Why rebalance in retirement?

[meleana]

I don’t want to do conversions either but my FA said sometimes it makes sense to do the harder thing. I wanted to just start taking money from our traditional IRA’s.

He wants us to use our cash to live on until we take SS at age 70 ( we are 65 and 67) and do the Roth conversions while our income is low.

 

[2177V]

I like to balance the cost of being conservative. For example: $1M portfolio of 50/50 versus 60/40. Assume stock performs 10% a year versus 7% a year for bonds which is a difference of 3%. The difference between $500K/$500K and $600K/$400K portfolio is $100K. Multiple $100K by 3% = $3000 a year of underperformance. The question is: Is sacrificing $3,000 a year of underperformance worth the additional safety of 50/50 versus 60/40? Over 10 years this is $30,000 which is the cost for a new midsize sedan. Are the benefits of being conservative worth it? Only the investor can answer that but at least the investor has a number to dwell in his decision making.

 

[reneeh63]

Rebalancing is a way to manage risk. When it comes to investing there are really only two things we can control. One is portfolio expense and the other is risk.

Rebalancing does not lead to higher returns but it can contribute to a reduction in portfolio volatility, and this improves the portfolio survival rate. For many of us that is critical.

...I was waiting for someone to say this. I'm not into rebalancing quarterly or in a compulsive way as I can certainly stomach a fair amount of fluctuation from my desired allocation. And I don't re-balance as a "cheat" to time the market.

However, I think it's a matter of fooling yourself to act as though rebalancing hurts your "performance". To not rebalance is to keep whipping a runaway horse...stocks tend to outperform bonds over time so generally a portfolio will become higher in stocks and become riskier over time. So yes, if you don't rebalance you'll make more money but the point of it is to control risk by slowly selling/taking your "winners" off the table.

So yes, I'm likely sacrificing a bit of money - but supposedly to stabilize the risk I didn't originally want based on my original asset allocation I set for myself. If you want more stocks then ..."be honest" and get it the right way rather than letting your horse run at a full gallop.

 

[Gearhead Jim]

^^^
Without rebalancing, you could end up with a very high percentage in equities when you are 80 years old. If the market takes a big drop, or a long decline; what are the odds you would live long enough to see you equities regain their value?

I rebalance for that reason, though I'm not yet that old.

 

[Markola]

See, now y’all have made me pull up Portfolio Visualizer to show that, as far back as that site’s data go, rebalancing or not rebalancing doesn’t make hardly a dime’s worth of difference.

Blue line is a 60/40 portfolio that’s never rebalanced. Red line is a 60/40 balanced mutual fund that rebalances practically daily.

 

[RetiredHappy]

See, now y’all have made me pull up Portfolio Visualizer to show that, as far back as that site’s data go, rebalancing or not rebalancing doesn’t make hardly a dime’s worth of difference.

Blue line is a 60/40 portfolio that’s never rebalanced. Red line is a 60/40 balanced mutual fund that rebalances practically daily.

 

[Markola]

^^^^^ But that’s exactly what it does if you expand the chart a bit. The unbalanced portfolio becomes stock-bloated, periodically, causing it to crash harder during the next, inevitable downturn than the daily-balanced one. Over time, the two investors end up in the same place, though the one who never rebalances endures more volatility en-route. Investors who rebalance quarterly, yearly, randomly or using rebalance bands end up somewhere between the two, also making no difference in their long-term returns.

 

[tulak]

^^^
Without rebalancing, you could end up with a very high percentage in equities when you are 80 years old. If the market takes a big drop, or a long decline; what are the odds you would live long enough to see you equities regain their value?

I rebalance for that reason, though I'm not yet that old.

This ignores that your overall balance might be higher after a big drop because you never rebalanced. In that case, what value do you need to regain?

 

[GTFan]

One other thing to consider is asset placement. In our portfolio I now have 100% of equities in our taxable accounts and 100% of bonds in tax-advantaged. This has happened over time as I've rebalanced within the 401k/IRAs to increase bonds to stay (roughly) around 60/40. But now I've run out of ways to increase bonds without buying them in the taxable accounts, and for me that means we would have interest gains I don't want (for ACA purposes) in the taxable accounts. It's probably not as big a deal now with the low interest rates, but I've always wanted to keep bonds within tax-advantaged.

