Am I a market timer or just rebalancing?

[MrLoco]

I am sure I am not alone here. In the past I would usually need to re-balance about once a year. Last year I re-balanced 3 times and this afternoon I just trimmed my equity position by another 2% to get me back to 50/50 AA.

I keep telling myself that i am NOT timing the market but I think I am trying to rationalize my actions in the following way:

1) I want my AA to be 50/50 so I will trim accordingly with narrow bands of 1.5 - 2.0 % not 5 % or more ( as I used to only re-balance if bands exceeded 5%). Of course these narrow bands require more frequent (re-balancing) selling of equities and buying short term bonds/ cash.

2) I rationalize that IF stocks keep rising....sure I will lose out on those gains I could have realized if I did not sell equities....BUT ....I will still "make money" on the remaining equities in my portfolio. And IF the market does suddenly tank at least I will have locked in those profits and IF I do buy back into equities, at least it won't be at these unprecedented high prices. I think what worries me the most is NOT that the market is as high as it is BUT the rapidity that it has achieved these lofty high levels.
Emotions are hard!

Anyone else?

 

[audreyh1]

Rebalancing doesn’t really have hard and fast rules about frequency or size of bands. Rebalancing less often usually results in better outcome especially in a taxable account. I try to limit myself to once a year to minimize tax impact and give assets time to diverge.

In tax deferred accounts there aren’t tax consequences for rebalancing, so I’m not surprised people do it more often.

 

[pb4uski]

... Anyone else?

You're not loco .... I've been doing the same thing.. rebalancing frequently to "lock-in" gains and avoid additional losses if TSHTF.

Since I'm undecided on where in fixed income to deploy it is sitting in cash for now... if equities go down sharply then it is ammunition to [-]jump in[/-] rebalance.

 

[LOL!]

Since you trimmed equities back to 50/50 which it seems you have rule for, you are just rebalancing.

Of course, you could have trimmed back to 52/48 as well and you would still be rebalancing.

Now if you want to be a market timer, you should have gone to 60% equities and announced that you had moved your entire 401(k) into equities with no bonds and no cash.

 

[Islandtraveler]

Re-balancing frequently incurs short term capital gains as well as unnecessary transaction costs. Make a re-balancing plan. (ie. 5% deviation or 1 year) Stick to it. If you can’t, you are a closet market timer.

 

[pb4uski]

Re-balancing frequently incurs short term capital gains as well as unnecessary transaction costs. ....

Nope. Most of us have so many lots over a year old that avoiding short term capital gains is no sweat.... besides.... many of us rebalance in tax-deferred accounts so no tax implications at all. No transaction costs either.

Not sure why you think either would be an issue.

 

[W2R]

In order to see the difference between rebalancing and market timing, it helps to have a written rule regarding what triggers rebalancing for you.

This way your volition is removed from the decision making process so you are not market timing. You are just following your written rule.

 

[Islandtraveler]

Nope. Most of us have so many lots over a year old that avoiding short term capital gains is no sweat.... besides.... many of us rebalance in tax-deferred accounts so no tax implications at all. No transaction costs either.

Not sure why you think either would be an issue.

Should have clarified accounts outside of a qualified account.

 

[43210]

You could read what Vanguard says.

"Best practices for portfolio rebalancing"
https://advisors.vanguard.com/VGApp...entary/article/IWE_InvResPortfolioRebalanceBP

 

[harllee]

I too am rebalancing more frequently inside my Vanguard IRA (so no tax or transaction costs). I rebalanced 4 times in 2017 and moved $100,000 additional funds to cash. I was caught in the 2008 Great Recession with a shortage of cash. It was awful for me and I lost a lot of sleep. When the next recession hits (and it will, the U.S. economy is overdue for a recession) I want to be able to sleep easy.

 

[easysurfer]

I say you are a serial rebalancer .

If you are rebalancing according to set allocation targets and not changing the allocations midstream, then I say you are a rebalancer, but probably more often you need to.

On the otherhand, if one month, you set you target to say, 60% stocks and rebalance, then next month set it to 70% and rebalance, then next to 55% and rebalance, then that's more like a market timer trying to come across as a rebalancer.

My plan is to rebalance only once a year if my allocations drift farther than 5%. This year, my allocation drifted about 4.8% in equities. I still rebalanced, so didn't follow my own rule all they way. Emotions have a way of doing that.

 

[Montecfo]

I do not use a hard and fast as to timing. I rebalance when I have harvested gains and have funds available.

