Nope, I didn't rebalance over that period. While I wasn't at 70/30 starting in 2009, I'm currently 79% equities and have no immediate plans on changing. I think if one were at 70% back then, today they would be ~85% equities. That is based on SP500 and Barclays Aggregate index.
So not sure one would feel comfortable at 85% stock exposure if their risk quotient started at 70%.
What happens if we reversed the numbers in a down market?
That is my point, not everyone uses AA as a rebalancing trigger, at least I don't. In my earlier post above, similar success results seem to be had anywhere from 40 to 70% equities. so what is the point in rebalancing if your target was 50% in 2009 and you are now at 70%?
Without running numbers, keeping more in equities in a rising market yields higher totals. One could lose more in a downturn, of course, but you are starting with a higher dollar amount. In historical perspectives, the net results in the end are virtually the same whether one rebalances or not, with not rebalancing making a very slightly higher end result, virtually identical for all practical purposes. See pb4uski's post above. Why bother sweating it with rebalancing? I don't see the point.
The point that CRLLS makes (the part I bolded) seems to be missed by many.
Are you really more risky if you don't rebalance? In the drawdown phase, you still have the same initial amount invested,
that is what is at risk. If we had a big run up, we now have a higher % in stocks, but also a higher
amount in stocks. So we can therefore accept a larger drop % and still have our money.
Maybe the psychological fear of a higher AA can be offset by this knowledge?
So not sure one would feel comfortable at 85% stock exposure if their risk quotient started at 70%.
What happens if we reversed the numbers in a down market?
Well, that would be pretty extreme, and along with it, a pretty extreme increase in the $ amount in the portfolio, something we would not have if we kept selling to rebalance. Here's the numbers for your example:
Code:
700 300 70.00% 1,000
1,700 300 85.00% 2,000
2.43
After 50% drop in stocks:
850 300 73.91% 1,150
To go from 70% AA to 85% AA, you need a 2.43x rise in stocks (assume bonds stay flat over this time). On a $1M portfolio, that takes a $700K stock holding to $1,700K. You have $1,000K more than you had before, and will have more after a drop as well.
But as I've tried to point out in some other threads, before we get to deep in the why and how something 'works' (or doesn't work), we ought to first see if it does work. And from the data we've seen here and elsewhere, rebalancing really doesn't seem to work, or at least works sometimes and doesn't work others, but there are many things like that.
And
pb4uski's post #5 is a much better test of this, the above numbers don't take into account w/d and changes in bonds, it only illustrates it in an over-simplified form.
Bottom line, I don't sweat AA or rebalancing, there just does not seem to be much sensitivity to these things.
-ERD50
