Balancing: Trim some off some equity, and put it into... what?

[Telly]

I'm a couple percent at most above my planned equity percentage. I feel like maybe I should trim it a bit while the market is up (does that make me a dirty market timer?) and put it into... what? This is in an IRA, and won't be tapped for at least 10 years, maybe even 12 - 13 years.

The classic approach would be to trim it and put it into Bonds. Bonds don't exactly thrill me right now. And I don't think I'm going to increase my REIT Index allocation now, either.

I keep coming back to bonds, but it seems to me that a short-term bond fund would be just a capital preservation move at best. It would seem that an intermediate term bond fund would have a better appreciation potential vs. short term bond fund, except the interest rate increase boogy man throws a wrench into that.

So I'm doing nothing, but am not comfortable with that either. As I use cash and cash-like after-tax funds to live on, the equity percentage will increase anyway as I nibble away at the cash slice of the pie. So sooner or later, I'll need to rebalance.

I'm stuck.  Suggestions?

 

[brewer12345]

Assuming you are happy drifting away from strict asset allocation, I think maybe commodities (PCRIX/PCRDX) or unhedged foreign bonds (GIM/Pimco fund) might be worth consideration. However, a few percent in anything is likely to result in nothing more than rounding error differences.

 

[azanon]

I recommend sticking with stocks for now.

When interest rates rise, LT bonds fall. As would be predicted by this general truth, bonds have been doing relatively poorly every since interest rates started to rise (and likewise they did great when interest rates fell the several years previous).

And because interest rates are low, fixed return investments (like money markets) are poor choices now.

So, by sheer process of elimination, stocks are left. Rising interest rates are a mild bullish sign for stocks, but not nearly as much so as high interest rates would be. But interest rates arn't high speaking relative to historal numbers, so that's not a concern (yet).

 

[Cut-Throat]

I'm a couple percent at most above my planned equity percentage. I feel like maybe I should trim it a bit while the market is up (does that make me a dirty market timer?) and put it into... what? This is in an IRA, and won't be tapped for at least 10 years, maybe even 12 - 13 years.
I'm stuck.  Suggestions?

No you're not a dirty market timer, just a re-balancer. I'd put it in some CD's. Someone here posted where you could get 5% on a 16 month CD.

 

[azanon]

just 5% on a long-term investment almost makes me hurt just thinking about it. I'd only do that if capital preservation was of upmost importance.

 

[Cut-Throat]

just 5% on a long-term investment almost makes me hurt just thinking about it.  I'd only do that if capital preservation was of upmost importance.

A 16 month CD is not long term in my mind. It just takes some equity money off the table for a while.

If interest rates on CD's rise to 8% in the next couple of years and the stock and bond markets tank, it will look like a good move. And if stocks tank, a rebalance then will force you to buy more stocks at a cheaper price.

 

[azanon]

I was thinking about it from the timeframes he quoted, not the timeframe on your proposed cd.   He mentioned that need needed an investment that wouldnt be tapped for a least 10 years, maybe even 12-13 years.   

A short term move to a CD would only make sense if you thought the stock market was partcularily vulnerable sometime between now and 16 months from now.   I'm not aware of anythign offhand right now that would suggest the market is currently vulnerable.  Recent stock gains aren't a reason to sell.   if anything, its a reason to continue to hold because the general trend is now (finally) upwards.

Its historically a little pricey, but relative to y2K levels, the prices dont look that bad to me.  I mean, comeon, the nasdaq is less than half what it was 5 years ago.  What an incredible opportunity! If that's not enough discount for you guys, exactly what would be enough discount?

 

[Cut-Throat]

I was thinking about it from the timeframes he quoted, not the timeframe on your proposed cd.   He mentioned that need needed an investment that wouldnt be tapped for a least 10 years, maybe even 12-13 years.   

A short term move to a CD would only make sense if you thought the stock market was partcularily vulnerable sometime between now and 16 months from now.   I'm not aware of anythign offhand right now that would suggest the market is currently vulnerable.  Recent stock gains aren't a reason to sell.   if anything, its a reason to continue to hold because the general trend is now (finally) upwards.

Its historically a little pricey, but relative to y2K levels, the prices dont look that bad to me.

