so usually less than a 20% drop in stocks will trigger a rebalance event depending on how much bonds zigged when stocks zagged. I say "oftentimes" because there are no guarantees and it hasn't always happened that way.

 

[big-papa]

A big part is how people actually use triggers.

I generally rebalance annually. It’s convenient since in addition to taking annual withdrawals, I receive a lot of distributions in December. I usually have some tidying up to do.

So the triggers are really for a major market event during the year. Rare. Otherwise, any tweaks will be handled the next Jan.

Overall there isn't much difference in performance whether one uses bands or just does annual rebalancing. If everything for me was in tax deferred accounts, I'd probably just do annual. However, I have approx. 40% of my holdings in a taxable account. If you only use bands, then depending on how loose or tight you make them, over the long haul you're going to have fewer rebalancing events than annual rebalancing does and potentially fewer taxable events, especially if you're still in accumulation mode. And it doesn't take a major market event for that to happen. Generally speaking, over the long term, stocks have better returns than bonds. So, eventually the stock to bond ratio is going to trigger a rebalance on the high side. On the low side, yes, it's usually major market event that causes a rebalance.

 

[audreyh1]

Lots of ways to do this. What I do:
- New money goes to whichever asset(s) are below target.
- Dividends/Cap gains go to a cash account and are redistributed to move things close to the target AA.
- If I were retired, I would withdraw proportionally, again, to move things back towards my desired AA.
- To prevent a bunch of back-to-back rebalancing when markets are volatile day-to-day, I only look at whether my AA has crossed my bands once per month. Not perfect, but it also has the added potential benefit of avoiding wash sales and avoiding frequent trading policy violations that mutual fund companies have. An alternative might be to mark when AA crosses a band and then require that it stays crossed for X number of days. Haven't backtested anything like that, but it's sort of "momentum-like".

Once retired some of those things are fine in a tax deferred account, but not so practical in a taxable account. Certainly not new paycheck money coming in to help with ongoing rebalancing.

I generally let my dividends and distributions accumulate in cash during the year in my taxable accounts. Most occur in Dec anyway. This can cover some of the withdrawal the next Jan without needing to sell from taxable funds because I reinvested. Then there is some cleanup/rebalancing required with what remains. If things are pretty close already I don’t bother, or do the minimum with an eye on taxes.

The rest of the year I check my AA at least monthly.

 

[USGrant1962]

I use -5%/+6% equity bands, with sub-bands for international and REITs (Core 4 portfolio). I hit my lower band on international equity yesterday, and my fixed income is within 0.5% of its upper band. So this morning I bought some Global Minimum Volatility with money market cash I had not deployed, and rebalanced from bonds to international in my big 401(k). I still have about 8% in money markets vs. my target of 4%, so if we tip into a real bear I can rebalance again.

That was nothing huge, less than 3% of my portfolio moved, and it is only my 2nd market-driven rebalance since my 2017 semi-retirement. The first rebalance was in 2018 when the Dow dropped 831 points on October 10.

 

[big-papa]

Once retired some of those things are fine in a tax deferred account, but not so practical in a taxable account. Certainly not new paycheck money coming in to help with ongoing rebalancing.

I generally let my dividends and distributions accumulate in cash during the year in my taxable accounts. Most occur in Dec anyway. This can cover some of the withdrawal the next Jan without needing to sell from taxable funds because I reinvested. Then there is some cleanup/rebalancing required with what remains. If things are pretty close already I don’t bother, or do the minimum with an eye on taxes.

The rest of the year I check my AA at least monthly.

Yep, everybody's circumstances are different. Not just whether they're retired or not, but the nature of their individual portfolios as well.

As for me, once retired, I'll likely do quarterly withdrawals since my taxable accounts use ETFs that do distributions quarterly. I'd rather be able to use the money from the distribution immediately. Rebalancing as part of the withdrawals quarterly means that exceeding rebalancing bands will probably be extremely rare.

Cheers.

 

[audreyh1]

Wow - I actually looked, and my rebalance trigger was hit today! 50/50 to 44.7/55.3. I guess market down near 20% was enough to get my 10% bands to trigger. Total portfolio is down 9%.

It seems so fast. Only 2.5 weeks ago I was at target. My head is spinning.

Maybe I misread this audience. Perhaps this group is more stoic in declining markets than the majority of investors. In my case, if 10% was a trigger point the market would have to drop 42% before rebalancing. As I mentioned earlier, I don't have a rebalance plan at all and don't have rebalance triggers.

My scenario didn't match your calcs. I thought you might be estimating 2X my calcs. For me 10% move is 50% stocks going to 55% stocks or dropping 45% stocks. In the old days (2008) I used to trigger on half of that.

 

[tdv2]

I hit my 5% re-balance point and made a change to get back to nominal (60-40). I have a policy and I'm sticking to it.....sometimes it doesn't feel right but so be it. I am making changes in my IRA accounts only at this point.


Here is my list of things to do:

1. Do half my Roth conversion for the year today.
2. Consider tax loss harvest--I have an international fund that is -5%. Was thinking I would sell in taxable and add back in IRA. (make sure I don't violate wash sale rule)
3. Stay vigilant and don't make decisions based on emotion.