So bottom line is that I'm going to let it ride as-is for a while, and accept that the equities % is going to go higher. Given that our portfolio has risen to the point where even a 50% drop in the market doesn't impact how we live, I can live with that risk. And if it crashes worse than that we're all in a world of hurt, IMO.

 

[indiajust]

The other way to do this is to use tax loss harvesting to reduce concentrated positions. I just read a rather complicated explanation about using Canvas, and a deliberate allocation to wildly volatile small and micro caps. The program did enough rebalances to generate tax losses to transform a single stock portfolio (hyper concentrated due to IPO) to a diversified worldwide portfolio, without taxable gains and without losing value over 2020. Doing this inside a taxable portfolio that was essentially 100% cap gains was quite a coup.

https://canvas.osam.com/Commentary/BlogPost?Permalink=the-concentrated-stock-puzzle

This is a software trading only approach, plus correlation analysis. Not free. But a plausible approach to de-risking a concentrated portfolio without the tax hit.

 

[ejman]

See, now y’all have made me pull up Portfolio Visualizer to show that, as far back as that site’s data go, rebalancing or not rebalancing doesn’t make hardly a dime’s worth of difference.

Blue line is a 60/40 portfolio that’s never rebalanced. Red line is a 60/40 balanced mutual fund that rebalances practically daily.

 

[CRLLS]

Anyone who looks at the end of that graph and says they are both virtually the same, please send me that extra $1.5+ million that is the "same" as the balanced fund on to me. The graph is deceiving being a logarithmic scale, Of course, there are periods where the balanced MF exceeds the untouched one. It is cherry picking to look at any one particular point on the graph without looking at the whole including the end data. I like the untouched version myself. It takes no quarterly, or annual extra work. Just sit and watch.

 

[mrfeh]

Anyone who looks at the end of that graph and says they are both virtually the same, please send me that extra $1.5+ million that is the "same" as the balanced fund on to me. The graph is deceiving being a logarithmic scale, Of course, there are periods where the balanced MF exceeds the untouched one. It is cherry picking to look at any one particular point on the graph without looking at the whole including the end data. I like the untouched version myself. It takes no quarterly, or annual extra work. Just sit and watch.

This only makes sense...in a world where equities tend to outperform bonds, a portfolio with more equities will do better.

Of course, that isn't true over every time period, and the future may not look like the past.

 

[Markola]

Well then the answer is obviously to rebalance -one ends up with the same amount of money but with less volatility whats not to like?

That’s what I think and do, but all of my assets are shielded in tax advantaged accounts. It was also probably a bigger decision in the days when trading fees were higher.

Anyone who looks at the end of that graph and says they are both virtually the same, please send me that extra $1.5+ million that is the "same" as the balanced fund on to me. .

How about if we agree to these terms at the trough of the next stock plunge? [emoji857]

 

[CRLLS]

That’s what I think and do, but all of my assets are shielded in tax advantaged accounts. It was also probably a bigger decision in the days when trading fees were higher.




How about if we agree to these terms at the trough of the next stock plunge? [emoji857]

I do believe that I covered that later in my post:

Of course, there are periods where the balanced MF exceeds the untouched one. It is cherry picking to look at any one particular point on the graph without looking at the whole including the end data.

Either by using the end balance in the table shown or your proposal of checking back when the market is down, is timing the market IMO. I don't try to do that. Most of us here do not either from reading many of their posts.

 

[Closet_Gamer]

The question few ask or answer is, "Risk of what?"

I think the risks AA & rebalancing are designed to address are:

1) The risk of emotions triggering bad trading decisions (loss aversion, FOMO)

2) The risk of over-confidence triggering bad trading decisions (Market timing, concentration risk)

I think smart people have tried to analyze the drag these risky behaviours create on long term portfolio performance, but don't ask me for citations.

 

[Markola]

Either by using the end balance in the table shown or your proposal of checking back when the market is down, is timing the market IMO. I don't try to do that. Most of us here do not either from reading many of their posts.

You wanted to use the end of the graph as the reference point, not me, so I guess you’re the market timer, The point I made, I think soundly, was the similarity of returns over 40 years between rebalancing vs. not rebalancing.

