The dangerous practice of rebalancing...

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
berntson
Posts: 1366
Joined: Mon Oct 29, 2012 12:10 pm

Re: The dangerous practice of rebalancing...

Post by berntson »

nedsaid wrote: So what I did starting in July 2013 and into 2014 a process of mild rebalancing from stocks to bonds that kept my asset allocation steady at 69% stocks and 31% bonds and cash. So like a good boy scout rebalancing helped keep me physically strong, mentally awake, and morally straight. I feel clean now.

Another lesson from this is that if you don't rebalance, the market will do it for you and often in a way that you don't like
Thanks Ned! I like the "rebalancing for boy scouts" analogy. Perhaps there's a nice balance between trigger-happy rebalancing (whenever anything diverges 5% from targets) and major rebalancing after a crash or whatnot. I don't have super-strong views about this yet. Maybe I should rethink things...
User avatar
nedsaid
Posts: 19275
Joined: Fri Nov 23, 2012 11:33 am

Re: The dangerous practice of rebalancing...

Post by nedsaid »

Berntson, you don't need super-strong views on rebalancing. Good old fashioned shaming from your fellow forum members will work just fine. :happy :happy :happy Or just think back to 2008, and hitting your head and saying, "I could have rebalanced." Sort of a V-8 moment.

A person who never rebalances should have higher returns than someone who does since stocks have higher returns than bonds over time. Some people think there is a rebalancing bonus which is essentially buying low and selling high. I think sometimes there is a rebalancing bonus and sometimes there is not. Who knows for sure. Whenever it is that I get around to rebalancing, I do it for risk control. I want to keep my asset allocation within a target range. As I get older, I think about risk control more and more.
A fool and his money are good for business.
User avatar
Kevin M
Posts: 15787
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: The dangerous practice of rebalancing...

Post by Kevin M »

What I've read, and it seems reasonable, is that there can be a decent rebalancing bonus in volatile markets without a strong, longer-term trend, but rebalancing is more likely to work against you in long, trending markets. It seems that we were offered some excellent opportunities to generate a rebalancing bonus in the last 14 years, but if the uptrend of the last five years continues, rebalancing out of stocks during the last few years could result in a penalty.

But as we commonly understand, rebalancing is more about risk management than about increasing returns. Given that, I wouldn't want to rebalance into stocks at this point in life (age 62, retired since age 55) beyond a point at which I had at least an approximation of a liability-matching portfolio in safe assets.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
berntson
Posts: 1366
Joined: Mon Oct 29, 2012 12:10 pm

Re: The dangerous practice of rebalancing...

Post by berntson »

ogd wrote:
berntson wrote:^Yes. Longinvest is assuming throughout that risk should be measured using percentages. This is an honest and easy mistake to make. Most fund companies (including Vanguard) and investment books talk about risk in terms of stock percentages almost exclusively. It can be hard to see that there are other ways.
There are very sound reasons to use percentages rather than the extended emergency fund approach.

Here's the few that require a linear allocation:
1) It allows for stable, "known" (to the degree that history can be trusted) risk/return tradeoffs. For example, efficient frontier arguments like "you need some stocks to reach minimum risk" would make no sense, and the tradeoffs would change over time.
2) It allows for meaningful portfolio comparisons between individuals, e.g. getting and giving advice.
3) It allows for all-in-one funds. A fund that started at a certain profile and did not rebalance would be a very diferent animal for individuals buying at different dates. It couldn't even have a stable name.
4) It integrates naturally with leverage. Once you cross 100%, percentage thinking is necessarily forced upon you.

The subjective ones that could work with other mathematical functions but recommend for bond dollars as a function of portfolio size:
1) Losses grow tremendously with portfolio size, which can have an impact on the non-theoretical human being.
2) One must allow for lifestyle upgrades with increasing net worth. What good is money if you can't spend it because your bond allocation does not support it and "you're not the percentage type".
3) ... And lifestyle downgrades in crises. These can be voluntary (it's a very natural thing to do after you get your brokerage statement, believe me), or occuring by themselves in some of the worst scenarios. Think gas, mortgage refinance, rent, going out of business sales, you name it.

