Portfolio Rebalancing

[friar1610]

The end of the year is a time when many of us rebalance our portfolios if they've gotten out of whack during the year. I've done so in the past, but most years it's just involved minor tweaks. (My objective is to keep about 5% in cash and the rest divided evenly between equities and fixed income. For me, equities means exclusively mutual funds, the overwhelming majority of them indexes. Fixed income means a combination of bond MF's, individually owned Treasuries, I-Bonds and CD's.)

Along with everyone else, my portfolio is seriously out of balance now due to the crash in the markets. I'm torn between sticking to the discipline of rebalancing, even though it would involve moving a big (for me) amount of money from fixed to equities and playing it "safe" by sticking with the higher allocation of less volatile investments.

Just wondering how others are dealing with this as we approach year's end.

 

[W2R]

Because my portfolio got so far from my intended AA, I decided that I needed to rebalance before the end of the year. I did so in three little steps in October since I could not bear to do it all at once. I will probably have to rebalance more before the end of the year.

Logically I happen to think rebalancing is a good thing to do, wise, rational, and so on. Emotionally it is very difficult for me to do.

 

[FIREd]

Like W2R, I am rebalancing in small steps.

 

[Alan]

My 401(k) auto-rebalanced in October - I have it set to re-balance every 6 months. I'll rebalance the rest of my accounts in January, however it is only currently slightly out of balance (39% equities instead of 40%).

 

[REWahoo]

Like W2R, I am rebalancing in small steps.

Same here. I don't have the courage to do more than 1/3 or so at a time.

 

[Gone4Good]

The rules are designed to help you take the emotion out of investing . . . follow the rules.

I rebalanced in February and again a couple of weeks ago in the middle of the vertical sell off.

 

[Bikerdude]

The end of the year is a time when many of us rebalance our portfolios if they've gotten out of whack during the year. I've done so in the past, but most years it's just involved minor tweaks. (My objective is to keep about 5% in cash and the rest divided evenly between equities and fixed income. For me, equities means exclusively mutual funds, the overwhelming majority of them indexes. Fixed income means a combination of bond MF's, individually owned Treasuries, I-Bonds and CD's.)

Along with everyone else, my portfolio is seriously out of balance now due to the crash in the markets. I'm torn between sticking to the discipline of rebalancing, even though it would involve moving a big (for me) amount of money from fixed to equities and playing it "safe" by sticking with the higher allocation of less volatile investments.

Just wondering how others are dealing with this as we approach year's end.

Are you still accumulating or retired? I'm retired and staying put for now.

 

[W2R]

Like W2R, I am rebalancing in small steps.

Same here. I don't have the courage to do more than 1/3 or so at a time.

You are making me feel better about being so reluctant to do it all at once. I thought I was probably the only one. Small steps seem to work for me. I rebalanced 1/3 of the way, and told myself that after that, if it didn't feel right, then I wouldn't continue. But eventually I got it all done.

I think that the reason it was so daunting, was the HUGE drop during the first week or two in October. Too much, too fast.

 

[NW-Bound]

however it is only currently slightly out of balance (39% equities instead of 40%).

Gee, you sound like you want it finely tuned like a turbine spinning at 20,000 rpm! Mine jumped +-3 % within a week.

From my usual AA of 70% equity, I sold enough to reduce it to 50% in August. Then, the stock drop plus the additional selling due to stop-loss orders brought my equity position down to 30%.

I am definitely going to force myself to "buy low" by rebalancing. However, being an active investor (though not as much as Ha), I also need to decide what stocks to buy. Decision, decision...

I want to be back to 50% equity around New Year, and will spread my purchase out.

 

[Gotadimple]

You are making me feel better about being so reluctant to do it all at once. I thought I was probably the only one.

Nope, the market is too unsettled to try and do it all at once. I've rebalanced a part of my portfolio, but will wait until after Thanksgiving to look at where I am for the rest.

-- Rita

 

[RonBoyd]

Just wondering how others are dealing with this as we approach year's end.

See, for example:

Testing Forward Looking Asset Allocation - Seeking Alpha

Rebalancing Can Be Hazardous to Your Portfolio - Seeking Alpha

One of the most often cited issues in portfolio management is the importance of rebalancing. Rebalancing is perhaps the most basic form of strategic asset allocation (other than buy-and-hold). Let’s start by comparing an annual rebalancing strategy to a simple buy-and-hold, starting with the equal weight portfolio among the components listed above. The re-balancing is performed once at the end of each 12-month period, and takes the portfolio back to equal weights. We will be looking at the period from July of 1999 through August of 2008 using end-of-day adjusted closing prices, inclusive of dividends. This was the longest period for which we have all of these funds available, allowing for three years of lead time (prior to July of 1999). We will be using this lead time to drive some forward looking models in a later section.
...
Several points are immediately apparent. First, the equally-weighted buy-and-hold portfolio diversified among these funds has done quite well over the 9.2 years of this study, with an average annual return of 10.6% and a standard deviation of 9.3%. Annual rebalancing of this portfolio decreases both risk and return—a phenomenon that has been documented in a range of studies. Simple calendar rebalancing reduces risk, but it also reduces return. Both the buy-and-hold and annually rebalanced portfolios have done well over this period, despite the fact that the cumulative gain in the S&P 500 over this entire period is 8%--i.e. less than 1% per year.

