In a crash, will you re-balance to maintain your target AA?

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acegolfer
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In a crash, will you re-balance to maintain your target AA?

Post by acegolfer »

Suppose you are a 80/20 investor and there's no personal change (same age, same job, etc.)

If the stock suddenly drops by 25% so your new portfolio weights are 75% (= 0.75*0.80/(0.75*80%+0.20)) and 25%. Will you re-balance back to 80/20?
Last edited by acegolfer on Mon Jul 14, 2014 6:22 am, edited 1 time in total.
sscritic
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Re: Will you change your AA based on market performance?

Post by sscritic »

That's the idea.

Are you committed or not? If not, you should rethink why you are an 80/20 kind of guy in the first place.

P.S. I don't rebalance, so the question doesn't apply to me, but if, if I say, you believe in 80/20 then you should believe in 80/20.
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acegolfer
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Re: Will you change your AA based on market performance?

Post by acegolfer »

sscritic wrote:That's the idea.

Are you committed or not? If not, you should rethink why you are an 80/20 kind of guy in the first place.

P.S. I don't rebalance, so the question doesn't apply to me, but if, if I say, you believe in 80/20 then you should believe in 80/20.
You are absolutely correct. But I wonder how many so-called 80/20 investors are committed to it.
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Re: Will you change your AA based on market performance?

Post by sscritic »

acegolfer wrote: You are absolutely correct. But I wonder how many so-called 80/20 investors are committed to it.
I hear you. It is a lot easier to be 80/20 when the markets are going up and you are selling stocks at a profit to buy more bonds, but much harder to sell bonds and buy stocks heading south when the markets are falling.

I didn't sell bonds to buy stocks in 2008-2009, but I didn't sell any stocks either (not having a target AA kept me from being a hypocrite - maybe that's why I don't have a target AA). I did buy CA IT Tax Exempt when people thought CA was going to fail and did well by it, but not as well as if I had sunk my money into TSM or similar on the same dates.
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Re: Will you change your AA based on market performance?

Post by ralph124cf »

I think that most Bogleheads rebalance quarterly or yearly, or when the AA exceeds a pre-established band. What is your comfort band? I would be quite comfortable with a 5% variance until the next rebalance date.

If stocks dropped 50%, I'm buying. And I did in 2008-2009, when some of the individual stocks that I own dropped 80%-90%. They have done very well since.

Ralph
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acegolfer
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Re: Will you change your AA based on market performance?

Post by acegolfer »

ralph124cf wrote:I think that most Bogleheads rebalance quarterly or yearly, or when the AA exceeds a pre-established band. What is your comfort band? I would be quite comfortable with a 5% variance until the next rebalance date.

If stocks dropped 50%, I'm buying. And I did in 2008-2009, when some of the individual stocks that I own dropped 80%-90%. They have done very well since.

Ralph
Makes sense.

If you had a fixed target AA ratio, in 2008-2009, did you re-balance (not just buying more stocks) to maintain your ratio?
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Re: Will you change your AA based on market performance?

Post by sambb »

I think this is an important thread. Why - because several people are in "3 fund portfolios". But will they rebalance into stocks in a down market? In theory they will - but will they really? What happened in the last big bear market - and what did posters do? I bet a lot did not rebalance back in.

This is why, in retirement accts, I prefer LS or target retirement funds - and that way, you don't have to worry about these things.

I believe that the slice and dicers and 3 fund advocates may have an unknown "rebalancing error" - but how would we ever track that?

It is just an opinion. Im sure that most people are able to rebalance - but not everyone, and you may surprise yourself?
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Re: Will you change your AA based on market performance?

Post by gkaplan »

Maybe I don't understand the question, but I don't consider rebalancing changing my asset allocation.
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Re: Will you change your AA based on market performance?

Post by tomd37 »

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Re: Will you change your AA based on market performance?

Post by noyopacific »

Would I change my AA based on market performance ?
It depends on how much it goes up or down.
My asset allocation % is not based on age, it is based on my reaching certain objectives.
As the portfolio balance reaches specific targets (rather than age,) my bond allocation % is increased. When the market dropped in 2008, my portfolio balance dropped far enough below the previous target that I reversed a previous shift toward bonds and increased my equity allocation. (Yes, adding to equities in 11/2008 was difficult !) My previous bond allocation was restored after the balance returned to the earlier target. Depending on where the portfolio is next time I rebalance, I may need to increase the bond allocation again. (Right now it is slightly above the next target but I only make changes once a year.)