I was only thinking of it in terms of his commitment to the Stock/Fixed ratio of his portfoilo. Rebalancing is an ongoing task and does not involve whether you think the Market is pricy or not. Notice the first sentence of his post: I'm a couple percent at most above my planned equity percentage.

For instance I have my Stock portion set at 55%, If at the end of this year it is 60% because of gains, I will all cull my stock holdings back to 55% and probably buy some 1-2 year CDs to maintain my 55% Stock/45% Fixed portfoilo.

 

[Nords]

I'm a couple percent at most above my planned equity percentage.

I feel like maybe I should trim it a bit while the market is up (does that make me a dirty market timer?) and put it into... what?

This is in an IRA, and won't be tapped for at least 10 years, maybe even 12 - 13 years.

Yes, you're a dirty market timer. In the immortal words of Jack Bogle: "Don't do something, just stand there!"

A couple percent is random noise. Five percent might be worth rebalancing if you need to sell off something for spending money but otherwise you're just tweaking the autopilot.

If you don't need the money for at least 10 years, one quarter's performance is only 2.5% of that timespan. We've already wasted at least that much effort just discussing the issue!

 

[azanon]

I am a market timer in the sense that I dont believe in diversification across unrelated asset classes, because i dont believe there is such thing as a "good, long-term investment".   The closest you can get to a "good long term investment" is probably stocks, followed by real estate, but even with those 2, there are bad times to own them i think.

Take, just for example, LT bonds.   I think now is a bad time to own any LT bonds and i can explain why.  History has shown time and time again, when interest rates are really low and they're rising, LT bonds are going to be poor performers (relative to other choices).   So why in the world would i want to hold any of them now.   Because I diversify?

I believe there is one or a few good investments for a given time period.  And i also believe making a generalized, eduated decision as to what those investments are isn't all that difficult.   So for that reason, my allocations will shift as the economy and market conditions shift, not as my stock/bond/cash ratios get out of wack.   If that makes me a market timer, so be it.

Bogle and Bernstein are destined to mediocrity.

For the record, i higly disagree with the practices like you see at TSPtalk where folks are changing their federal allocations almost weekly. I"m more for the taking several steps back and just looking at the market as a whole, and maybe making some adjustments on a yearly, or perhaps even less often, time basis.

 

[yakers]

Azanon, I get where you are coming from. I adjust my TSP occasionally although I am adding all new contributions to a L Fund (Lifecycle) to keep life simpler.
But the original posters question remains, if you feel stocks are over priced and bonds are due for a tumble, real estate (esp REITs) are in a bubble----where doyou put your funds?
I see only a couple responses one was a commodity based investment the other was to go to CDs.
I would go with continue buying all asset classes in a selected AA. This should actually work given time and I have at lest 5 years before I expect any withdrawals. Now if a person is retired and has no time for aditional contributions then the CDs become more compelling. But within the TSP program there are only 5 choices, what do you do? More I (international) or S (small cap)? In the overall market?

 

[Dawg52]

5% is not bad to me. I keep roughly 1/3 in stock funds, 1/3 in bonds, and 1/3 in other which includes cd's, reits and commodites. If I can make 5% on my conservative portion of the mix, I'm gonna take it. 

 

[wabmester]

Bogle and Bernstein are destined to mediocrity.

You've obviously heard the usual arguments for Bogle's and Bernstein's approach.   The coin flipping analogy, etc.    But my favorite stats come from the Dalbar study:

http://www.dalbarinc.com/content/printerfriendly.asp?page=2003071601

 

[uncledrz]

This thread raises a question in my mind about rebalancing.

I have a goal of asset allocation. Once a year, I review my investments and move to rebalance to get to the goal asset allocation.

Do other do so on a monthly/weekly basis?

 

[azanon]

I dont buy/sell on emotion, I use techniques that are backtested for accuracy.  I've also been investing long enough to know that i'm doing pretty well.   Yes, i did get burned in Y2K, but OTOH, ive also been virtually 100% stock since January 03'.  

Someone bump this thread at the end of the year.   I'll post a real, actual return # for my portfolio.   So far, i'm well past the S&P500.

But yes, use this thread as an actual example why those statistics are true.   The original poster is wanting to liquidate some of his stocks just as they are starting to turn a profit.   A great case example!

.....