It's fine to dispute "dogma", but you must consider all the implications.
Just to clarify, there's nothing wrong with targeting a certain stock/bond percentage. This may be a great approach for many investors.

I'm also not advocating that investors hold less bonds. The idea behind the big EF approach is to set your cash/bond allocation as a multiple of yearly expenses rather than a ratio of total assets. As expenses go up, bonds and cash go up. The target multiple could also go up automatically over time. Maybe two months a year. (Note that this approach scales well to investors with different spending levels and total assets, so work fine when "giving advice".)

I would have thought you would like the big EF approach! Suppose an investor holds bonds to protect herself from the possibility of extended unemployment. At the bottom of a recession, she is more likely to lose her job, not less. Selling bonds to buy stocks then look like a mildly insane behavior. Her unemployment is not likely to be shorter or her expenses lower just because the stock market has tanked.

An important difference is that a big EF is meant to be spent down if there is an emergency during a recession. This helps the investor avoid selling stocks when prices are low. On the ratio approach, even a 60/40 investor is forced to immediately sell mostly stocks during a crisis. A big EF investors can put off selling stocks until her big EF runs out. This could well be several years.

There are also psychological advantages. Many investors feel more secure dividing their portfolio into safe money and risky money. My wife, for example, responds more positively to the idea of having x years in bonds than she does to having y% in bonds, even when x years and y% are the same amount. As someone who doesn't spend lots of time thinking about investments, she can easily imagine having enough money for x years. It can be harder for a novice to have a feel for what y% in bonds means.

It's also well known that investors are not good at rebalancing. They don't do it during recessions. Some say that this is just irrational behavior. I'm not so sure. Investors are also at more risk during a recession, so they may be having the same sorts of thoughts I have: Why should I be selling my safe assets to buy stocks precisely at the time when I'm most likely to need them for an emergency? The big EF approach doesn't require investors rebalance during a recession. So it can be psychologically easier for "non-hypothetical" human beings.

I agree that there couldn't be any all-in-one funds targeting this approach.

Thanks ogd! :beer
Last edited by berntson on Sat Sep 13, 2014 10:22 pm, edited 1 time in total.
berntson
Posts: 1366
Joined: Mon Oct 29, 2012 12:10 pm

Re: The dangerous practice of rebalancing...

Post by berntson »

nedsaid wrote:Berntson, you don't need super-strong views on rebalancing. Good old fashioned shaming from your fellow forum members will work just fine. :happy :happy :happy Or just think back to 2008, and hitting your head and saying, "I could have rebalanced." Sort of a V-8 moment.
Ha! Yes, this is one of the best things about being a Boglehead. Your plan doesn't have to be perfect, because everyone else will batter you over the head until you do have a sensible plan. Every Boglehead should be issued a standard inflatable bat to use o their fellows when necessary.

I'm using the big EF approach for now, but this is very much open for revision. I'm still new at this and thinking things through.

One thought about the 2008 case. You might think that if you have enough in bonds to safely sell to buy stocks after a crash, you have more than you need in bonds. You could have just had a higher stock allocation all along. So if an investor already knows that she has only the bonds she needs, she doesn't need to kick herself for not rebalancing. Any "losses" will be made up over time from holding more in stocks. Just one perspective though.
Last edited by berntson on Sat Sep 13, 2014 10:20 pm, edited 1 time in total.
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: The dangerous practice of rebalancing...

Post by Leeraar »

Browser wrote:Jack Bogle on rebalancing:
Jack Bogle: I am in a small minority on the idea of rebalancing. I don't think you need to do it. The data bear me out, because the higher-yielding asset is going to be stocks over the long term. That's the way the capital markets work. Not in every 10-year period, or even for that matter every 25-year period. But the higher-returning asset you're getting rid of to go into a lower-returning asset, so it dampens your returns, and the differences turn out to be, if you look at 25-year periods, very, very small. And sometimes rebalancing improves your returns. Sometimes it makes them worse.
Yes,

I will stop rebalancing while maintaining age in bonds and counting future Social Security as a bond.

L. :twisted:
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
berntson
Posts: 1366
Joined: Mon Oct 29, 2012 12:10 pm

Re: The dangerous practice of rebalancing...