I also reposition within my equity allocation to cheaper sectors such as international and emerging markets. This is done within tax deferred accounts so no tax implications.

 

[audreyh1]

I seriously tax manage my rebalancing. As such, I’m unlikely to rebalance more than once a year. I set my triggers pretty wide. What I usually wait for is my year end capital gains distributions which I take in cash. Once those are paid out usually very little additional trimming is required and often I decide I am close enough. I take my annual withdrawal and rebalance what is remaining. This year all I had to do was buy a bunch of bond funds as they were seriously out of whack.

I widened my triggers after 2008. I did not enjoy the experience of rebalancing multiple times while things were dropping rapidly. I prefer to rebalance less often on the way down and up.

Most withdrawal models assume annual rebalancing at the beginning of the year.

 

[ERD50]

You could read what Vanguard says.

"Best practices for portfolio rebalancing"
https://advisors.vanguard.com/VGApp...entary/article/IWE_InvResPortfolioRebalanceBP

Interesting. They sort of downplay it, IMO, (though I pretty much skimmed), but Figure 6 is what struck me:

Example Avg Annualized Returns for Rebal @ 0%, 1%, 5%, 10% Monthly Quarterly and Annually run from 8.0% ~ 8.3%, while never Rebal was 8.9%.

The volatility was reduced from 13.2% annually, to 9.8% ~ 10.2% for rebal. Significant, but if your stash has grown, you can handle a downturn better too.

I keep getting more and more in the "What, me worry?" mode. Of course, if your AA has gotten out of your comfort zone, you should probably adjust. But I just don't see any reason to be rigorous about it. If your AA has become higher than your target, it's because those stocks have done well. So some downside volatility will likely leave you ahead of where you were had you been rebalancing, and never had that much in stocks.

Even a modest amount of fixed assets provides lots of cushion, even in a prolonged down market. If you are getting an average of say 2.5% divs, and a 3.5% WR, you only need to sell off 1% per year on average. An aggressive 80/20 provides 20 years of cushion before having to sell any equities. That is a simplification, as the portfolio shrinks, it's a bigger % of the total - but it illustrates the point.

-ERD50

 

[pb4uski]

Should have clarified accounts outside of a qualified account.

Actually in my case even for taxable accounts I have no STCG since i select the lots to be sold and no transaction costs since mine are all index funds.

 

[jimbee]

Aren't balanced funds rebalanced regularly? If you're rebalancing to maintain your desired asset allocation, chosen to match the level of risk you wish to preserve, I would't call it market timing.

 

[DrRoy]

You're not loco .... I've been doing the same thing.. rebalancing frequently to "lock-in" gains and avoid additional losses if TSHTF.

+1. I put the proceeds into intermediate BBB corp bonds.

 

[donheff]

Interesting. They sort of downplay it, IMO, (though I pretty much skimmed), but Figure 6 is what struck me:

Example Avg Annualized Returns for Rebal @ 0%, 1%, 5%, 10% Monthly Quarterly and Annually run from 8.0% ~ 8.3%, while never Rebal was 8.9%.

The volatility was reduced from 13.2% annually, to 9.8% ~ 10.2% for rebal. Significant, but if your stash has grown, you can handle a downturn better too.

I keep getting more and more in the "What, me worry?" mode. Of course, if your AA has gotten out of your comfort zone, you should probably adjust. But I just don't see any reason to be rigorous about it. If your AA has become higher than your target, it's because those stocks have done well. So some downside volatility will likely leave you ahead of where you were had you been rebalancing, and never had that much in stocks.

Even a modest amount of fixed assets provides lots of cushion, even in a prolonged down market. If you are getting an average of say 2.5% divs, and a 3.5% WR, you only need to sell off 1% per year on average. An aggressive 80/20 provides 20 years of cushion before having to sell any equities. That is a simplification, as the portfolio shrinks, it's a bigger % of the total - but it illustrates the point.

-ERD50

I haven't read the paper yet but glanced at figure 6. A couple of guesses. First, I expect the costs listed for rebalancing involve transaction costs and taxes. Using index funds in a 401K those numbers would not be accurate. Second, wouldn't the difference in return (other than the portion covered by costs) simply reflect that the no rebalancing account gradually increases it's equity component? So, basically the idea is an upward gliding equity allocation. I read that as a recommended strategy somewhere. You trade return for volatility.

Like you I am getting more comfortable with that as I get older. At some point I plan to ask the kids what AA they want me to keep our portfolio at as it will soon be coming to them.