 

[Nords]

Just wondering how others are dealing with this as we approach year's end.

We started with our four main ETFs each at 23% of our portfolio's total, and we rebalance when one of them exceeds 28% or drops below 18%.

A research paper ([-]FPA, I think? Can't find the link here right now[/-] http://www.early-retirement.org/forums/showpost.php?p=605754&postcount=9) concluded that mechanical bands around 20% of the target AA afforded enough rebalancing during bull/bear markets without generating additional taxes.

 

[Urchina]

We're going to "rebalance" this year by directing new money to lagging AA categories. So we won't be selling anything, just buying low.

This works for us because we're still in the accumulation phase and most of our assets are in equities, which have all tanked.

We rebalance once a year, in February.

 

[TromboneAl]

I'm looking forward to rebalancing on Jan 2. I'm the kind of investor who gets the urge to invest when the stock market goes down, so I've been champing at the bit.

I think I'll do it all at once, but we'll see.

 

[friar1610]

Are you still accumulating or retired? I'm retired and staying put for now.

I'm retired and pretty much don't need to hit the portfolio up very often due to a pension and SS.

 

[jIMOh]

I prefer to not sell anything which has lost 40%... so I will rebalance with contributions only. I have not even looked at the account recently (since July) because it might be too painful. I will take a quick look in December (when I also calculate my annual return) and redirect contributions to the lowest performers relative to my allocation.

 

[Dennis]

Rebalancing

Well been doing this for awhile and I found from others:

1. I rebalanced after I re-evaluate what my New Bal SB for the comming Yr.
2. This will depend on several factors from How much $ it made vs what my Goals are to How much I really need in each type ( Bonds or Equity) .

3. In 07' I made more than estimated and thus didn't need as Much in Equites this yr and thus Rebalanced and Reduced my Equities and Increased my Bond Side to adding More Bond Funds to my Balanced Funds that I have mostly of..to get a 50/50 mix. Then I figured from experience that things look stormy ahead in 08' and thus Moved another 10% from equites into the bonds to have a 40/60 mix. Guess I should have done 99% in Bonds...LOL

4. Fortunately, It's a nice Problem when you make more than you need and estimate to make, but none the less, is still a problem to contend with.

5. Most of the past 5 yrs has been this way and just Moving more into The Bond Side and the same remaining in the equity side..

6. Ultimate goal? More than enough in the Bond Side to more than provide enough $ for me to Infinity and Beyond and leave a Max of 20% in equities to build more for My Charitible Trust...

7. It's alot easier to Gamble more into the equities when you have plenty in the Bond Side of course and that is were I've been for quite awhile..

8. What kind of added Bonds? Just like my Balanced Funds have> Treasuries..Short and Intermediate.. VFITX and VFISX..

9. If Boggles Allocation method appeals to you? Then stick with that.. but for those HNW that done' need more than say 20% in equities may provide, More Bond Allocation maybe better for you, regardless of your age..

10. If I still want to Gamble and try to Beat the Market and Win a Trifecta? I Take out what Extra $ I want to play with and go play with that ..but no more or until you have at least 2-3x as much in your Retirement Plan Portfolio.. ( I now use about 5% of extra $ And Played the Bear Funds earlier this yr and now am moving that into Bull Funds )

and If you are Retired? I surely hope your keeping 3 yrs of COH in MMkt, Short term Treas like FISX or VSGBX or like kind..It sure makes things alot eaiser to deal with in times like these..

So far, so good!

 

[Donzo]

I have been throwing money from the sidelines (cash) into this market all the way down. This had not been a good feeling......
I re-balanced a few weeks ago when the DOW was at about 8200 - I still have 4-5 years in cash and then a good slug of Wellesley to get us through this mess...hopefully.
I have either set us up for a nice increase in wealth - or will have to update my resume - time will tell! these are exciting times - still way less stressing than my job was though.

 

[SteveL]

Asset Allocation begins with an appreciation of your own risk tolerance. There are several sites with risk tolerance questionnaires. One might want to go through this process again. If you have lost 50% of your equity value, are you prepared to lose 50% of your rebalanced portfolio again? If the answer is no, then you must adjust your AA before rebalancing!

 

[CuppaJoe]

.... time will tell! these are exciting times - still way less stressing than my job was though.