My wife occasionally credits me with (or accuses me of) being a market timer. My position is that I've just been following the plan and we have been lucky. :moneybag

I do not suggest that anyone else try this approach.
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Re: Will you change your AA based on market performance?

Post by investor1 »

No, I won't change my desired AA. Yes, I will change my real AA when I rebalance back to my desired AA. That's how it works. Buy low, sell high :)
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Re: Will you change your AA based on market performance?

Post by Aptenodytes »

gkaplan wrote:Maybe I don't understand the question, but I don't consider rebalancing changing my asset allocation.
The OP framed the question two different ways, which is the source of your confusion.
1) Will you rebalance, maintaining your AA? That's what the post asks.
2) Will you not rebalance, letting your AA drift? That's what the title asks.
To be more clear, I would have titled the post "I'm worried I might not stick to my AA if the market falls"
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Re: Will you change your AA based on market performance?

Post by Call_Me_Op »

To me, the whole idea of strategic asset allocation is to pick an AA that you can stick with regardless of market conditions.
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Re: Will you change your AA based on market performance?

Post by pennstater2005 »

acegolfer wrote:
sscritic wrote:That's the idea.

Are you committed or not? If not, you should rethink why you are an 80/20 kind of guy in the first place.

P.S. I don't rebalance, so the question doesn't apply to me, but if, if I say, you believe in 80/20 then you should believe in 80/20.
You are absolutely correct. But I wonder how many so-called 80/20 investors are committed to it.
I'm in the Lifestrategy Growth fund which rebalances automatically back to 80/20. So, I'm automatically committed to it.
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acegolfer
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Re: Will you change your AA based on market performance?

Post by acegolfer »

Aptenodytes wrote:
gkaplan wrote:Maybe I don't understand the question, but I don't consider rebalancing changing my asset allocation.
The OP framed the question two different ways, which is the source of your confusion.
1) Will you rebalance, maintaining your AA? That's what the post asks.
2) Will you not rebalance, letting your AA drift? That's what the title asks.
To be more clear, I would have titled the post "I'm worried I might not stick to my AA if the market falls"
Didn't realize it. I changed the title to be consistent with the OP's question.

"In a crash, will you re-balance to maintain your target AA?"

Fortunately, nobody answered "yes" or "no" without explanation.
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Re: In a crash, will you re-balance to maintain your target

Post by livesoft »

There is no doubt that I buy equities during market drops to maintain my asset allocation. I've done it in the past and will do so in the future. I even change my asset allocation so that the fraction of my equities is increased, so that one may say that I over-rebalance.

OTOH, market performance has also caused me to change my asset allocation. The huge increase in the portfolio due to market performance means that I have reached my goals and no longer need to have it grow. So I have changed my asset allocation to reflect my current need, willingness, and ability to take risk. I also retired.

I have started many threads where I have suggested that one might wish to rebalance. For instance, a year ago when the market dropped: http://www.bogleheads.org/forum/viewtop ... &p=1748564 Did you rebalance back then yourself?
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Aptenodytes
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Re: Will you change your AA based on market performance?

Post by Aptenodytes »

acegolfer wrote:
Aptenodytes wrote:
gkaplan wrote:Maybe I don't understand the question, but I don't consider rebalancing changing my asset allocation.
The OP framed the question two different ways, which is the source of your confusion.
1) Will you rebalance, maintaining your AA? That's what the post asks.
2) Will you not rebalance, letting your AA drift? That's what the title asks.
To be more clear, I would have titled the post "I'm worried I might not stick to my AA if the market falls"
Didn't realize it. I changed the title to be consistent with the OP's question.

"In a crash, will you re-balance to maintain your target AA?"

Fortunately, nobody answered "yes" or "no" without explanation.
That's a step in the right direction, but I think the overall thread is still confusing because I suspect you have in mind a question about yourself, but you pose a question about others. If you are worried about your own resolve, you might benefit from elaborating and inviting discussion. If, on the other hand, you have no doubts about your own resolve but you feel an obligation to warn others that they may be unprepared, then why not explain how you got to where you are and suggest how the weak-kneed might go about steeling their own nerves.