 

[street]

^^^
Without rebalancing, you could end up with a very high percentage in equities when you are 80 years old. If the market takes a big drop, or a long decline; what are the odds you would live long enough to see you equities regain their value?

I rebalance for that reason, though I'm not yet that old.

I believe that is a good possibility of that happening. I guess then the positive in that is, that our RMD will be smaller and can reinvest when things are on sale.

After 40 years being in the market I started with a ~74% equity funds and today without me doing any rebalancing my equity funds are at ~78%. That has been doing nothing. At this point in my life that is where I want to be and don't feel the need to shave it back. If I feel later in life that I want to cut that back then I will.

 

[reneeh63]

Anyone who looks at the end of that graph and says they are both virtually the same, please send me that extra $1.5+ million that is the "same" as the balanced fund on to me. The graph is deceiving being a logarithmic scale, Of course, there are periods where the balanced MF exceeds the untouched one. It is cherry picking to look at any one particular point on the graph without looking at the whole including the end data. I like the untouched version myself. It takes no quarterly, or annual extra work. Just sit and watch.

But it's a "cheat"...or an illusion..or a delusion. You've said you want 60% equities (or whatever) then allow it to go higher and higher citing the higher returns. Why not just go 100% equities at the start and be done with it?

Rebalancing at a set, predetermined point also eliminates the possibility of using that event as a way to time the market.

Either you have a plan with a particular asset allocation or you don't - you can't have it both ways. Or you "can" but you're not being as self-disciplined as you think you are.

 

[CRLLS]

But it's a "cheat"...or an illusion..or a delusion. You've said you want 60% equities (or whatever) then allow it to go higher and higher citing the higher returns. Why not just go 100% equities at the start and be done with it?

Rebalancing at a set, predetermined point also eliminates the possibility of using that event as a way to time the market.

Either you have a plan with a particular asset allocation or you don't - you can't have it both ways. Or you "can" but you're not being as self-disciplined as you think you are.

Well, It is not my choice for using a 60/40 portfolio for comparison, It was Markola's choice he used in his graph in post #80. When I mentioned my Fido analysis back in post #20, he used whatever AA I had at the time.

WRT either I do or I don't, I believe I have already addressed that in:

I like the untouched version myself. It takes no quarterly, or annual extra work. Just sit and watch.

meaning I am not focused on AA. I did started out blindly years ago with some AA (probably 60/40) but thru years of not rebalancing I am way off that now. I'm perfectly OK with that. I know that goes against most conventional wisdom. For those with a target AA, I don't believe that everyone of them starts out with an AA and rebalance range and keeps that throughout their lives. Situations change as we get older, knowledge changes, perspective changes, goals change etc. I just have taken that to the extreme. To put it in the different terms, consider my plan is a 60% equities starting AA with a +/- 40% rebalance trigger.

 

[reneeh63]

Well, It is not my choice for using a 60/40 portfolio for comparison, It was Markola's choice he used in his graph in post #80. When I mentioned my Fido analysis back in post #20, he used whatever AA I had at the time.

WRT either I do or I don't, I believe I have already addressed that in:

meaning I am not focused on AA. I did started out blindly years ago with some AA (probably 60/40) but thru years of not rebalancing I am way off that now. I'm perfectly OK with that. I know that goes against most conventional wisdom. For those with a target AA, I don't believe that everyone of them starts out with an AA and rebalance range and keeps that throughout their lives. Situations change as we get older, knowledge changes, perspective changes, goals change etc. I just have taken that to the extreme. To put it in the different terms, consider my plan is a 60% equities starting AA with a +/- 40% rebalance trigger.

The percentage is not important - it is the setting of the percentage based on your objectives and risk tolerance. The rebalancing is a confirmation that your strategy still holds so that rather than "falling into" a higher equities allocation you make a conscious decision.

Changing the allocation is great if your objectives and tolerance for risk have changed - no one ever said that what you wanted at age 20 should hold for when you're 60. If your situation has changed, why not just MAKE the necessary change to your portfolio rather than relying on the meandering market to eventually do it for you?

Maybe you think you're "staying the course" with a completely hands off strategy but the actual consequence is that by failing to take action your strategy has changed. This is what seems a bit disingenuous.