Yes! I'd rather live retired in tough times than as I did while working: I was totally obliviously to the fact that that market then was in steep assent. Really.

 

[Dennis]

Well assuming our Pro's in this business are correct? It maybe prudent to be buying Equities and not Bonds or Balanced Funds to take advantage of The recovery, when it does finally arrive.. I waited another Yr. after Mid 01' till that one started and it was the Longest time awaiting in my Life!...But, it was Extremely rewarding.. It was then I had Set up my own Balanced Port of Just My Best Equity ( FARIX) and Treasuries and ReBalanced it for a Recovery/Bull Market, using the Pro's telling me a Bull last an average of 3 yrs before leveling off.. The Balanced was a 30/70 and switched it to a 70/30 for this timeframe and then moved it back to 30/70..
Regardless of what was projected for 07''.

It was like playing Craps in Vegas and Quiting while your on a Nice Run, but none the less I did it.. and although didn't make that much in 07', it sure has paid off this yr..

I plan to do the same thing ( reverse the Bal. Port allocations) when I feel the time is right, gradually.. in 5% Increments after I see Large volumes in trading on the upside again.. It takes So little to move things now, it's still too volatile for my taste..

>"Simple calendar rebalancing reduces risk, but it also reduces return. Both the buy-and-hold and annually rebalanced portfolios have done well over this period, despite the fact that the cumulative gain in the S&P 500 over this entire period is 8%--i.e. less than 1% per year."

Re: I agree and found All this Rebalancing stuff every Yr wasn't worth Much more than suing my own common sense and as Charlie Munger said at a Annual Berkshire Meeting I go to every other yr..Rebalaning early on in a Bull market is Self Defeating, if you have faith in your Equities, you ought to go with them, there are plenty of Warning Signs of they slowing down and gives you time to rebalanced out of them and not loose all your gains from previous yrs.. ( At 07's meeting, WB and CM siad to expect A Down Yr for 08' and should be a good -overdue buying opportunity and that further confirmed my moving back to my 30/70 mix.)

Of course, I want to Note that I don't use All my $ in this Rebalancing game, only Extra money that I don't need. My Core Income retirement $ has been in a 30/70 port since day one... I started out in 02' with about = to 20% extra $ to play with and I do this to make More $, but not for myself, but for my Charitable Trust I want to build up. Otherwise, if I Was selfish? I'd just do like J. Boggle does and go with all of it in a 30/70 port and the heck with it.. And I suspect All this Constant Rebalancing Business is for the benefit of Feeding the Brokeage business and lining their pockets..

 

[WilliamG]

Dennis, I admire your courage. In contrast, I feel inclined to be more passive in shifting allocations. Completing 9th year of retirement and like the idea of a portfolio that supplies some pretty steady income and doesn't require much maintenance. I may shift some Wellesley to Wellington in early 2009, but don't see much more than that right now.

 

[Dennis]

re: Thanks Bill.. Butt?

1. I only needed about 80% of my Total savings to my 'Conservative Retirement Port" and

2. Had about 20% left over as Extra $ I could afford to Loose and still be ok..and do some gambling and playing with.. ( some of the Things On my list to do before dying )

3. VWINX? It was one of my only Funds and has done a 'decent" job over the yrs and i use it as a Comparsion to my other Bal. Funds .. and It's in my will to move most of my Left over $ into it in my Charitible Trust .( 10 yrs endin in 07'? about a 7% apy ain't to shabby vs VWELX and some other Index Port mixes vs other Cosnervative funds out there..and all in one shopping Mall..and if one wants More? Just add a couple of growth funds to the mix and go for it..or play It's big brother, VWELX. )

4. Seeing as, Its been my experience since the late 90's and Playing with Thes activeBalancedFunds? And Being a Former Magellon investor and got out about a Yr too late? AMF's( Active managed funds) aren't for the buy and Hold forever.. They go Flat after 8-10 yrs or whenever Mgmnt. Changes or When it just gets too big..or Like a Janus fund I had? They got caught playing around & breaking the rules..
Don't mind if they cheat, just don't get caught.. & leave a paper trail..
they should have stolen the $ and left for another country and hid out ther for 7-10 yrs.... the dummies.. Chicago style..

Peace
;0>)

 

[WilliamG]

Yup. Didn't read your last paragraph closely.

Correct about managed funds for long term, but I feel pretty good about Wellington and Wellesley, even though you can't just go to sleep and need to maintain some vigilance. I like the idea that these guys are in the core of our portfolio and are making informed (at least better than me) decisions on stock and bonds while also doing some ongoing re-balancing.

We are shooting for an overall 50/50 stock bond mix with 25% in Total International and Stock indices on one end and 25% bond on the other. The middle 50% is our growth and income core; 5% REIT, 15% Wellington and 30% Wellesley.