Post by berntson »

dodecahedron wrote: Spending time on pursuits that interest you more (rather than obsessing about rebalancing, wondering about when to do it, etc.) sounds good to me as well. A lot to be said for simple, sensible rules of thumb.
+1
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: The dangerous practice of rebalancing...

Post by Browser »

I was playing around with the 60/40 allocation using Simba's spreadsheet. Starting in 1972 and not rebalancing, it was the end of 1992 (21 years) before the stock allocation would have drifted just above 70%. At the end of 1998, the equity allocation of an unrebalanced portfolio would have drifted above 80%. Even someone who didn't believe in rebalancing might have felt that this was too great a difference from their original 60% allocation. Had they decided to rebalance back to 60% at that time, their timing would have been pretty good, since after one more good year for stocks in 1999 they tanked.

But let's say our investor continued to let things ride. Had he done that, the equity allocation of his unrebalanced portfolio would have topped 80% once again at the end of 2006. Once again, this would have been a good time to take some chips off the table by rebalancing back to 60% had he not rebalanced previously. After one more so-so year, we know what happened to equities in 2008-09.

Moving forward, we see that at the end of 2013 the unrebalanced portfolio would once again have topped an 80% equity allocation. Well, the last two times that happened there was one more year before the bottom fell out of the market. Just another benchmark of over-valuation, I guess. It will be interesting to see what happens in 2015. :?: If you're not a rebalancer, maybe this year might be a good idea to just do it.
We don't know where we are, or where we're going -- but we're making good time.
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: The dangerous practice of rebalancing...

Post by Leeraar »

A little history:

Rebalancing is not just about a two-fund allocation of Total Stocks and Total Bonds.

Back in the 1980s my 401k (known then as Stock-Savings Plan) had about four choices:

GM Stock
EDS Stock
GM Hughes Stock
Income Fund

The company match (100% up to 10% of salary!) was all in GM Stock and took a couple of years to earn out (become vested). The components fluctuated wildly relative to each other. I chose rebalancing as best I could to 25% each.

Around 1990, the choices became wider (Putnam Funds, boo!) but there were still no index fund choices. Rebalancing was essential, in my mind, to maintain a rational portfolio.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
berntson
Posts: 1366
Joined: Mon Oct 29, 2012 12:10 pm

Re: The dangerous practice of rebalancing...

Post by berntson »

Browser wrote:I was playing around with the 60/40 allocation using Simba's spreadsheet. Starting in 1972 and not rebalancing, it was the end of 1992 (21 years) before the stock allocation would have drifted just above 70%. At the end of 1998, the equity allocation of an unrebalanced portfolio would have drifted above 80%. Even someone who didn't believe in rebalancing might have felt that this was too great a difference from their original 60% allocation. Had they decided to rebalance back to 60% at that time, their timing would have been pretty good, since after one more good year for stocks in 1999 they tanked.

But let's say our investor continued to let things ride. Had he done that, the equity allocation of his unrebalanced portfolio would have topped 80% once again at the end of 2006. Once again, this would have been a good time to take some chips off the table by rebalancing back to 60% had he not rebalanced previously. After one more so-so year, we know what happened to equities in 2008-09.

Moving forward, we see that at the end of 2013 the unrebalanced portfolio would once again have topped an 80% equity allocation. Well, the last two times that happened there was one more year before the bottom fell out of the market. Just another benchmark of over-valuation, I guess. It will be interesting to see what happens in 2015. :?: If you're not a rebalancer, maybe this year might be a good idea to just do it.
One thing to keep in mind is that normally, equities will beat bonds by more than they did since the late 70s. Bonds have roughly kept up with stocks. But globally and historically, this is not how things usually go. So usually, there will be more opportunities to rebalance back to 60/40.
grayfox
Posts: 5569
Joined: Sat Sep 15, 2007 4:30 am

Re: The dangerous practice of rebalancing...

