Good year for equities, time to re-balance?

[prototype]

After 2013 being a banner year for equities (20+ % in my case) I am now at roughly at 63%/37% equities/bonds (~5% cash not included). Since my planned and actual AA a year ago was a 55-60%/45-40% range, I am wondering if it is time to do a 6 percent (or so) re-balance or just let it be. (Age 58, retired and not getting any younger).

 

[Onward]

I'm not a rebalancer, but if I were I would do it on specific date each year.

If you're having to decide on the fly when to do it, you'll suffer the fate of the market timer, which isn't pretty.

 

[braumeister]

Agreed. I do it on my birthday in June, to avoid the crowds.

 

[prototype]

I'm not a rebalancer, but if I were I would do it on specific date each year.

If you're having to decide on the fly when to do it, you'll suffer the fate of the market timer, which isn't pretty.

I go in mid-January (no specific date). Funny I should be asking this question because last January I moved about 4% from bonds to equities. Worked out well.

 

[HFWR]

I thought the reason to rebalance was to keep your asset allocation close to your "ideal". Assuming that, I rebalance whenever my allocation gets >X% from my chosen allocation.

 

[walkinwood]

I though the reason to rebalance was to keep your asset allocation close to your "ideal". Assuming that, I rebalance whenever my allocation gets >X% from my chosen allocation.

+1
If my equity/bond balance is off by more than 5%, I rebalance.

Here's a paper to read if you're interested:
http://www.tdainstitutional.com/pdf/Opportunistic_Rebalancing_JFP2007_Daryanani.pdf

 

[NanoSour]

I have to agree with Onward and Braumeister. If you are going to rebalance, pick a random day to evaluate the portfolio and adjust accordingly. Attempting to do this with market swings is simply trying to time the market. Eventually, you'll moving out of a asset with a lot more run to go, and substituting in it's place an asset with a lot more to downside left.

Either you're a market timer or you're not. You choose.

 

[HFWR]

I have to agree with Onward and Braumeister. If you are going to rebalance, pick a random day to evaluate the portfolio and adjust accordingly. Attempting to do this with market swings is simply trying to time the market. Eventually, you'll moving out of a asset with a lot more run to go, and substituting in it's place an asset with a lot more to downside left.

Either you're a market timer or you're not. You choose.

Without some sort of objective criteria, how does one evaluate?

 

[NanoSour]

The objective part is:

1) Your choosen rebalance date.
2) Your target Asset Allocation, which equates to your risk profile.

Simple and Done. Like investing should be.

 

[HFWR]

The objective part is:

1) Your chosen rebalance date.
2) Your target Asset Allocation, which equates to your risk profile.

Simple and Done. Like investing should be.

Okay.......

I use 25% rebalance bands, so, e.g. a 5% allocation can vary between 3.75% and 6.25% before needing to be adjusted. This keeps me from trading too actively. Still not sure why picking a random day to rebalance back to your "ideal" allocation is any better, but to each his/her own.

 

[NW-Bound]

The managers of the often-touted MF Wellington and Wellesley rebalance whenever they like it according to some proprietary methods. They also buy only a subset of the S&P 500, meaning that they pick stocks. Gasp!

Apparently, they do well in the long run as they know what they are doing. In another thread, I have shown that both above MFs beat by a large margin the straight conventional 40/60 and 60/40 index-and-rebalance-once-a-year method, over the period of 1980-2012.

Caveat: I hold only minor positions in Wellesley and Wellington, as I also consider them "experimental" just as whatever else I own.

 

[Lsbcal]

I think the reason to rebalance is to reduce risk (stocks -> FI) to your safe level as chosen by you in long term planning mode. A minor consideration is to rebalance for "capturing" some possible rebalance bonus (FI -> stocks).

I personally select the AA for max tolerable equity exposure. Then I rebalance (stocks -> FI) when stocks go +1% above my limit. In recent years this has helped to replenish our short term reserves for spending. In our case there are no tax considerations as this is all within tax advantaged accounts.

If stocks go down I don't buy more. No desire to get caught in a 1930's style disaster while spending in ER.

The OP mentions rebalancing in a rising market. I know it is a hard thing to not let the profits ride. One should stick to the plan or modify the plan to meet a newfound realization or altered circumstances. As the market rises I'm considering reducing our max stock exposure as a semi-permanent plan change.

 

[Telly]

A timely topic! I just finished rebalancing, well, when the market closes today.

Earlier in the month when I looked over it all, my spreadsheet showed I was just a fraction of a percent (total Eq.) below my upper Eq. limit. With the market gains since then, it would be over. Bit the bullet and did it.

I sure don't like to chip off and sell bits of the gainers, but I stick to my allocation rules. One time I didn't exchange to rebalance, and then I kicked myself for not doing it after the market dropped off quite a bit a few days later. When it came back up, I rebalanced like I should have done.

For me, the pain of knowing that I could have "locked in" some of that gain by selling appropriately, and didn't, exceeded the joy of something continuing to go up some more, where the amount of "more" is unknown.

I think this fits the investment psychology idea that for many, the pain of loss is greater than the joy of gain. Always viewing that through limits, of course, or else one would never invest!