If i were retired, i would be considerably more conservative. My job is my mitigating backup for any poor performance. If my portfolio doesnt do so great, i simply work longer. But if history continues to repeat itself (aka stocks continue to produce 10%+ returns), then i will benefit because in most scenarios, i'm going to have my money in some kind of stocks.

 

[greg]

Take, just for example, LT bonds. I think now is a bad time to own any LT bonds and i can explain why. History has shown time and time again, when interest rates are really low and they're rising, LT bonds are going to be poor performers (relative to other choices). So why in the world would i want to hold any of them now. Because I diversify?

Not too long ago I bought some longer-term US bonds. They're now worth less than I paid for them--but just a tad. I captured a little better than 4%. The bond market goes up and the bond market goes down, These bonds keep banging out 4%.yr. If and when they go up in price (and the stock market goes down) I'll be ready to look at their sale--but not now, even though the FED says the rate hikes will continue.

I don't worry so much about daily, monthly, and yearly fluctuations so much when I have semi-solid bonds. I don't pay too much attention to total net worth fluctuations or sector fluctuations that are anticipated. I see performance differently. Bond prices will move up sooner or later. I can wait for them to come to me. Until then 4%-4%-4%--tic, toc, tic, toc. 8)

--Greg

 

[Mr._johngalt]

Not too long ago I bought some longer-term  US bonds.  They're now worth less than I paid for them--but just a tad.  I captured a little better than 4%.  The bond market goes up  and the bond market goes down,  These bonds keep banging out 4%.yr.  If and when they go up in price (and the stock market goes down) I'll be ready to look at their sale--but not now, even though the FED says the rate hikes will continue.   

I don't worry so much about daily, monthly, and yearly fluctuations so much when I have semi-solid  bonds.  I don't pay too much attention to total net worth fluctuations or sector fluctuations that are anticipated.  I see performance  differently.  Bond prices will move up sooner or later.  I can wait for them to come to me.  Until then 4%-4%-4%--tic, toc, tic, toc.   8)

--Greg

Me too, except it's 7%+ , tic toc, etc.

JG

 

[Mr._johngalt]

This thread raises a question in my mind about rebalancing.

I have a goal of asset allocation.  Once a year, I review my investments and move to rebalance to get to the goal asset allocation.

Do other do so on a monthly/weekly basis?

Nothing.

 

[Cut-Throat]

This thread raises a question in my mind about rebalancing.

I have a goal of asset allocation.  Once a year, I review my investments and move to rebalance to get to the goal asset allocation.

Do other do so on a monthly/weekly basis?

Personally I do it once a year in early January. If you do a search in Google, there are some studies that may show every 2 years is better. But marginally at best. Yearly for me is a good exercise.

 

[AltaRed]

I think annual re-balancing makes sense if there is 15-20% movement in an asset class in one year. Otherwise single digit moves per year warrant re-balancing only every 2 years or so. For me, it's a matter of getting out of balance by ~10% that becomes the trigger.

 

[azanon]

Me too, except it's 7%+ , tic toc, etc.

JG

Not now its not.   Come back from fantasy land.

The LBA Bond index for the year of 05' is ~ 2.3% so far (that's real return, not annualized).

 

[Mr._johngalt]

Not now its not.   Come back from fantasy land.   

The LBA Bond index for the year of 05' is ~ 2.3% so far (that's real return, not annualized).

I'm still getting 7%+ on my original investment, although NAVS are
down obviously. Of course that makes the yield even higher.
I don't care as long as the checks keep coming.

JG

 

[azanon]

Ahh - i just look at various investment choices holistically.  If principle change + interest = 4% annualized, that 4% in my book.  As you know, i still work, so i'm evaluating based on overall investment performance.

For max performance, bonds just isnt going to be it right now.   Now if the interest rates get back up to the 1970s levels and are falling to boot, sure i'm going to be holding a lot of bonds.

Looking at the prime interest rate and seeing how its changed recently isnt exactly rocket science.

 

[JPatrick]

??<I'm stuck.  Suggestions>

First off, I'd tuck that cash in a MM (3.18%-getting better!) or under the mattress until the market shakes off its current slump. I continue to believe the next few weeks will give us a nice entry point.
A couple of very good all weather funds that have a record to brag about and will provide income are- - - FBALX & FSICX.

 

[azanon]

My best performer has been my utility sector fund JPatrick, (ticker BULIX).

I think there's plenty of uproom still too.