Post by grayfox »

Austintatious wrote:Wow! Sure glad I read this before it was too late. Just when I thought I'd arrived at an asset allocation I was relatively comfortable with, along comes Mr. Mandel and throws a huge monkey wrench smack dab into the middle of my plan. Cover your basic retirement needs with safe assets like Social Security and pensions, says he, and that's where I've been all along. Then, he says, you let the rest ride on risky assets, and that's where I've been doing it all wrong.

http://www.marketwatch.com/story/why-st ... =countdown
Lets say you earn 100K per year and save 20% for retirement, 20K per year.
You do this for 40 years.
Somehow you have to invest this savings to pay for your daily bread when retired.

Well, investing for retirement can be as simple as baking bread. Here is the recipe for your retirement bread.

1. Take the 20K dough you save each year and purchase the ingredients, which are stock index funds. Mix in a bowl until you have a nice consistent bread dough. Put the dough in in the oven and let it bake for 25 or 30 years at 350 degrees. [Invest in stock index funds for 25 or 30 years]

2. After about 30 years, when the bread has risen to several times its original size, say 4x or 8x, remove the it from the oven and put on the counter top to cool. [10 to 15 years before retirement, start selling the stock index funds and start buying U.S. Treasury bonds, CDs or TIPS.]

3. When the bread has finished cooling, slice it into slices and begin eating slices. [When bonds mature, buy a life annuity to give you retirement income.]


Here is how the money flows:

Cash Savings --> Stocks --> Bonds --> Annuity --> Cash Income

Most of the growth happens during the stock phase.
The bond phase is when you take money off the table to preserves the gains you have.
The annuity phase is when you finally get to eat.

Rebalancing from bonds into stocks is really unnecessary.
Last edited by grayfox on Sun Sep 14, 2014 6:45 am, edited 1 time in total.
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: The dangerous practice of rebalancing...

Post by YDNAL »

Leeraar » Sat Sep 13, 2014 11:20 pm wrote:
Browser wrote: Jack Bogle on rebalancing:....
Yes,

I will stop rebalancing while maintaining age in bonds and counting future Social Security as a bond.
:D

Seriously, the link in the OP was not intended for ANY one individual specifically. Some of the posts, that follow the OP since last Friday, are not intended for ANY one individual specifically. EACH person should make their own informed decision after digesting what is being discussed.
Harry Markowitz, who won the Nobel Prize in Economics for founding modern portfolio theory, once paid me the honor of asking me how frequently I rebalanced my portfolio.

I'm certain that I gave him a respectful response, but in actual fact, I have never rebalanced my portfolio because I've always been a strategic investor.

Sure, I used to teach my students the accepted gospel of choosing an appropriate balance between risky and riskless assets and sticking with that balance through market turbulence, because that was in all the textbooks, including, ashamedly, my own. However, if you think through the strategic ramifications of portfolio rebalancing for middle and upper-middle income families approaching retirement, it just doesn't make a lot of sense. (emphasis added)

For me, strategic investing for retirement involves taking no risk whatsoever with the income needed to cover my core (non-discretionary) retirement expenses. No-risk sources of income include Social Security, TIPS (Treasury inflation-protected securities), and Federal government indexed pensions, since they lack default and inflation risk. Highly rated fixed-life annuities with cost-of-living adjustments are nearly risk-free as are most unindexed defined benefit pensions since inflation risk can be hedged by holding an appropriate amount of TIPS (snipped advertisement). Short maturity Treasuries, munis and highly rated corporate bonds are nearly risk free.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
berntson
Posts: 1366
Joined: Mon Oct 29, 2012 12:10 pm

Re: The dangerous practice of rebalancing...

Post by berntson »

grayfox wrote: Well, investing for retirement can be as simple as baking bread. Here is the recipe for your retirement bread.[...]

Here is how the money flows:

Cash Savings --> Stocks --> Bonds --> Annuity --> Cash Income

Most of the growth happens during the stock phase.
The bond phase is when you take money off the table to preserves the gains you have.
The annuity phase is when you finally get to eat.

Rebalancing from bonds into stocks is really unnecessary.
+1

Investing really is as simple as baking bread. Good portfolio construction has more to do with the stages in an investors life than with Monte Carlo simulators or efficiency frontiers.
CantPassAgain
Posts: 577
Joined: Fri Mar 15, 2013 8:49 pm

Re: The dangerous practice of rebalancing...