 

[atmsmshr]

I hit my 5% re-balance point and made a change to get back to nominal (60-40). I have a policy and I'm sticking to it.....sometimes it doesn't feel right but so be it. I am making changes in my IRA accounts only at this point.


Here is my list of things to do:

1. Do half my Roth conversion for the year today.
2. Consider tax loss harvest--I have an international fund that is -5%. Was thinking I would sell in taxable and add back in IRA. (make sure I don't violate wash sale rule)
3. Stay vigilant and don't make decisions based on emotion.

Very Good advice = any rebalancing should be done with consideration of tax implications.

 

[scrabbler1]

My rebalance band is only 3% but it applies just to my tIRA. I made one small rebalancing move last week to get me back into range. I shift a little from stocks to bonds every year, so this downturn sorta took care of that anyway.


My taxable account is more geared to generate income from the big bond fund, so as long as it keeps generating its usual income I don't do any rebalancing there. I don't have any specific rebalancing bands.

 

[ripper1]

This is falling way too fast.....not rebalancing nothing

 

[audreyh1]

Me neither. I don’t like to do things in a rush and like to take my time. I don’t normally even look at my AA except on Fridays, and sometimes only monthly. I’ve never been in a situation where the markets have gone down almost 30% in less than a month. As devastating 2008 was, it unwound much more slowly.

However, I probably will rebalance at quarter end.

I do attribute the crash (because I think it will qualify) to the markets being so wildly overvalued IMO. They were priced for perfection+, so a giant whoosh is not unexpected.

 

[Dtail]

This is falling way too fast.....not rebalancing nothing

Same here. I have saved 1.5% returns with my small bond allocation and just not ready to put it back to equities yet.

 

[BeachOrCity]

Same here. I have saved 1.5% returns with my small bond allocation and just not ready to put it back to equities yet.

agree with everyone that they MAY rise a bit quickly at some point but no way they will fully recover as quickly as they fell.

My personal opinion is this will only quickly recover if somehow this virus fizzles out which is not expected at this point. Otherwise some lasting damage.

For those of us retired or near retirement our risk is much more of losing a lot than missing out on a sharp uptick.

 

[foxfirev5]

IMHO rebalancing is just another form of market timing. I'm guilty as I allocate my cap gains, dividends and interest to help maintain my 40+ % equity stake. However it is not doing the job at all in the current situation. In a couple of months I've got a big chunk of CD's maturing.
With about 25 years expenses in cash, st bond funds and CD's I could afford to put some more in equities. Tempting but I know I'll continue to plod along dripping dividends until the market turns up.

 

[Mark1]

I was basically at my rebalancing bands at market open yesterday, so after another 10% drop yesterday I went ahead and rebalanced at closing. I figured the point of the bands are to take the emotions out of the decision, so I went ahead and pulled the trigger. I still have a large amount of safe money that is more than enough to live on, so the risk seemed minor.

 

[big-papa]

IMHO rebalancing is just another form of market timing. I'm guilty as I allocate my cap gains, dividends and interest to help maintain my 40+ % equity stake. However it is not doing the job at all in the current situation. In a couple of months I've got a big chunk of CD's maturing.
With about 25 years expenses in cash, st bond funds and CD's I could afford to put some more in equities. Tempting but I know I'll continue to plod along dripping dividends until the market turns up.

I've seen just about everything having to do with investing called "market timing" by one person or another, including just buy-and-hold. It's as if nobody wants to be labelled with the scarlet letters "MT"

I personally think of rebalancing as follows:
I decided long ago on a stock/bond mix. I did it because, historically, the volatility and drawdowns suited my need, ability, and willingness to accept risk. If my portfolio deviates much from my desired stock/bond mix, then it is no longer meeting my need, ability, and willingness to accept risk based on the reasons I chose the stock/bond mix in the first place. So I rebalance.

If, instead, I rebalance because I believe that in doing so, I will capture some sort of "rebalancing bonus" because I believe there is an immenent recovery, then, yes, I personally would call that market timing. Or if I change the exact mechanism of how I rebalance because of recent events, then, again, I would call that market timing. To me, at least, intentions matter.

This has been debated a few times over on bogleheads. The whole thing could just be semantics as we humans seem to have an innate need to categorize things, even when our particular language fails us in precision.

Here's an example thread for your reading enjoyment:
https://www.bogleheads.org/forum/viewtopic.php?t=204932#p3141881

Cheers,
Big-Papa

 

[lem1955]

I've been retired (mostly) since 2015 and living partly on tIRA investments. I rebalance once per year when I move mutual funds to Vanguard Prime MM for living expenses for the new year. This is the first time I've seen my AA shift more than my +/- 5% tolerance after the yearly rebalance. I just calculated a rebalance that will take me most but not all the back to my 56/44 AA. I printed the Portfolio Tester sheet and then came here to see what people more experienced than me were doing. I appreciate audreyh1 recommendation to take it slow. I felt some urgency to respond immediately. I think I will wait a couple of days to see if there is enough rebound to bring me back to inside the band. But if it doesn't soon, I'll go ahead with the rebalance - no new money, just selling Total Bond and buying Total Stock and Total Intl Stock.