To start, I have always rebalanced in down markets. But I have no issue with someone who has enough and chooses not to.
If someone has enough in safe assets to live a nice comfortable life (yes nothing is known with perfect precision, the supposed rebalancing bonus included), an extra potential (remember, history may not repeat) fraction of a percent return may have little to no value to them. This is a well known fact of utility curves. The old $1 to a poor person is far more meaningful than $1 to a rich person. They may well agree they are likely to leave that fraction of one percent return on the table, but they rationally have no interest in putting safe assets at risk for the potential to earn that fraction of a percent. This is little different from saying I have enough I am going to move from 60/40 to 20/80; you largely opt out of playing the game. You won.
This may not be for everyone, but it is a rational approach.
as a reason to convince us its OK to do what we know we shouldn't when things begin to get scary.
Vs using history that may not repeat to take on more risk than is necessary. It works both ways.
I think you are mixing rationality
with behavioral preferences
, which may or may not be rational. Rational
is to hold a portfolio with an appropriate expected return for your goals without taking unnecessary risk. That risk is either concentration, active management, or an asymmetric portfolio that holds more stocks prior to declines and less stocks prior to recoveries. Irrational
is to adopt a portfolio with a higher equity component that you don't rebalance when equities are down (reducing returns for a given level of risk) vs. a lower equity commitment (same return as previous portfolio) with less downside that you do rebalance. In doing so, you are trying to get something for nothing--higher returns from stocks while hoping they don't decline significantly. I'd also argue that "irrational" includes making portfolio decisions under the belief that if stocks go to 0% you'll still be OK in both terms (that stocks may go to 0% and you'd still be OK), but that is another topic.
It is a preference
to not buy stocks after they have declined (and expected returns are higher) thereby lowering the risk-adjusted return of your portfolio. But there is a cost to that and bearing that cost isn't rational relative to achieving a similar return by simply holding a lower-risk portfolio and rebalancing.
By the way, we are talking about long-term portfolios (even if its a 75 year old with only 1/2 their 3 decade retirement left), not the 4 year scenario you mentioned a few days ago -- if you need 100% of your money in 4 years this discussion doesn't apply. (just to clarify that point).
PS -- to say this more simply: if two portfolios have the same expected return, one has less downside risk but requires you to rebalance when stocks are down, while the other has greater downside risk but lets you off the hook when stocks drop, it is irrational to choose the later over the former (and that is the case for a lower equity/rebalanced portfolio vs. a higher equity/asymmetric rebalanced portfolio). That is a preference. I'm fine with anyone doing that, just don't assume there are not actual costs that must be compared to purely emotional benefits.
I'm quite sure no one is interested in anything further I have to say on the topic, I'll let you all takeover from here
. Thanks for the thoughts.