Post by CantPassAgain »

Wow, this thread is confusing. Not sure why the concept of rebalancing needs to be put under such a microscope as it isn't that complex.

To me, rebalancing is done to maintain an asset allocation. That asset allocation is determined based on my need, ability, and willingness to take risk. Thus, that asset allocation is not static. It is not some random percentage. It is based on circumstances TODAY. Not yesterday and not tomorrow. If someone has reached a point where they have enough fixed income to meet their basic needs, then they don't have much need to take risk, correct? Thus that should be reflected in their asset allocation.

Also, I have seen a few posts stating rebalancing into risky assets increases your risk. If the stock market tanks 50% tomorrow and I rebalance into more stocks, how have I increased my risk? Seems to me I am taking the same risk as I was yesterday. The only way one can claim I am taking on more risk is if one believes they can see the future of the market. I can't.
flyingaway
Posts: 3908
Joined: Fri Jan 17, 2014 9:19 am

Re: The dangerous practice of rebalancing...

Post by flyingaway »

How many times did the market tank 50% in a day? People on this forum used that example too frequently, IMO. The problem in this rebalancing issue is if the market tanks,5% tomorrow, another 5% after tomorrow, and another 5% after that, and you do not know that sequence in advance. Then how about down 5% today, up 5% tomorrow, down 5% after tomorrow, and up 5% ...
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: The dangerous practice of rebalancing...

Post by Browser »

You aren't taking the same risk if the market tanks and, as a result, you transfer money from your safe reserve (bonds) into the riskier asset (stocks). Now the balance in your safe reserve has been drawn down. How can you have the same level of safety with your portfolio that you had before? If stocks keep going down, you will continue depleting your safe reserve by "rebalancing" into stocks. You are gambling, my friend, under the guise of being prudent. That's the mistake people make when they think of portfolio risk only in terms of allocation percentages. You have to think in terms of dollars, amigo.
We don't know where we are, or where we're going -- but we're making good time.
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: The dangerous practice of rebalancing...

Post by The Wizard »

OK, we should probably quantify the new Boglehead rule of thumb for rebalancing from bonds into stocks during (significant) declines in the stock market.
Does it vary with age? People in theiir 20's and 30's can direct new contributions to stocks and effectively rebalance that way in many cases since they may have modest investment balances then.

At the opposite extreme, people who are retired should *never* rebalance into stocks since they risk digging a bottomless pit. They have zero (or much reduced) Human Capital to assist in a recovery.

What about working people in middle age with healthy retirement account balances and at least 5 years to go to retirement?
The US stock market always recovers within five years, right?
Attempted new signature...
Leesbro63
Posts: 10638
Joined: Mon Nov 08, 2010 3:36 pm

Re: The dangerous practice of rebalancing...

Post by Leesbro63 »

The Wizard wrote:OK, we should probably quantify the new Boglehead rule of thumb for rebalancing from bonds into stocks during (significant) declines in the stock market.
Does it vary with age? People in theiir 20's and 30's can direct new contributions to stocks and effectively rebalance that way in many cases since they may have modest investment balances then.

At the opposite extreme, people who are retired should *never* rebalance into stocks since they risk digging a bottomless pit. They have zero (or much reduced) Human Capital to assist in a recovery.

What about working people in middle age with healthy retirement account balances and at least 5 years to go to retirement?
The US stock market always recovers within five years, right?
This is good. Yes, I think Bogleheads needs to come up with some sort of general rule here.
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: The dangerous practice of rebalancing...

Post by The Wizard »

Leesbro63 wrote:
The Wizard wrote:OK, we should probably quantify the new Boglehead rule of thumb for rebalancing from bonds into stocks during (significant) declines in the stock market.
Does it vary with age? People in theiir 20's and 30's can direct new contributions to stocks and effectively rebalance that way in many cases since they may have modest investment balances then.

At the opposite extreme, people who are retired should *never* rebalance into stocks since they risk digging a bottomless pit. They have zero (or much reduced) Human Capital to assist in a recovery.