In other words, your question seems all subtext. Bring what's on your mind into the foreground.
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Re: In a crash, will you re-balance to maintain your target

Post by gasman »

I found it very difficult to buy stocks when the market was tanking during the financial crisis. But I gritted my teeth and did it. I was very dysphoric as the market continued to drop. Didn't quite hit the second rebalancing band and sell bonds to buy stocks again. Not sure I would have had the stomach had it actually gotten there. I did do a lot of tax loss flipping on the way down.
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Re: Will you change your AA based on market performance?

Post by shaboob »

pennstater2005 wrote: I'm in the Lifestrategy Growth fund which rebalances automatically back to 80/20. So, I'm automatically committed to it.
Thats why I'm inTarget Retirement. Same idea. You don't have to summon up the courage to manually rebalance. Read the business section, yawn, and carry on. Let Vanguard deal with it.
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Re: In a crash, will you re-balance to maintain your target

Post by ofcmetz »

I rebalance with new contributions and on a certain date every year. So, it may not be an immediate thing for me, but yes I'd rebalance.

Don't knock 80/20 till you've tried it. :sharebeer
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acegolfer
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Re: Will you change your AA based on market performance?

Post by acegolfer »

Aptenodytes wrote: That's a step in the right direction, but I think the overall thread is still confusing because I suspect you have in mind a question about yourself, but you pose a question about others. If you are worried about your own resolve, you might benefit from elaborating and inviting discussion. If, on the other hand, you have no doubts about your own resolve but you feel an obligation to warn others that they may be unprepared, then why not explain how you got to where you are and suggest how the weak-kneed might go about steeling their own nerves.

In other words, your question seems all subtext. Bring what's on your mind into the foreground.
As replied to sscritic, I am curious about how committed the target AA investors are to their set ratios, even in a stock market crash. To find this out, how will you rephrase the question?
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Re: In a crash, will you re-balance to maintain your target

Post by TomatoTomahto »

I generally rebalance with new money. I don't know if technically that's rebalancing. I don't know what we'll do once we're no longer accumulating.
I get the FI part but not the RE part of FIRE.
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Re: In a crash, will you re-balance to maintain your target

Post by pop77 »

I think there is levels of emotional maturity in investing
1. Not buying more stocks in an euphoria after stocks have gone up
2. Not selling stocks in a panic after market has crashed
3. Selling stocks in an euphoria after they have gone up (when everyone else is buying)
4.Buying stocks in a crash after they have gone down (when everyone else is selling)

You are asking about the highest level of emotional maturity . This is very easily said than done. Being mechanical and detached helps you do it. Also it is easier to do on an index fund or ETF rather than on an individual stock.

I think I am there but I would add more new money to the fallen asset classes rather than selling bonds. I need to sell some my bond fund next time !
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Re: In a crash, will you re-balance to maintain your target

Post by Beliavsky »

When the stock markets falls a lot, volatility rises. VIX, an option-based forecast of future realized volatility over the next month, hit 80 in 2008. Now it's in the low teens. If you start with a 60-40 stock-bond allocation, and the stock markets falls enough that your allocation is now 40-60, your stock allocation in dollar terms and as percentage of your portfolio has gone down, but your equity risk measured as dollar volatility may have gone up. For example, if equity volatility triples, and your stocks fall 40%, you are now taking

3*0.6 -1 = 80%

more equity risk at a time when you are poorer and likely more risk-averse. It may be enough to simply hold on to your stocks. Lots of people will not have the stomach to rebalance, and for good reason.
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Re: In a crash, will you re-balance to maintain your target

Post by IlliniDave »

I'm not sure if that's enough of a drop/deviation to prompt me to take action, I'm kind of loose with my AA, and on sort of on a glide path towards more conservative allocations. So I might just stand pat in the face of 25% equity drop, which would cause a 5-6% shift in my AA.
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acegolfer
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Re: In a crash, will you re-balance to maintain your target

Post by acegolfer »

IlliniDave wrote:I'm not sure if that's enough of a drop/deviation to prompt me to take action, I'm kind of loose with my AA, and on sort of on a glide path towards more conservative allocations. So I might just stand pat in the face of 25% equity drop, which would cause a 5-6% shift in my AA.
25% drop may not be enough. But if the market suddenly drops by 50%, other factors such as job stability can change, which complicates the question. I picked 25% because I consider it as a crash and leads to a simple new portfolio weights.
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Re: In a crash, will you re-balance to maintain your target

Post by Doc »

acegolfer wrote:"In a crash, will you re-balance to maintain your target AA?"

