Rebalancing in a really down market, and long-term effects

[walkinwood]

I realize alot of folks are going to argue that this is market timing but I would submit that given the current market conditions you are better off on the sidelines waiting this out rather than to loose a significant portion of your LT savings staying the course. THOUGHTS?

Market timing is a valid strategy. After all, it is your money

But, a lot of studies followed by people that frequent this board (me, included) show that market timing does not beat an AA strategy.

I plan to go back and re-read the studies. What did they use as the benchmark for market timing? I am more convinced about index funds beating actively managed funds than I am about AA+rebalancing beating market timing - especially if the latter is done only rarely.

For example, a friend of mine, who normally follows an AA strategy, took all his money out of the stock market in July of 07 and put them into treasuries. And he is still out, but is thinking of slowly moving into the market. This one move puts him so far ahead of me that I can't imagine the scenario that will allow me to catch up with his portfolio performance.

For now, though, I'll continue to rebalance slowly. But this episode has made me re-examine market timing.

 

[haha]

However, we need to keep in mind, that all the SWR studies that we rely on use rigorous (albeit, after the fact) rebalancing. By failing to do that, I think we throw out a very basic tenet of those studies. We may still be fine, but there aren't any studies to use as a guide.

An excellent point that seems to be getting lost in the desire to be safe.

Another kind of intersting thing (to me anyway) is how all the engineer/obsessive focus on tiny details of FireCalc and planning "tools" goes out the window when a little bit of real life drops in.

Ha

 

[REWahoo]

An excellent point that seems to be getting lost in the desire to be safe.

Another kind of intersting thing (to me anyway) is how all the engineer/obsessive focus on tiny details of FireCalc and planning "tools" goes out the window when a little bit of real life drops in.

Ha

I agree - with one major exception. What we are experiencing is a darn sight more than "a little bit" of real life.

If you disagree I'll be happy to send you a pair of my undershorts as proof...

 

[unclemick]

Hmmm - given my track record since 1966 - overall speaking handgrenade wise with a few(very few) flashes of brilliance in the stretch:

I completed Unclemicks lefthanded general unified theory of chickenheartedness going Target Retirement 2015 in Jan 2006 with a few div stocks on the side to get close to my 3% minmum SEC yield.

Old age(65) and full auto that's my story.

The recent unpleasantness has me whining a lot - but at least I haven't pulled the trigger(in panic) or spent sleepless night's agonizing over rebalancing(bless those VG computers toiling away).

heh heh heh - whether that's a good thing going forward or not - my crystal ball is cloudy.

 

[ziggy29]

An excellent point that seems to be getting lost in the desire to be safe.

Another kind of intersting thing (to me anyway) is how all the engineer/obsessive focus on tiny details of FireCalc and planning "tools" goes out the window when a little bit of real life drops in.

Perhaps so. But just because FireCalc may show something as 100% survivable and backtesting various AAs and withdrawal rates have been 100% successful in all real historical periods, it doesn't mean that there weren't serious questions and anxiety along the way. And some of the scenarios may come very close to bust -- if one or two events occurred differently, for example, maybe a market goes lower, a recovery doesn't spark in time, and we do bust.

So I think it's reassuring to have history overwhelmingly on your side, but it doesn't help when you're (say) five years away from running out of the money if the market doesn't recover, and soon. I think the recovery in 1982, for example, came just in time for someone who retired in 1966. Had it waited until '84 or '85 I seem to recall that 4% with a 60/40 AA would have busted. I for one would prefer to not tempt the fates that much.

 

[unclemick]

Perhaps so. But just because FireCalc may show something as 100% survivable and backtesting various AAs and withdrawal rates have been 100% successful in all real historical periods, it doesn't mean that there weren't serious questions and anxiety along the way. And some of the scenarios may come very close to bust -- if one or two events occurred differently, for example, maybe a market goes lower, a recovery doesn't spark in time, and we do bust.

So I think it's reassuring to have history overwhelmingly on your side, but it doesn't help when you're (say) five years away from running out of the money if the market doesn't recover, and soon. I think the recovery in 1982, for example, came just in time for someone who retired in 1966. Had it waited until '84 or '85 I seem to recall that 4% with a 60/40 AA would have busted. I for one would prefer to not tempt the fates that much.

The Norwegian widow always says to keep a key to the back door(SEC yield) on your keyring.

heh heh heh - I can't speak for others - but I have less tendency to panic when I see a portfolio producing some dividends and interest.

 

[haha]

And some of the scenarios may come very close to bust -- if one or two events occurred differently, for example, maybe a market goes lower, a recovery doesn't spark in time, and we do bust.

Hey, I've been posting about that very thing since 2003 or '04, so you don't need to convince me.