What about working people in middle age with healthy retirement account balances and at least 5 years to go to retirement?
The US stock market always recovers within five years, right?
This is good. Yes, I think Bogleheads needs to come up with some sort of general rule here.
It should probably go in the Wiki, with a note that there are differences of opinion...
Attempted new signature...
User avatar
nedsaid
Posts: 19275
Joined: Fri Nov 23, 2012 11:33 am

Re: The dangerous practice of rebalancing...

Post by nedsaid »

This is what I love so much about this forum. A year and a half ago I was in another rebalancing thread and defended my rather relaxed attitude about rebalancing. I got battered and bruised pretty good and decided it might be a good idea to do some rebalancing. So from July 2013 into 2014, I did some mild rebalancing from stocks to bonds and after having done all that kept my asset allocation steady at 69% stocks and 31% bonds.

Now rebalancing is potentially dangerous to my financial health. It was like reading how studies said that coffee was bad for you. So you cut back and then read other studies that say coffee is good for you. Which is it?

This thread illustrates my dislike for mechanical investing strategies or statements in an Investment Policy Statement that say if X happens, I will do Y. I don't like the rigidity, I allow for myself a certain amount of flexibility.

So should investors rebalance?

I think rebalancing is one heck of a good idea. It is a very good investing discipline. But like any other strategy one has to take into account someone's personal situation, market conditions, and valuations. I have a definite plan of where I want to go and stick to it best I can but I allow myself some wiggle room and flexibility. I see it mainly as a strategy for risk control and not for return enhancement.

A lot of folks are saying that rebalancing from stocks to bonds is good for risk control. If you are younger, rebalancing from bonds to stocks might be a great idea and lead to higher returns over time. If you are older, lets say 50 or older, you might consider one-way rebalancing only rebalancing from stocks to bonds. But again, even this depends on a person's individual situation.

So this is a good illustration that on the surface, investing is very simple. But because we are individuals and all different and with different life situations, this stuff gets to be more complex.
A fool and his money are good for business.
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: The dangerous practice of rebalancing...

Post by The Wizard »

nedsaid wrote:
...A lot of folks are saying that rebalancing from stocks to bonds is good for risk control. If you are younger, rebalancing from bonds to stocks might be a great idea and lead to higher returns over time. If you are older, lets say 50 or older, you might consider one-way rebalancing only rebalancing from stocks to bonds. But again, even this depends on a person's individual situation...
Exactly, you've nailed it.
The closer you are to The Edge approaching or in retirement, the more important one-sided rebalancing is.
If your pension plus SS is more than adequate for your retirement needs, then rebalance on both sides if you want.
Similar for people with very large portfolios...
Attempted new signature...
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: The dangerous practice of rebalancing...

Post by YDNAL »

Strevlac wrote:If the stock market tanks 50% tomorrow and I rebalance into more stocks, how have I increased my risk? Seems to me I am taking the same risk as I was yesterday. The only way one can claim I am taking on more risk is if one believes they can see the future of the market. I can't.
No, Strevlac, it is not about knowing the future. Do you accept that Equities are risky? (rhetorical, I assume you do)

Owning 100 Equity shares, valued at $50 today then priced at $25 tomorrow, means you still own 100 shares. Taking fixed income - needed to pay bills to buy another 100 shares - IS indeed doubling exposure to the riskier asset you own. Whatever we *hope* to get by doubling exposure is irrelevant, since as you said, no one should "believe they can see the future."

Code: Select all

Shares	Price	Market Value
100	    $50 	 $5,000 
	      ($25)	($2,500)
		
+100	   $25 	 $2,500
Using FI to buy 100 Equity shares - FI needed to pay bills in retirement - IS the topic in this thread based on the link provided by original poster (unless you see another topic).
nedsaid wrote:This thread illustrates my dislike for mechanical investing strategies or statements in an Investment Policy Statement that say if X happens, I will do Y. I don't like the rigidity, I allow for myself a certain amount of flexibility.
Yes, the operative word is flexibility. No single point of view should be construed to be applicable to everyone, and that includes your point of view when "writing the IPS."
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
Leesbro63
Posts: 10638
Joined: Mon Nov 08, 2010 3:36 pm

Re: The dangerous practice of rebalancing...