Fortunately, nobody answered "yes" or "no" without explanation.
Yes
noyopacific wrote:Yes, adding to equities in 11/2008 was difficult !
And it was very easy.
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Re: In a crash, will you re-balance to maintain your target

Post by dickenjb »

Of course I would rebalance to maintain my target AA. That is what "buy, hold and rebalance" entails and it is what my IPS dictates. My AA is 60/40 by the way.

In 2009 I did not have a set AA and bought equities all the way down, going to 92% equities in Nov 2008. It worked out very well for me.
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Re: In a crash, will you re-balance to maintain your target

Post by k66 »

Assuming that it is an equities crash, of significant proportion (>20% from peak), then I plan to liquidate bonds and utilize cash to temporarily readjust proportion of equities according to the magnitude of loss in equities market(s).

New_%Bonds = Target_%Bonds x (Current_Equity_Index / Peak_Equity_Index)^2

If and when the Equities Index returns to flush, so to will Bond allocation; but while Equities are depressed, then I will use bond holdings to purchase equities. The more the equities drop, the more bonds I sell to make equities purchases.

Edit to add:
I should also point out that this is an Accummulation phase strategy. I doubt that I would employ the same during Retirement phase!
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Re: In a crash, will you re-balance to maintain your target

Post by Beliavsky »

If you have $600K in stocks and $400K in Treasury bonds, you at least have the comfort that you will have $400K even if stocks go to zero. If you frequently rebalance to 60-40, there is no lower limit on your wealth. The family members I discuss investments with -- my wife and my parents -- would find that intolerable. It took a real effort to withstand their pressure to sell stocks in March 2009. Buying more stocks was not on the table.
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Re: In a crash, will you re-balance to maintain your target

Post by Toons »

No :happy
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Re: In a crash, will you re-balance to maintain your target

Post by HomerJ »

acegolfer wrote:Suppose you are a 80/20 investor and there's no personal change (same age, same job, etc.)

If the stock suddenly drops by 25% so your new portfolio weights are 75% (= 0.75*0.80/(0.75*80%+0.20)) and 25%. Will you re-balance back to 80/20?
You can also rebalance by changing all your new money to 100% stocks instead of 80/20 and slowly get the percentage back up to 80/20 from 75/25

That's usually much easier than rebalancing (emotionally, and possibly tax-wise).

I know during the 2008-2009 crash, I had zero problems investing all my new money 100% stocks... But it was VERY hard to rebalance my old money... I sold some bonds and bought stocks when the DOW dropped below 10,000, but as it kept going down (all the way to 6500), I was too scared to rebalance again... Now it NEVER occurred to me to sell stocks, and cash out...So that's a victory of some sorts. I know plenty of people who did, and missed out on the recovery.

I just couldn't sell my good "safe" bond money... We had about $300,000 in bonds, and a $200,000 mortgage... and I just really liked the idea of having $100,000 net in "safe" money, just in case we really were entering the Great Depression II.
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Re: Will you change your AA based on market performance?

Post by HomerJ »

ralph124cf wrote:in 2008-2009, when some of the individual stocks that I own dropped 80%-90%. They have done very well since.
That is a dangerous game... The market as a whole is 99.99% likely to come back.... Individual stocks... not nearly as good odds.
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Riceman
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Re: In a crash, will you re-balance to maintain your target

Post by Riceman »

I've said this in a few threads, but I believe this is one of the psychological advantages of a 100% equities portfolio, especially a 100% total stock market portfolio. For better or worse, there is not much you can do or need to do, so when things get bad, you can just tune everything out. That's what I did during 2008-2009; I simply didn't look at my portfolio balances (auto deposit for tsp made this even easier for purchasing more equities).

Of course, the same problem applies when you slice and dice a 100% equities portfolio; do I actually rebalance away from US small cap into emerging markets? The answer so far has been Yes.
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Re: In a crash, will you re-balance to maintain your target

Post by vitaflo »

My favorite time to buy stocks is when the market is down. Been through that and love it. It's like buying something on sale. Having bonds to rebalance with is also nice when that happens.

