When does rebalancing become market timing?

[karluk]

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.

Well, things worked out ok on that guess, so now I'm properly balanced and can forget about rebalancing for a while, right? Well, not quite that either. I suspect that there will be some bumpy days ahead because of the debt ceiling issue. I know I'll be following the market over the next month or so, hoping for an opportunity to repurchase my shares at a lower price.

I've done this sort of dual purpose rebalancing many times over the years, generally with favorable results. It has become a little hobby of mine that I thoroughly enjoy. I am probably rationalizing, but I figure that allowing myself the flexibility to decide when to rebalance puts me in a no lose situation. 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.

Do other people do the same thing? If so, what is your experience?

[jon-nyc]

I suppose when it ceases to follow your investment policy it's market timing.

And to answer your other question I' also often a tad flexible on when I rebalance.

[HighRoller]

I don't keep what I consider a lot in stocks but I do allocate some of my cash for "buying in" on what I consider good market dips for certian DOW stocks that I track closely. I suspect a lot of folks with spare cash do the same.

[mathjak107]

When you think you are going to beat the markets at their own game by picking the best time to rebalance- thats timing.

When you say i will except wherever the market is when it is time to rebalance either by calander or predetermined percentages that is not timing.

[W2R]

Make a written investment plan. In that plan specify what the triggers will be to rebalance. For example, "I will rebalance during the first week in January each year, and additionally if my asset allocation becomes incorrect by 3%" or some such thing. Then, rebalance only according to that plan. Then you are not market timing.

[Closet_Gamer]

If it works, its well managed asset rebalancing.

If it doesn't, it was ill advised market timing.

Sounds like you've been rebalancing to me.

[ziggy29]

Quote:

Originally Posted by W2R Make a written investment plan. In that plan specify what the triggers will be to rebalance. For example, "I will rebalance during the first week in January each year, and additionally if my asset allocation becomes incorrect by 3%" or some such thing. Then, rebalance only according to that plan. Then you are not market timing.

This. If you only rebalance according to predefined objective triggers, and not just at random intervals because of a gut feeling, then it's not market timing.

[photoguy]

It's all a matter of intention.

[easysurfer]

Quote:

Originally Posted by W2R Make a written investment plan. In that plan specify what the triggers will be to rebalance. For example, "I will rebalance during the first week in January each year, and additionally if my asset allocation becomes incorrect by 3%" or some such thing. Then, rebalance only according to that plan. Then you are not market timing.

+1

For me, I've decided to just rebalance during the first week of January each year and that's what I did in early Jan.

That said, I almost gave into temptation by having an internal conversation such as "Should I wait until the end of Jan in case there's a large January effect?"

[kaneohe]

Quote:

Originally Posted by karluk Today I sold about $18,000 worth of stock mutual funds to get back within my target asset range. .................. I know I'll be following the market over the next month or so, hoping for an opportunity to repurchase my shares at a lower price.

.....just curious.........if the first action is a rebalance and aligns things properly, what does the second do?

[NW-Bound]

This question has come up in a long-ago thread.
I don't care what people call themselves, but I call myself a market timer. However, I consider myself clean and not at all dirty.

Quote:

Originally Posted by krotoole If it works, its well managed asset rebalancing. If it doesn't, it was ill advised market timing. Sounds like you've been rebalancing to me.

It is similar to the difference between a revolutionary hero vs. a dirty rebel. The first was successful and became the ruler, while the latter got captured and executed in a public square.

A successful market timer gets rich, and is honored as a wise contrarian investor. An investor who loses money through ill-timed market moves gets poor, and is called dirty to rub insults to his injuries.

[rbmrtn]

Quote:

Originally Posted by NW-Bound I don't care what people call themselves, but I call myself a market timer. However, I consider myself clean and not at all dirty.

Same.

[NW-Bound]

Whatever...

Quote:

Originally Posted by photoguy It's all a matter of intention.

Isn't the intention always either to have more money, or less volatility?

[jollystomper]

My own approach is to check at the beginning of each quarter, and only if my target allocations are more than 2% out of alignment then I'll rebalance.

I have a very small amount (1.5% of total savings/investments) set aside for buying opportunities for individual stocks, but I consider this money that if it disappeared I could live with. Even then I buy with the intent to hold for a long time (at least 5 years) unless the company fundamentals change.

[karluk]

Quote:

Originally Posted by kaneohe .....just curious.........if the first action is a rebalance and aligns things properly, what does the second do?

Let's take yesterday's transactions as an illustrative example. By my calculations, I am now $311.46 below my target percent for equities. If the market declines from here by as little as 3%, I can repurchase the entire $18,000 of yesterday's sale and remain within my target percent. My hoped-for profit would be 3% of $18,000 = $540.