Post by Leesbro63 »

nedsaid wrote: I think rebalancing is one heck of a good idea. It is a very good investing discipline. But like any other strategy one has to take into account someone's personal situation, market conditions, and valuations.
And tax cost.
CantPassAgain
Posts: 577
Joined: Fri Mar 15, 2013 8:49 pm

Re: The dangerous practice of rebalancing...

Post by CantPassAgain »

flyingaway wrote:How many times did the market tank 50% in a day? People on this forum used that example too frequently, IMO. The problem in this rebalancing issue is if the market tanks,5% tomorrow, another 5% after tomorrow, and another 5% after that, and you do not know that sequence in advance. Then how about down 5% today, up 5% tomorrow, down 5% after tomorrow, and up 5% ...
My response would be that if you are fearful of a 5% drop, then another, then another, and "rebalancing into oblivion" then what are you doing investing in stocks in the first place?

Do we or do we not invest in stocks because we believe they have a greater chance of outperforming other assets in the long run? We don't know that, but we hope it will based on our belief in capitalism. If stocks have an extended period of underperformance does that alter your faith in the future? If it does, then you took too much risk in the first place.

It all goes back to holding an appropriate asset allocation based on your circumstances today. Like I said earlier, if someone has enough to cover basic expenses then that person has little need to take risk. Their asset allocation should reflect that. If the market tanks then they shouldn't rebalance into stocks, their asset allocation should reflect the appropriate percentage of fixed assets to cover their expenses.

"If you have won the game, quit playing"

I haven't won the game. Not even close. Therefore I am going to take as much risk as I am comfortable with to give me a shot at reaching my goals. I don't know what will happen tomorrow or next week or next year. All I can do is set an asset allocation and stick to it barring a significant change in my circumstances.

I'll also ask you this:

If you think there is significant risk to rebalancing (I am not arguing that there isn't), do you not also believe there is significant risk of not rebalancing as well?
berntson
Posts: 1366
Joined: Mon Oct 29, 2012 12:10 pm

Re: The dangerous practice of rebalancing...

Post by berntson »

nedsaid wrote: This thread illustrates my dislike for mechanical investing strategies or statements in an Investment Policy Statement that say if X happens, I will do Y. I don't like the rigidity, I allow for myself a certain amount of flexibility.
+1

It's good for investors to have a plan. You don't want to be flying by the seat of your pants at the bottom or a recession. But having a plan is not a substitute for financial wisdom, the ability to prudently changes plans and incorporate new ideas as you go along.

The risk of giving yourself wiggle room is that you will end up making all the subtle behavior mistakes that investors are known for. On the other hand, the risk of lashing yourself to the mast of a mechanical plan is that you will be stuck with a bad plan. The IPS I wrote my first year of investing was a great exercise. But I am now better at financial planning than I was then, so it would be silly for me to defer to my past self. I also know much more about my present financial situation than my past self.
Johno
Posts: 1883
Joined: Sat May 24, 2014 4:14 pm

Re: The dangerous practice of rebalancing...

Post by Johno »

Strevlac wrote:
Also, I have seen a few posts stating rebalancing into risky assets increases your risk. If the stock market tanks 50% tomorrow and I rebalance into more stocks, how have I increased my risk? Seems to me I am taking the same risk as I was yesterday. The only way one can claim I am taking on more risk is if one believes they can see the future of the market. I can't.
It has nothing to do with seeing the future. If yesterday you have $100k in stock and $100k in high grade bonds and today* you have $50k in stocks and $110 in high grade bonds, and you rebalance to $80 each, you have reduced low risk coverage of your future bare bones liabilities by $20k while there's no reason to think those liabilities have changed a lot. Moreover, prices of put options to limit loss on your equity position by a given further % drop over a given time horizon will be far more expensive after the crash than before, IOW implied volatilities in options prices will very likely have increased dramatically. If one believes markets are generally efficient, this can't be waved off as just mumbo-jumbo not relevant to the 'stay the course investor'. You are free to stay the course in that case, it may work, it has generally worked in the US in modern history (not so much for home biased Japanese investors in the early 90's though). But the options market will tell you it's riskier than it was. After all, that big drop won't have come from nowhere, again if one believes markets are basically efficient**.