The question will be how I feel when I'm 5 years from retirement. It's easy to manage the crashes when you're accumulating because you have such a long time horizon to make up for it. But I have a while before I need to worry about that.
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Re: In a crash, will you re-balance to maintain your target

Post by bradshaw1965 »

The trouble I had during the last down turn was velocity. REIT's as an example fell %44 in less then a month and had down days of 6-7%. I just wasn't equipped to know how to systematically rebalance in that kind of environment. So I didn't do anything. Later in the year, I taxed lost harvested in taxable and rebalanced in tax deferred. Looking back, it was probably the best that I could do, not panic selling and getting things sorted when the volatility had settled a bit.
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Re: In a crash, will you re-balance to maintain your target

Post by magneto »

Would rebalance progressively. Currently we move towards targets at 10% of deviation per quarter. The investor is then moving cautiously in the right direction, if seldom reaching the target. Gives system and investor stability in an uncertain world. Pick you own percentage for rate of approach.
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acegolfer
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Re: In a crash, will you re-balance to maintain your target

Post by acegolfer »

For those who answered they will re-balance to the target gradually over time such as with new contributions, I have another q.

Why gradually? If ratio deviates enough, shouldn't you re-balance immediately?

Is it because of tax reasons? Or market correction? Or not committed to your target?
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Re: In a crash, will you re-balance to maintain your target

Post by sperry8 »

I intend to buy in with cash on the sidelines during the next crash. Buy low, sell high :)
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Re: In a crash, will you re-balance to maintain your target

Post by Ged »

During the last crash I rebalanced using a DCA approach. But both I and my wife were working and investing a lot. With the rebound the gains were really good, and it led to me retiring a couple of years earlier than I had planned.

However now that I'm retired I'm not accumulating any more. I really doubt I'd rebalance to the same degree. A bit of a drop in my equity allocation would be something that I wouldn't find discomfiting.
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Re: In a crash, will you re-balance to maintain your target

Post by KlangFool »

TS,

1) My ratio was around 70/30 at that time.

2) 40% of my portfolio is in Wellington Fund (65/35 - VWENX) fund. Hence, in any situation, the crash is buffered some what.

3) I was adding money. Hence, it did not trigger my re-balancing band.

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Re: In a crash, will you re-balance to maintain your target

Post by Chan_va »

Yes to the original question - I will re-balance in a crash. Use 10% bands.

I actually have a harder time rebalancing when the market is up. Primarily for tax reasons. I don't have enough tax advantaged space,and new contributions wont make enough of a difference. So I have to choose between not rebalancing, and taking the cap gains hit in taxable. I know I know.. I should have built up a tax loss base by harvesting losses during the last crash. Lesson learned.
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Re: In a crash, will you re-balance to maintain your target

Post by OutInThirteen »

According to my IPS, I would buy more equity (enough to restore my target value) with each 5% drop from my target equity value. I've only had to do this once since I adopted this approach - in 2011. Other than that, there have been many more occasions where I've had to sell back down to the target value after a 5% increase. I'm not sure how long the trend will continue, but I intend to follow that approach no matter what happens. My wife and I are both retired now, so there is no new money coming in.
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Re: In a crash, will you re-balance to maintain your target

Post by letsgobobby »

The better question than "will" you rebalance in a crash is, "Did" you rebalance in the last crash?

Actually, here's a list of possible spin off poll questions that have crossed my mind after reading Bogleheads this week:

- If you are 100% invested in stocks, in what year did you start to have 'substantial' money to invest (define 'substantial' how you like)? You may choose only one answer.
1994 or earlier
1995-1999
2000-2008
2009-present

- During either of the last two stock market crashes, if you had substantial money to invest, what did you do? You may choose more than one answer.
I rebalanced dutifully.
I rebalanced but not all the way; I was scared.
I overrebalanced - I increased my stock allocation when there was blood in the street.
I market-timed successfully - I sold before the crash, and bought on the way back up.
I sold.
I got out and didn't get back in.
I panicked.
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Re: In a crash, will you re-balance to maintain your target

Post by tetractys »

The rule I am committed to is to rebalance sensibly when an asset is out by 25% or when a major allocation is out by 5% (the 5/25 rule). In the past one or more of my individual assets have gone out 25% or more before my major allocations of international stocks, US stocks, or fixed income have gone out anywhere near 5%. And rebalancing has shown terrific benefits. So my goodness!!, if 5% ever comes around a flurry of action would certainly follow! -- Tet
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HomerJ
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Re: In a crash, will you re-balance to maintain your target

Post by HomerJ »

letsgobobby wrote:The better question than "will" you rebalance in a crash is, "Did" you rebalance in the last crash?

