Rebalancing 2018

[audreyh1]

I’m getting ready to buy quite a few bond funds this week to get back to my target AA. It's been a year since I rebalanced.

Stock funds were already trimmed last year, mainly via distributions paid in Dec, plus a few small trims. I’m close enough to the target stock allocation that I’ll leave it alone.

It will be interesting to see how bonds fare this year. Interest rates really moved up on the short end last year and are near 1 year highs now. Intermediate rates moved up less. It could go either way this year - if inflation increases (consistently exceeding 2%) interest rates could rise substantially to steepen the yield curve, and the Fed would likely be more aggressive raising the Fed Funds rate. If inflation remains under target as it did last year, long term rates should be stable or even drop, and intermediate rate changes muted. Short rates should continue to move up as long as the Fed raises the Fed Funds rate, flattening the yield curve.

I rebalance regardless of outlook. Predictions are often wrong. Unexpected things often happen.

 

[Montecfo]

I’m getting ready to buy quite a few bond funds this week to get back to my target AA.

Stock funds were already trimmed last year, mainly via distributions paid in Dec, plus a few small trims. I’m close enough to the target stock allocation that I’ll leave it alone.

It will be interesting to see how bonds fare this year. Interest rates really moved up on the short end last year and are near 1 year highs now. Intermediate rates moved up less. It could go either way this year - if inflation increases (consistently exceeding 2%) interest rates could rise substantially to steepen the yield curve, and the Fed would likely be more aggressive raising the Fed Funds rate. If inflation remains under target as it did last year, long term rates should be stable or even drop, and intermediate rate changes muted. Short rates should continue to move up as long as the Fed raises the Fed Funds rate, flattening the yield curve.

I rebalance regardless of outlook. Predictions are often wrong. Unexpected things often happen.

I began trimming some equity positions but I am mainly reallocating between US and international equities. I bought more bond funds earlier in the fall.
I am pretty relaxed on timing of reallocation. When I have new cash from harvested positions, I tend to re-deploy where my AA indicates.

 

[easysurfer]

I've already scheduled the transactions to rebalance today. This year, trimming from US and international equities and putting some in bond funds and cash.

Rebalancing regardless to outlook is the way to go.

 

[Ronstar]

I'll rebalance during the weekend. I want to track the result of my rebalance and I want the market to be closed for a while after I do it. I don't know if it makes a difference - it will just give me peace of mind.

 

[audreyh1]

Rebalancing today before market close is the same as rebalancing over the weekend. The transactions occur at market close today unless you are trading ETFs, stocks, individual bonds, etc.

I do my calculations over the holidays based on Dec 31 values and then enter them today.

I generally have more than a day's worth of transactions - I'm also withdrawing my income. Sometimes I run into daily limits.

 

[frayne]

I rebalanced a couple of times last year when my AA got out of whack because of the market run up, so I'm good to go into this new year.

 

[43210]

I'm nearing retirement and am at >90% stocks. But I don't feel like selling them. They look expensive compared to the past, but may be cheap compared to the future (e.g. 20-30 years in the future).

Also I'm targeting absolute $ amounts, not %, and I feel the $ amount of stocks is about right, but I need a lot more $ in cash+bonds. I feel I need to get cash+bonds up to about 5-8 years of spending, and it's much less than that now.

So I'm directing 100% of new contributions to cash+bonds, and since we save more than we spend, we can get that total built up.

I will keep bond duration low, since they're earmarked for near-term spending. (Actually I'll also use stable value funds.) No need for me to take term risk, especially with such a shallow yield curve.

Also, no need to take credit risk (credit spreads are apparently low too), so I plan to exit my junk bond holding.

I have plenty of risk on the stock side, so I'm making the cash+bonds conservative (and larger) even if I give up some yield, since I have to get near-term spending covered. Cash and ST bond yields are moving up just in time for me to make these moves.

If stocks keep going up, then I'll seriously consider "taking some winnings off the table" but the urge to do so hasn't totally overwhelmed me yet (maybe it will hit me when the retirement date gets closer, and the human capital is to be extinguished).

 

[audreyh1]

I rebalanced a couple of times last year when my AA got out of whack because of the market run up, so I'm good to go into this new year.

I didn't rebalance during 2017 after the first week in Jan. It's been a bit white knuckle at times, and bonds went well out of allocation near the end of the year with the stocks rising so much. But I knew considerable cap gains distributions were going to be paid out of equity funds in Dec, so I waited for those to be paid to cash.