 

[ziggy29]

If you believe in the concept of rebalancing, when you ask if it's "time", I'd say you need to define specific, objective and non-emotional triggers that tell you when it's time. There are two primary triggers for rebalancing in most AA strategies:

(1) Time. You would always rebalance regardless of market conditions based on a predefined criterion, say every 12 months, every 18 months, or whatever. (I recall Bernstein once calculated that rebalancing every 18 months seemed optimal, but I think that is at least a decade old.) The point being, whether "irrational exuberance" or a "doomsday" mentality prevailed (or something in between), on that day you buy and sell as needed to restore your "target" allocation.

(2) Deviance from the target. Let's say you wanted to maintain a 60/40 allocation -- 60% equities, 40% fixed income. Maybe you decide that you will rebalance any time the actual makeup of your portfolio is at least (say) 5% off from the target. In such a case, if your actual equity concentration reached 65%, you'd sell some stocks and buy fixed income to get back to 60/40. If the equity concentration dropped to 55% or below, you'd sell bonds to buy equities to get back to 60/40.

Some people even use AA strategies that incorporate both. For example, they can say "I will rebalance every 18 months OR when my allocation becomes more than 5% out of whack, whichever comes first." There's nothing wrong with that, either; it's just more complex. The most important thing is that you are (a) rebalancing to "sell higher and buy lower", and (b) you are using objective standards that take emotions (fear and greed) out of the picture.

 

[IlliniProgrammer]

My rebalancing rule is the exact opposite of Onward. In order to avoid market timing, I try not to rebalance more than 1-2% at any given time and to do so slowly and incrementally.

Both rules can work. Both rules can fail. Both rules are better than having nothing to fight behavioral biases.

 

[audreyh1]

I go in mid-January (no specific date). Funny I should be asking this question because last January I moved about 4% from bonds to equities. Worked out well.

Well - January will be here soon.

I get distributions paid out from my equity funds, and those go to cash, so there is some automatic trimming in December (and a little in Nov) just from having distributions paid out.

Then in Jan when I take my withdrawal, I take the cash from what needs to be trimmed to rebalance. In other words, I use the withdrawal to rebalance.

 

[RockyMtn]

I wait till after the first of the year. No reason to have to pay the tax man April 2014 when you can do it April 2015. Only other reason I rebalance during the year is if I'm way off my AA and/or need to do some tax loss harvesting.

 

[Ready]

I like the idea of rebalancing when your allocation is 5% or more out of line. So if 60% equities is your goal, rebalance when it gets to either 55% or 65%.

You could try to set a time frame like every 18 months, but what if your don't find yourself out of balance in 18 months? No need to fix something that isn't broken, but no need to wait another 18 months to look at it if it should rise or fall down the road.

I'm about 5% over now but I'm trying to resist the temptation to rebalance because I don't want to incur the capital gains this year. Next year will be a much lower tax bracket for me, so I'm crossing my fingers that the market is still strong in January. I suppose that could be called market timing, but I'm trying to time my taxes on capital gains more than the market.

 

[LOL!]

I don't like to use a "date" on which to rebalance. The reason is that one can miss significant moves down, then back up.

An example of a possible missed opportunity occurred just this year. From mid-May to late-June, emerging markets dropped 15%. Time to rebalance into EM. From late-June to mid-October, EM is up 18% since then, but still down year-to-date.

Many (but not all) asset classes move more than 10% each way in any given 12-month period.

While one's overall stock:bond ratio may not change, other things can be going on, so I am in the "look-often, but rebalance on significant change" camp. Even so, rebalancing can be a rare event.

 

[RunningBum]

I just rebalanced earlier this week, first market day after my birthday. In the past I may have rebalanced when I noticed my AA was more than 5(?)% off, and I may have deferred or accelerated due to tax situations, but I can't recall for sure. I think mostly I've either used influxes due to bonuses while working, stock option exercises, etc, or outflows due to big expense items or just ongoing expenses that distributions couldn't cover to rebalance any other time during the year.

 

[REattempt]

Jim Otar says to rebalance every 4 years after the Presidential election with some supporting data to show it is the best approach. YMMV

 

[foxfirev5]

I'm at the stage where I'm trying to manage risk rather than maximize returns. Being what I consider FI, I'm pulling my gains from equities. I view this as another couple months of expenses gained, there's plenty left for long term growth.

 

[NW-Bound]

I don't like to use a "date" on which to rebalance. The reason is that one can miss significant moves down, then back up.

An example of a possible missed opportunity occurred just this year. From mid-May to late-June, emerging markets dropped 15%. Time to rebalance into EM. From late-June to mid-October, EM is up 18% since then, but still down year-to-date.

Many (but not all) asset classes move more than 10% each way in any given 12-month period.

While one's overall stock:bond ratio may not change, other things can be going on, so I am in the "look-often, but rebalance on significant change" camp. Even so, rebalancing can be a rare event.

As I am a slicer, I can see relative movements between sectors, countries, industries, etc... These relative movements are often a lot larger than the relative movements between total equity market index and total bond market index. I find the above large movements interesting, and would attempt to capitalize on it by rebalancing between sectors. This results in mixed success of course, so I do not go overboard and liquidate something on a wholesale level.

And when trying to reduce equity AA, I could be selling some loser stocks or ETFs that I felt could never recover, or also to sell stocks that I thought were overvalued.

 

[Onward]

Jim Otar says to rebalance every 4 years after the Presidential election with some supporting data to show it is the best approach. YMMV

I remember reading that. He made a good case for it.

 

[Lsbcal]

Jim Otar says to rebalance every 4 years after the Presidential election with some supporting data to show it is the best approach. YMMV

How would this have done in 2008?