Actually, here's a list of possible spin off poll questions that have crossed my mind after reading Bogleheads this week:

- If you are 100% invested in stocks, in what year did you start to have 'substantial' money to invest (define 'substantial' how you like)? You may choose only one answer.
1994 or earlier
1995-1999
2000-2008
2009-present

- During either of the last two stock market crashes, if you had substantial money to invest, what did you do? You may choose more than one answer.
I rebalanced dutifully.
I rebalanced but not all the way; I was scared.
I overrebalanced - I increased my stock allocation when there was blood in the street.
I market-timed successfully - I sold before the crash, and bought on the way back up.
I sold.
I got out and didn't get back in.
I panicked.
I have a selective memory, I only remember the brilliant things I did and the impervious feelings I felt, and do not remember the bad things I did and the bad feelings I felt.

Good post... Easy to rebalance when you're 35 and you have $200k invested. A little harder when you're 50 and you have $800k invested... When I'm 60 and retired with 2 million, I'll be 30/70 stocks/bonds and I doubt I'll rebalance at all.

For the record, this was me...

"I rebalanced but not all the way; I was scared."
placeholder
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Re: In a crash, will you re-balance to maintain your target

Post by placeholder »

Beliavsky wrote:If you have $600K in stocks and $400K in Treasury bonds, you at least have the comfort that you will have $400K even if stocks go to zero.
If the stock market goes to zero then the nation as a whole is bankrupt and there's a good chance those Treasuries won't be worth much either.
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HomerJ
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Re: In a crash, will you re-balance to maintain your target

Post by HomerJ »

placeholder wrote:
Beliavsky wrote:If you have $600K in stocks and $400K in Treasury bonds, you at least have the comfort that you will have $400K even if stocks go to zero.
If the stock market goes to zero then the nation as a whole is bankrupt and there's a good chance those Treasuries won't be worth much either.
Okay not zero, but even when the market dropped 89% during the Great Depression, Treasury bonds actually went UP in value.

Part of the reason I was able to stand fast and not panic during the last crash was because 40% of our money was in bonds. Because the possibility of another 89% crash was on my mind, and I bet on most of your minds too, even if you've now forgotten it.
random_walker_77
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Re: In a crash, will you re-balance to maintain your target

Post by random_walker_77 »

pop77 wrote:I think there is levels of emotional maturity in investing...<snip>
This is very easily said than done. Being mechanical and detached helps you do it.
Emphasis on having something mechanical telling you to do it. In 2008, I did sell bonds to buy equities. It's really really hard to do because after you rebalance, a month later, your spreadsheet tells you to rebalance again, and you have to decide how much more you want to throw into sinking stocks. At the same time, it's all gloom and doom, and people are getting laid off around you.

I keep a spreadsheet which tells me what my actual allocation is relative to my expressed targets, and tells me how much to move in/out of each fund to bring it back inline w/ the target. If you have to take the initiative to rebalance, that's one thing. If, on the other hand, you naturally see your spreadsheet that says "total bond fund is 150K overweight and total stock market is 100K underweight" then it becomes more about coming up with reasons not to do it. For me, that helps me rebalance as that is what I'd told myself I'd do and the spreadsheet makes it clear that it's time. It makes the process more mechanical.
Rodc
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Re: In a crash, will you re-balance to maintain your target

Post by Rodc »

I have rebalanced in past crashes.

Not sure I will when retired.

While historically it has been a good idea, as markets have rebounded well and in time, during my life, they may not.

A lot of people who piled into equities, I have read, after the crash of 29 got creamed in the crash of 36. "The dumb money was lost is 29, the smart money was lost in 36", so goes one saying.

I have a bit before I decide.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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