Taking some money off the table

[redduck]

OK, I'm sort of new here.  I admit it--I missed out on early retirement as I've already hit 61.  But, hey, I look and act like I'm 58 (ok, maybe 59-60). But, more importantly, I still have a full head of hair(gray).

Anyhow, I have a job that I like, so I'm in no real hurry to retire.  The kids have moved out, the house is paid for.  We live in Los Angeles (Hollywood Hills).

I have a rather diversified portfolio of mutual funds (stocks/bonds/TIPS and ETFs and just three stocks (Johnson and Johnson, Home Depot and Apache Oil). 

Severaly months ago I reached my made-up, based on nothing target of what dollar amount I was shooting for in the stock market. (taxable accounts).  I've been taking some money off the table and putting the dollars into 6 month CD's paying about 3.25 to 3.75. and keeping the target amount (plus a bit more) in the market.   This works really, really well as long as the market keeps going up. 

So, the questions are: does what I'm doing make sense and are some of you folks also taking long-term profits and turning them into dollars? Why? Why not?
Thanks...
I remain...
redduck

 

[wabmester]

Sure. It's called rebalancing, and it's sort of a religion around here. There's not a whole lot of evidence that it actually does any good in the long run, but the basic idea is that you pick an asset allocation and periodically sell appreciated assets to buy depreciated assets to restore "balance."

(It's really a form of market timing in disguise, but don't tell that to the asset-allocation groupies.)

 

[Spanky]

If you are referring to those 3 stocks and you have no immedidate need for cash, you should evaluate whether these stocks are worth holding based on future growth and earning or whatever evaluation method of choice regardless of the overall market condition.

 

[Cut-Throat]

Sure.   It's called rebalancing, and it's sort of a religion around here.   There's not a whole lot of evidence that it actually does any good in the long run, but the basic idea is that you pick an asset allocation and periodically sell appreciated assets to buy depreciated assets to restore "balance."

(It's really a form of market timing in disguise, but don't tell that to the asset-allocation groupies.)

Wab is exactly right when he says that portfoilo rebalancing is "Market Timing". The difference lies in the fact that rebalancing forces the investor to sell some good performing assets, and buy some underperforming ones. Market timing left up to the whims of the individual often results in doing the opposite and at often the wrong times.

I've got to disagree that there is little evidence that rebalancing does not do any good in the long run. Unless, you are talking about "In the long run, we are all dead"

 

[Jarhead*]

Wab is exactly right when he says that portfoilo rebalancing is "Market Timing". The difference lies in the fact that rebalancing forces the investor to sell some good performing assets, and buy some underperforming ones. Market timing left up to the whims of the individual often results in doing the opposite and at often the wrong times.

I've got to disagree that there is little evidence that rebalancing does not do any good in the long run. Unless, you are talking about "In the long run, we are all dead"

Cutthroat: I sold you half of my Reits first part of last year, because I thought they were getting out of proportion with the rest of my stuff.
(They were up 30% last year, and up about 8% this year.)
Glad my re-balancing worked out so well for you.
Jarhead

 

[Cut-Throat]

Cutthroat: I sold you half of my Reits first part of last year, because I thought they were getting out of proportion with the rest of my stuff.
(They were up 30% last year, and up about 8% this year.)
Glad my re-balancing worked out so well for you.
Jarhead

Yes, Thanks! - I was 'Forced' to Sell off about 15% of my Reit Holdings the first part of this year. Looks like I may be 'Forced' to sell some more this coming Jan.

 

[Spanky]

The purpose of rebalancing is to reduce volitility of a target return. It reduces the likelihood of strongly negative outcomes. While it also reduces the likelihood of strongly positive outcomes. In some cases, it may enhance returns.

 

[redduck]

OK, well, I'm sort of rebalancing, but I'm rebalancing it all into cash (CD's). Any major/minor problem with that? And, I guess I'm fairly conservative as most of my mutual funds/ETF's are in Health Care, Reits/Utilities and Dividend Growth. I imagine I'm one of those people who are hoping that if anything bad happens to the stock market that the dividends will be a form of protection as the market as a whole slides down.

 

[Cut-Throat]

OK, well, I'm sort of rebalancing, but I'm rebalancing it all into cash (CD's).  Any major/minor problem with that?  And, I guess I'm fairly conservative as most of my mutual funds/ETF's are in Health Care, Reits/Utilities and Dividend Growth.   I imagine I'm one of those people who are hoping that if anything bad happens to the stock market that the dividends will be a form of protection as the market as a whole slides down.

Mostly folks have a portfolio that is divided up into Stock/Bonds/Cash and then individual asset classes after that. If you've decided that you want to keep a large cash position for safety, there is nothing wrong with that.

Typically, as you get older you should have a larger portion in Bonds and Cash than Stocks. One approach is to match your Bond Percentage to your Age. 55 years old 55% bonds etc. etc.

 

[BUM]

Red,

Good advice above. Sounds like you think there might be something wrong with moving some profits into cash. Go for it! Most (of us) amateurs never do that. We sell the losers.

 

[redduck]

Good insight Cuthroat and Bum. Yeah, I do feel somehow changing market investments into cash is not a popular/smart/effective way to go. Most of what I read seems to be selling some percentage of the winners and using that money to rebalance (buying other market investments that have been lagging or that are not yet in one's portfolio at all.

 

[wildcat]

Sitting on cash and in MM funds for me ---- all work and no play makes me a poor boy

 

[Spanky]

---- all work and no play makes me a poor boy

Does that mean the all play and no work will make you a rich boy?

 

[TromboneAl]

Interesting that the frequency of rebalancing seems to affect the results (from the chart). Why do you think that is? Is that a real effect?

Also, I wonder if the results would be even better if the rebalancing were done every two years?

 

[Cut-Throat]

Interesting that the frequency of rebalancing seems to affect the results (from the chart).   Why do you think that is?  Is that a real effect?

Also, I wonder if the results would be even better if the rebalancing were done every two years?

Part of the reasoning behind this is that an asset class tends to get overvalued and some get undervalued. The longer holding period tends to cash in on this effect. (i.e. Selling even higher and buying even lower)

I think that there are examples where two year rebalancing is even more effective over the long haul.