It's just that I don't think that ad hoc allocation adjustments are likely to help, and they may even hurt.

There is a great John O'Hara novel called Appointment in Samarra. All investors should read it. It will do more good than reading yet another tedious exploration of the nuances of AA, especially since those AAs will be abandoned anyway when difficulty comes.

http://www.amazon.com/Appointment-S...=sr_1_3?ie=UTF8&s=books&qid=1236733846&sr=8-3

As far a my experience in this downturn goes, I wish I had perhaps seen a way to do something different, but I am not sure that I know of any legitimate reason to have sold out fall 2007, and not any one of many other times between 1986 and the present.

Damn the torpedoes, full speed ahead!

Ha

 

[Dennis]

Rebalancing? I think Its a Very Tough call...

1. If you Rebalanced ouot of bonds and into your equites in 00 & 01'? You lost $
2. Rebalanced in end of 02', did good in 03'
3. Rebalanced and took profits out of Equites in end of 03' and back into Bonds? and did this thru and including 06'? You lost out on big gains.. and measly Bond rtns.
4. I didn't rebalanced Since 99' and not until 2007' Only Because? making a Est. 6-7% on Bonds was going to be Far more or Double what I needed out of my $, so why take on more risk, especially with a Iffy market in late 07' for the future?
5. But, My Bonds made over 17% in 08' ( Mostly Trasuries ) so going into 09' with about a 20/80 port..
6. I did take Alot of the profits out of the treasuries and put them in GNMA, TIPS and Some Corporates.
7. But if they do even 6-7%? I don't need to take the added risk moving that $ into equites, even if the equites do 50%? So why bother..?
8. . Not sure about adding to my Equities for this yr.. about 20% is in them and if they double? Great, if they don't, not a big deal for me..

So, I think it just All Depends on what you need, not what you want that has to come first..

and If you, like me? I Have about 80% of my $ in Conservative Balanced Funds? I Just add to them and let them do the Job for me and it takes out the X factor that Screwer's my Portfolio? Me!..LOL

I Do think and saw in the last Bear, alot sold some in Bear rallies and then sold the rest of their Equities once a Recovery and Bull came in 03' and thus slowed down the Bull market for 04' for awhile. Probaly alot of Seniors that were stuck in Equites and had Enough and got out and have stayed out ever since.. Not a Wise move, but none the less.. and this time around?
That May just happen again..

I also think far to many Retired people have far too much in equities and your port should be based soley on the Bonds APY's, not the Equites, and I don't care if they are in stocks with High Ylds and Divs..try selling those stocks today and your lost alot of $ and Divs will Change ( like GE's) just give them alittle time..they can't afford to pay such HYlds and Divs..while their stock goes Bust..( We just settled a Aunts estate, she had alot of stocks with Nice Divs and Ylds, only problem? We had to sell them Now and it lost alot and all those Divs and Ylds paid where chump change vs what she Lost on the stock Prices vs her Cost Basis ) Apparently alot think they will just Hold them forever and live forever I guess..or the stocks will be worth more..

And another mistake is? Regardless of how old you are, if you want to retire at age 50? I think You should have a 65 yr old's Balance, like a 35/65 and not a 50 yr olds 50/50 or 40/60 and if a 35/65 won't give you enough Income? Guess what? You can't retire yet.. that is were alot burned themselves..this time around.. they got suckered into beleiving equites is the way to go, but all those pro's that advocate it? Make their $ from you who do it! Most of their $ is in Bonds! LOL

This is One subject Jack Boggle & others doesn't discuss very much and it should be for Early Retiree's...

Hopefully You will recover enough and you will be given a 2nd chance to Do so accordingly..

Of course, what did you expect for nottin..

 

[W2R]

I'm in the group that is not rebalancing as they should. I am doing so in small increments monthly, but am nowhere near my tolerance bands on AA.

However, we need to keep in mind, that all the SWR studies that we rely on use rigorous (albeit, after the fact) rebalancing. By failing to do that, I think we throw out a very basic tenet of those studies. We may still be fine, but there aren't any studies to use as a guide.

C'est la vie

This is why I cannot feel happy with the fact that I am not rebalancing. I know in my heart that rebalancing is a necessary part of the plan.

Not rebalancing only shows a lack of faith in the markets, a fear that this time the market may descend to near zero and stay there. But if that should happen, our trouble will not be limited to our portfolios.

Wish I had the courage to get out there and rebalance!

 

[ziggy29]

Wish I had the courage to get out there and rebalance!

And that you did it yesterday...

 

[W2R]

And that you did it yesterday...

Well, yeah.......

 

[ERD50]

However, we need to keep in mind, that all the SWR studies that we rely on use rigorous (albeit, after the fact) rebalancing. By failing to do that, I think we throw out a very basic tenet of those studies. We may still be fine, but there aren't any studies to use as a guide.