 

[NW-Bound]

I wrote several call options with Jan 19 expiry.

If those stocks keep on going, somebody will buy these shares from me at even higher prices than now. That will trim my AA.

If the market bombs, I still have the shares, but the stock AA also gets trimmed due to price dropping.

 

[Ronstar]

I’ve never formally rebalanced to given AA. But I have moved $ from fund to fund when it seemed right. Mid 2017 I rolled my 401k into an IRA with a given AA. Maybe I don’t need to rebalance since I effectively rebalanced in July. How far out of whack should the AA get before one rebalances?

 

[easysurfer]

I’ve never formally rebalanced to given AA. But I have moved $ from fund to fund when it seemed right. Mid 2017 I rolled my 401k into an IRA with a given AA. Maybe I don’t need to rebalance since I effectively rebalanced in July. How far out of whack should the AA get before one rebalances?

How far, subjectively depends on your comfort level. Not joking.

I rebalance only once a year. But 5% stray from target allocations I think is pretty common.

 

[audreyh1]

I’ve never formally rebalanced to given AA. But I have moved $ from fund to fund when it seemed right. Mid 2017 I rolled my 401k into an IRA with a given AA. Maybe I don’t need to rebalance since I effectively rebalanced in July. How far out of whack should the AA get before one rebalances?

That's a matter of personal preference. I used 5% until 2008/2009. But then I felt like I rebalanced too often in 2008 and increased my bands to 8-10%.

5% is pretty common.

 

[audreyh1]

If the market bombs, I still have the shares, but the stock AA also gets trimmed due to price dropping.

Hmmmm - don't know about that kind of rebalancing! Kind of defeats the purpose.

 

[Cobra9777]

I just can't bring myself to buy more bond funds right now. So I'm letting equity grow in the AA, which is OK for a couple reasons:

I'm starting to buy-in to the idea that our two pensions function like bond equivalents. If I count their NPV as bonds, then I would need to own 100% equity in the portfolio to be ~50/50 overall. And that strikes me as a bit conservative. If we were more reliant on the portfolio to cover non-discretionary expenses, then I'd probably be rebalancing today. With SS still to come, I think letting the AA naturally drift toward higher equities is fine for us.

I also think the economy is quite strong and still growing enough to support more equity growth, especially if the impact of corporate tax cuts is more than currently baked in. I've read that analysts are only letting about 70% of the impact fall-through to net income in their estimates. In addition, I believe the cash will be used primarily for increased dividends and stock buy-backs, which should also benefit equity valuation, especially our dividend-heavy tilt. But all that is obviously just a guess and may be wildly wrong.

My main objective this year AA-wise is to increase international equity from 12% to about 20%. I'll try to do that opportunistically throughout the year. I'll leave the existing bonds alone for now, but I won't be buying more.

 

[Lsbcal]

I rebalance at 1% above my max equity exposure.

current max equity exposure = 51% (reduced from 61% in Dec 2017)
current equity at = 50.7%

This is all in retirement accounts so not based on tax consequences.

 

[audreyh1]

I just can't bring myself to buy more bond funds right now. So I'm letting equity grow in the AA, which is OK for a couple reasons:

I'm starting to buy-in to the idea that our two pensions function like bond equivalents. If I count their NPV as bonds, then I would need to own 100% equity in the portfolio to be ~50/50 overall. And that strikes me as a bit conservative. If we were more reliant on the portfolio to cover non-discretionary expenses, then I'd probably be rebalancing today. With SS still to come, I think letting the AA naturally drift toward higher equities is fine for us.

I also think the economy is quite strong and still growing enough to support more equity growth, especially if the impact of corporate tax cuts is more than currently baked in. I've read that analysts are only letting about 70% of the impact fall-through to net income in their estimates. In addition, I believe the cash will be used primarily for increased dividends and stock buy-backs, which should also benefit equity valuation, especially our dividend-heavy tilt. But all that is obviously just a guess and may be wildly wrong.

My main objective this year AA-wise is to increase international equity from 12% to about 20%. I'll try to do that opportunistically throughout the year. I'll leave the existing bonds alone for now, but I won't be buying more.

If your pensions and dividends are covering your annual expenses, then you are free to take higher market risks. A big drop in net worth is not likely to impact your income much.