That's what happens if I guess right. If I guess wrong and never have a chance to repurchase, I will wait patiently, doing nothing, until it's time to rebalance again.

[karluk]

Quote:

Originally Posted by krotoole If it works, its well managed asset rebalancing. If it doesn't, it was ill advised market timing. Sounds like you've been rebalancing to me.

I love your comment. It's a very witty way of looking at it. I don't mind being accused of "ill advised market timing" when I'm wrong, as long as I can show off my "well managed asset rebalancing" skills when I'm right.

My latest sale could easily turn out to be ill advised. Word from Washington is that Congress, in a rare display of ordinary common sense, may be backing away from a confrontation over the debt ceiling. We'll see how it goes.

[kaneohe]

Quote:

Originally Posted by karluk Let's take yesterday's transactions as an illustrative example. By my calculations, I am now $311.46 below my target percent for equities. If the market declines from here by as little as 3%, I can repurchase the entire $18,000 of yesterday's sale and remain within my target percent. My hoped-for profit would be 3% of $18,000 = $540. That's what happens if I guess right. If I guess wrong and never have a chance to repurchase, I will wait patiently, doing nothing, until it's time to rebalance again.

if the market continues to drop (e.g -50%), wouldn't you have been better off not doing that purchase at -3% but at -50% instead? so not clear which is better?

[karluk]

Quote:

Originally Posted by kaneohe if the market continues to drop (e.g -50%), wouldn't you have been better off not doing that purchase at -3% but at -50% instead? so not clear which is better?

A repurchase at -50% is clearly better than a repurchase at -3%. My willingness to repurchase quickly after only small declines makes my strategy most successful during periods of relatively flat markets with high volatility. Specifically, I did extremely well during the European debt crisis talks in the spring and summer of 2010 and also during the US budget negotiations during the summer and early fall of 2011.

But my strategy is also self correcting, in the sense that if I did repurchase at -3% and then got an additional decline to -50%, I would revert back to being a traditional rebalancer. We saw that exact scenario in 2008. I made several profitable in-out trades early in 2008, but then spent the rest of the year rebalancing into the teeth of the worst market decline in my lifetime. I ended the year with about $150,000 of net stock purchases, which as you know have roughly doubled in subsequent years.

So my strategy really is a hybrid. It looks a lot like market timing during periods when the market is seeing swings both up and down, but when the direction is almost exclusively either up or down, I act like a rebalancer.

[Closet_Gamer]

Now that used up all my meager wit in my first post, I have to admit that I've been noodling this a bit.

I'm a pretty dedicated,"I have a written plan, rebalance and don't screw with it" guy. I've got 10 years of good discipline there. (I did flinch and move some college funds when the DOW was at 7000...not totally out of the market, but I've under-performed vs having just left it alone. Fear. Not good.)

That said, on the heels ofthe big crunch a couple years back, a Warren Buffett quote has been ringing in my ears. It was something to effect that "We had a gross under-pricing of risk. Investors weren't demanding enough return for the risks they take."

With that persepctive, I have become far more willing to look at the absolute return of an asset class and say "not worth it right now" even if that's against the grain of my AA. For example, I recently exited Muni bonds all together. Meager interest returns, limited upside, big potential downside if CA or IL default and scare the heck out of everyone. I'm out for now. Its still in my target AA but I've decided that the downside risk isn't warrented by the upside exposure. Sort of like saying "I bike for 1 hour every day" but then noticing huge dark clouds and saying "Still true...but not today." I might miss a great ride on a beautiful day...but more likely I'll avoid huddled on some strangers porch as the lightning flashes.

So I think I've essentially modified my AA strategy:

I have a disciplined AA but that discipline includes being aware of the absolute returns on an asset class and being willing to forgo a few points of upside to eliminate a drastic downside.

There...I'll stop rationalizing in public now. Thanks for letting me talk it out ;-)

[REWahoo]

Quote:

Originally Posted by krotoole So I think I've essentially modified my AA strategy: I have a disciplined AA but that discipline includes being aware of the absolute returns on an asset class and being willing to forgo a few points of upside to eliminate a drastic downside.

A great strategy - provided you have the correct analysis. Markets and asset classes often perform far differently than the best analysis indicates. Zigging when you need to zag (as in your college fund example) is often worse than holding your nose and rebalancing, ignoring the cries of "Dow 20,000!" and/or "Doomsday Looms Ahead!".

But I do agree it is difficult to stay the course when there is so much noise about what is sure to happen...