C'est la vie

An excellent point that seems to be getting lost in the desire to be safe.

Ha

Now here is what I would find interesting... The ability to run FireCalc *without* rebalancing.

I've looked at 20 years or so of SPY500 data in excel at one point, not rigorously, but it seemed to show that rebalancing didn't help as much as I would have expected. Sure, it helped at the peaks, but since we have bull and bear *runs*, you also keep re-balancing OUT of stocks on the way up, and that hurts performance.

It seemed to average out - but this was a fairly small sample.

-ERD50

 

[haha]

Now here is what I would find interesting... The ability to run FireCalc *without* rebalancing.

I've looked at 20 years or so of SPY500 data in excel at one point, not rigorously, but it seemed to show that rebalancing didn't help as much as I would have expected. Sure, it helped at the peaks, but since we have bull and bear *runs*, you also keep re-balancing OUT of stocks on the way up, and that hurts performance.

It seemed to average out - but this was a fairly small sample.

-ERD50

Good point. Obviously the less rebalancing you did between the end of the 1991 recession and the beginning of the 2000 market drop the better. Ditto from Oct 2002 to Oct 2007. Again true from Oct 2007 to present.

So maybe it is not the wonder drug that it is supposed to be.

Ha

 

[tulak]

Good point. Obviously the less rebalancing you did between the end of the 1991 recession and the beginning of the 2000 market drop the better. Ditto from Oct 2002 to Oct 2007. Again true from Oct 2007 to present.

So maybe it is not the wonder drug that it is supposed to be.

Ha

Which leads to a scary thought: it's actually times like this that you need to rebalance.

Rebalancing when equities are increasing year after year lowers your overall return. But if you rebalance when equities are signficantly decreasing, then you are setting yourself up for a big rebound at some point, historically speaking at least.

It looks like now is the time to act...

 

[DblDoc]

My 2 cents on rebalancing having followed numerous discussions at Bogleheads and looking at various studies that show minimal increases/decreases depending on strategy is that it is a risk management tool only. It is not a method for significantly increasing your portfolio returns - you would be better off spending your time reducing your fees and expenses. I am rebalancing but I am putting in new $. If I was retired I would be more focused on making sure I had sufficient fixed income to last through this downturn and sacrifice rebalancing to be sure I could sleep at night.

Now if the markets had gone the other way and people were talking about not rebalancing even though their 60:40 (equity:bonds) was now 80:20 that would be a different kettle of fish...

DD

 

[TromboneAl]

To summarize: It's probably best to rebalance based using an objective formula, but it's hard to do and maybe it's different this time, but it probably always feels "different this time," but this time it REALLY feels different this time.

 

[Lsbcal]

A few comments that may not have been mentioned:

1) If you are spending from fixed income while retired then you will slowly be rebalancing by default. So you could perhaps justify doing nothing.

2) I've decided to rebalance to some extent based on a market timing methodology. That way, I will not be doing things based on my feelings about the market. It is completely mechanical based on past market history. It's an approach that is fairly complex and I would not recommend it to anyone else. A fairly simple approach is to pick a buy in point based on something like a 50-200 day exponential moving average or even a 200 day moving average. Yahoo charts make this pretty easy to do.

3) Even mechanical trend following approaches can be wrong for some time. In 1932 there was a big up move in the market for around 2 months and then a major fall back to previous lows. At that point the market moved up big time until the next recession in 1937.

3) Coming out of previous major downturns (1933, 1975) small value stocks did better then the general market and even large value.

4) I'll be value tilting my portfolio but only when the trend starts up as measured by past fairly reliable price indicators.

5) There is some comfort in having a plan which has worked in the past.
It could all be different this time, of course.

 

[W2R]

To summarize: It's probably best to rebalance based using an objective formula, but it's hard to do and maybe it's different this time, but it probably always feels "different this time," but this time it REALLY feels different this time.

By George, I think we have a winnah!! T-Al has captured the essence.

 

[Bikerdude]

My 2 cents on rebalancing having followed numerous discussions at Bogleheads and looking at various studies that show minimal increases/decreases depending on strategy is that it is a risk management tool only. It is not a method for significantly increasing your portfolio returns - you would be better off spending your time reducing your fees and expenses. I am rebalancing but I am putting in new $. If I was retired I would be more focused on making sure I had sufficient fixed income to last through this downturn and sacrifice rebalancing to be sure I could sleep at night.

DD

William Bernstein in his book "The Intelligent Asset Allocator" discusses re-balancing in chapter 8. He mentions its a complicated matter that is best done on longer intervals due to market "trends" that usually persist for long periods of time. The old "the trend is your friend" saying...or not.