I notice big differences in investing strategies between folks living entirely off their investments (like us) and folks who have their annual needs covered by pensions, SS, and/or dividend income.

 

[LOL!]

I checked my AA this past weekend. I have not hit a rebalancing trigger point where I would need to sell something (stocks) and buy something else (bonds).

It is true that the distributions paid out in December kind of knocked back the allocation to equities. I have already invested or spent all those distributions though. When I invested, I bought things to try to keep my AA where I wanted it to be. When I spent, I had no choice: property taxes, college tuition, credit card bills.

 

[Hamlet]

I've been raising my cash/bond/stable value percentage for the last couple of years. I'm down to about 75% stocks now.

I sold a small chunk of taxable stocks today to fund our Roth IRA's for the year and pay down our mortgage a little.

At these stock valuations I feel more comfortable paying down the mortgage.

It really feels like everyone has forgotten that stocks go down as well as up. I remember 2001-2002 and 2008-2009 too well too not get a little more defensive here

 

[43210]

It really feels like everyone has forgotten that stocks go down as well as up. I remember 2001-2002 and 2008-2009 too well too not get a little more defensive here

Sure, but after Alan Greenspan's 1996 "irrational exuberance" comment, the S&P500 first doubled (with divs) before it crashed.

 

[Chuckanut]

It really feels like everyone has forgotten that stocks go down as well as up. I remember 2001-2002 and 2008-2009 too well too not get a little more defensive here

I remember 73-74. Talk about a relentless, nasty Bear. It took years to recover from that. IIRC, a return to the previous high in 'real' terms, took about 20 years.

 

[NW-Bound]

Hmmmm - don't know about that kind of rebalancing! Kind of defeats the purpose.

If the idea of rebalancing is to reduce the loss if the market drops, then it works for me. In 2017, I picked up an extra 2% return selling options that mostly expired worthless.

If the market drops big, then that 2% would not be enough. If one anticipates that, then severely reducing stock AA would be the only thing that could help. I may still do that tactical AA if things start to look bad.

 

[big-papa]

Did mine the last week of the year. Primary reason was to get my bonds into my deferred accounts for tax purposes, which I hadn't done before. Along the way, I got my AA back where I wanted it. Was a big juggling exercise to do all of this and buy 'near equivalent' funds after selling in one account and purchasing in another to avoid the wash rule (there was also a little TLH) and the round-trip-trade police. But it's done and hopefully anything I do from this point onwards is the usual rebalancing when it's needed.

 

[Live And Learn]

My stocks are mostly defensive and / or dividend players so while I may have lost on some capital gains I've also managed to dodge the "I need to rebalance" bullet because my AA hasn't stayed into rebalance territory. On the plus side, my divs paid 89% of my annual expenses. The other 11% came from DH's salary.

 

[Cobra9777]

If your pensions and dividends are covering your annual expenses, then you are free to take higher market risks. A big drop in net worth is not likely to impact your income much.

I notice big differences in investing strategies between folks living entirely off their investments (like us) and folks who have their annual needs covered by pensions, SS, and/or dividend income.

Agree. Our two pensions plus a small amount of rental income cover 80% of non-discretionary expenses. Dividends cover the remainder plus most of our discretionary spending (usually). This is all pre-SS however. We do sell shares occasionally, but only because we are still living off the taxable account exclusively. We reinvest all distributions in tax-deferred. Even with occasional selling, our withdrawal rate is usually below the overall portfolio dividend rate.

Our bonds are now down to about 26%. As I said, I'll probably just leave them and let the portfolio naturally drift toward higher equity over time. Even though we don't rely *heavily* on the portfolio to meet spending needs, I still like the stabilizing effect of bonds and real estate when equities drop sharply.

 

[Hamlet]

Sure, but after Alan Greenspan's 1996 "irrational exuberance" comment, the S&P500 first doubled (with divs) before it crashed.

Yup. The market could certainly go up a lot from here. However, I think we are more likely in 1998-1999 territory than 1996.

Remember too that I am moving from a very aggressive stock allocation to a still pretty high stock allocation. Many people would consider my current 70-75% stock allocation as still way too high for their risk tolerance.

If the market does double from here, I'm still going to make a massive amount of money even with the lower allocation. That increase would put me in near-FIRE territory, with the only real concerns being health insurance ( which is going to be a big concern no matter what the market does).

However, if the market goes down 40% instead, I'm going to feel a lot better about my losses if I have some cash available to invest at lower levels.