When does rebalancing become market timing?

[smjsl]

I don't know exactly where the boundary is. I think it has to do with trying to keep risk under control rather than maximizing your returns... but in any case, your delays are clearly market timing IMO. It does not mean it's "bad" in the sense that if you are happy with it, go for it.

Today I sold about $18,000 worth of stock mutual funds to get back within my target asset range. Routine rebalancing, right? Well, not quite. It was a delayed implementation of the rebalancing I normally would have done at the end of December in order to start the New Year fresh. I intentionally held off on my year end rebalancing because it was looking as if there would be a resolution to the fiscal cliff negotiations, and I didn't want to miss out on a potential relief rally.

[...]

If I guess wrong and the market continues to go up after I sell, I've accomplished my goal of reducing risk and getting back to my target asset allocation. If I'm lucky enough to guess the market's direction correctly, I get to make a little money by repurchasing shares at a lower price.

Now, I wanted to comment about your bets. You make it sound at the end (where I bolded the text above) like there is no possible way to lose because in the worst case you'd be "rebalancing" and in best case, you make some money... But there are two parts to your bets here. Only because your first bet worked out, now you can try to bet again and in worst case end up with nothing or win again... Imagine for a second your first bet did not work out and there were no deal and we'd be re-living 2008-2009 now... So, in this scenario, your first bet would not have worked out, and because you had decided to not control your risk as much as your plan would have warranted otherwise, you'd have higher losses as a result today. Now, your choices would be to accept that loss and rebalance late with lesser overall portforlio value, or keep waiting / hoping for recovery with out-of-balance portfolio...

In other words, there is no free lunch here. Just a bet that did well but could have done equally bad.

 

[karluk]

Now, I wanted to comment about your bets. You make it sound at the end (where I bolded the text above) like there is no possible way to lose because in the worst case you'd be "rebalancing" and in best case, you make some money... But there are two parts to your bets here. Only because your first bet worked out, now you can try to bet again and in worst case end up with nothing or win again... Imagine for a second your first bet did not work out and there were no deal and we'd be re-living 2008-2009 now... So, in this scenario, your first bet would not have worked out, and because you had decided to not control your risk as much as your plan would have warranted otherwise, you'd have higher losses as a result today. Now, your choices would be to accept that loss and rebalance late with lesser overall portforlio value, or keep waiting / hoping for recovery with out-of-balance portfolio...

In other words, there is no free lunch here. Just a bet that did well but could have done equally bad.

I see your point. If the market had taken a dive in January, I would now be worse off for not having rebalanced in December.

Nevertheless, I don't agree with your conclusion that I am now a "winner" because my first "bet" worked in my favor. I don't believe in comparing the results of the actual buys and sells I've made with hypothetical buys and sells that I might have made, but didn't. The appropriate baseline for comparison, it seems to me, is a comparison of how my actual buys and sells perform compared to a buy-and-hold strategy.

From this perspective, the only "bet" I've made in the last couple of months is the one I made on Friday. I am basically now on record saying that I think that now is not only a good time to rebalance for the purpose of minimizing volatility, but that it is also a good time to rebalance in the hope of repurchasing similar stocks later at a reduced price. The outcome of that bet is still unknown.

I always keep detailed records of my buys and sells to know how I'm doing when compared with buy-and-hold. It's nice that I've sold after a significant market uptick, but that doesn't make me a "winner". Whether I gain or lose money on Friday's sale will be determined by how the stock market performs in the coming days, weeks, months and years. If I lose money, I still have the consolation of knowing that I accomplished the traditional goal of rebalancing to reduce risk, but I will have still lost money compared to buy-and-hold.