 

[Telly]

As Tuesday's close of market approached, I thought "hmmm, maybe Monday WAS the day to rebalance, after all". Well, maybe Friday...

It's a drag to go through the day with one eye on the clock to check the S&P as the closing hour approaches. I only do that if I'm in a rebalancing mode of thought, but it just sort of pollutes the ER day. It's sort of like.....working.... ACK!

Then again, it could be a sucker rally, and even better times to rebalance may lie ahead. See how this starts?

 

[Dennis]

Rebalance? Not really.they do it for me.. owing 4 Balanced Funds that is and the seperate bonds Ylds pay the Bills only needed 3% from them..
for past 9 yrs and counting? Not doing too bad.. and saved me alot of work playing around with that stuff..now..used to play with over a dozen Index and other funds for yrs.. never got much anywhere with them.. 1 stepFwd, 2 back.. LOL

Glad I had most of my Money invested in 2 homes.. 1 Lived in and other Rental for yrs.. Sold the 1st one and downsized in 03', that $500k tax Free was very nice, the other rental is long paid for and still cranking it out.. will probably sell it in next Bubble, it's getting pretty old and small for the neighborhood it's in now... Rich Kids in their McMansions all around don't like Poor -Middle class Folk living on their Street now...LOL

 

[Dennis]

If it helps? Like someothers have said> Go more into Small & Mid caps , playing the recovery period.. Hold for about 12-18 mos and then Rebalance it back into your Conservative Port..Probably best to load up Bonds with those gains..

That's what my Investment Firm did with my Port In the Last Bear for 03'and 04' and worked outvery well..

After 05'? We really converted over to a very conservative port ( 25/75) and it's still paying out too much and loading up the bond side now to a +80% level ( I know, nice problem) but the taxes will be pretty big this time...on all those Treasuriy Bonds from last yr..Sold them now and back into the usual stuff..

 

[harley]

Glad I had most of my Money invested in 2 homes.. 1 Lived in and other Rental for yrs.. Sold the 1st one and downsized in 03', that $500k tax Free was very nice, the other rental is long paid for and still cranking it out.. will probably sell it in next Bubble, it's getting pretty old and small for the neighborhood it's in now... Rich Kids in their McMansions all around don't like Poor -Middle class Folk living on their Street now...LOL

I don't know, seems like you have a great deal going there. The rich kids may not like your middle class renters, but it should be easy to keep tenants living in a relatively low cost nice neighborhood. Unless, of course, you're going to have to spend big bucks on maintenance. But still, sounds good.

 

[ERD50]

Interesting subject and comments. Let me catch up...

Good point. Obviously the less rebalancing you did between the end of the 1991 recession and the beginning of the 2000 market drop the better. Ditto from Oct 2002 to Oct 2007. Again true from Oct 2007 to present.

So maybe it is not the wonder drug that it is supposed to be.

Ha

Exactly, and that is the conclusion I came to in my less-than-perfect but probably-pretty-close study.

Which leads to a scary thought: it's actually times like this that you need to rebalance.

Rebalancing when equities are increasing year after year lowers your overall return. But if you rebalance when equities are signficantly decreasing, then you are setting yourself up for a big rebound at some point, historically speaking at least.

It looks like now is the time to act...

Yes, but if you didn't rebalance at the peak, the market rebalanced for you in the trough. But I agree. BAsed on history, if you are low on equities, now *should* be the time to act (crosses fingers).

My 2 cents on rebalancing having followed numerous discussions at Bogleheads and looking at various studies that show minimal increases/decreases depending on strategy is that it is a risk management tool only. It is not a method for significantly increasing your portfolio returns - you would be better off spending your time reducing your fees and expenses.
DD

To summarize: It's probably best to rebalance based using an objective formula, but it's hard to do and maybe it's different this time, but it probably always feels "different this time," but this time it REALLY feels different this time.

DD & T-Al - Yes, in my view, one of the great things about AA and rebalancing (and DCA on the other side) is that it makes it an easy, mechanical thing to do, and removes emotion from the decision. But, with this wild of market swing, emotion comes back into play. Kinda hard to ignore it. And it has value for that reason, but I don't think it really makes a whole heck of a lot of difference to your portfolio in the long run.

William Bernstein in his book "The Intelligent Asset Allocator" discusses re-balancing in chapter 8. He mentions its a complicated matter that is best done on longer intervals due to market "trends" that usually persist for long periods of time. The old "the trend is your friend" saying...or not.

I remember that. And it struck me as wimping out. How long an interval? That is all getting back to TA and market timing and as you say, trend analysis.

So does Bernstien believe in TA or not? IIRC he does not, until it seems to suit him. That didn't sit too well with me.


-ERD50