*I take the point about how the market doesn't go all in one direction, might be +5 -5 +5... for extended periods; however, the '08-09 situation wasn't *that* different from just 'market goes down 50%', some zigzagging but *very* strong downtrend covering a lot of ground in a short time.
** the 1987 crash was more puzzling in that respect than the 08-09 one, but in any case if we believe markets are basically efficient then some kind of new information must have entered into the picture to cause such large moves; where it turns out there's actually no new valid information, the market may snap back virtually instantaneously (as in the 2010 flash crash).
flyingaway
Posts: 3908
Joined: Fri Jan 17, 2014 9:19 am

Re: The dangerous practice of rebalancing...

Post by flyingaway »

There are risks in either rebalancing or not rebalancing. If we believe a bear market will recover and a bull market will crash eventually, then blind rebalancing does not matter. Only we know when the market is at bottom (or close to bottom) or at top (or close to top), does rebalancing bring the most benefits. This looks like market timing to me. In addition, buying (or rebalancing) into a down market needs courage.
Since the market stock price is high these days, selling stocks to cash is called market timing, and selling stocks to bonds is called rebalancing. (If interest rises as expected, then the one holding cash will probably be happier).
Last edited by flyingaway on Sun Sep 14, 2014 10:19 pm, edited 1 time in total.
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: The dangerous practice of rebalancing...

Post by The Wizard »

flyingaway wrote: ...Since the market stock price is high these days, selling stokes to cash is called market timing, and selling stokes to bonds is called rebalancing. (If interest rises as expected, then the one holding cash will probably be happier).
Not quite right.
Selling 2% to 10% of your "stocks" and moving the proceeds to cash or bonds is called rebalancing.
Selling 80+% of your stocks and moving to the others is called market timing...
Attempted new signature...
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: The dangerous practice of rebalancing...

Post by JoMoney »

Wow. I'm a bit taken back by the shift in this thread. It started out being sarcastic and dismissive about anything other than constant-mix portfolio rebalancing, highlighting a few extreme points taken out of context from the article. Then we started bashing rebalancing... rebalancing isn't necessarily bad either, it might be an important part of your portfolio if your goal is to dampen the volatility or maintain your allocations "risk profile" between assets. It's not bad, but it's not necessarily the "perfect plan" either, nothing is. To borrow a phrase, "There's more than one road to Dublin"
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
nedsaid
Posts: 19275
Joined: Fri Nov 23, 2012 11:33 am

Re: The dangerous practice of rebalancing...

Post by nedsaid »

berntson wrote:
nedsaid wrote: This thread illustrates my dislike for mechanical investing strategies or statements in an Investment Policy Statement that say if X happens, I will do Y. I don't like the rigidity, I allow for myself a certain amount of flexibility.
+1

It's good for investors to have a plan. You don't want to be flying by the seat of your pants at the bottom or a recession. But having a plan is not a substitute for financial wisdom, the ability to prudently changes plans and incorporate new ideas as you go along.

The risk of giving yourself wiggle room is that you will end up making all the subtle behavior mistakes that investors are known for. On the other hand, the risk of lashing yourself to the mast of a mechanical plan is that you will be stuck with a bad plan. The IPS I wrote my first year of investing was a great exercise. But I am now better at financial planning than I was then, so it would be silly for me to defer to my past self. I also know much more about my present financial situation than my past self.
Berntson, it is also a fact that investors forget things over time. It is good to go back through old investment books, old investment records, old Investment Policy Statements, and even old Boglehead's posts. We need reminders of where we came from, where we are now, and how we got from there to here. This is an exercise of reinforcing old lessons.

I keep a spreadsheet listing my investments, with a tab for each year. I also have Quicken with records going back quite a ways. Looking back I can see what I actually did in prior years as opposed to what I remembered that I did. There was a difference. For example, I erroneously posted that I sold 30% of my stocks in early 2000. When I looked at the records, half of my stocks were in mutual funds and the other half were in individual stocks. What I sold was 30% of my stock mutual funds and I left my individual stocks untouched. So I really only sold 15% of my stocks. I have used research through my investment records as the basis for some posts.

As I look back, my memories are rekindled and I remember why the heck I did what I did. I could also see the evolution of my thinking as I learned from other investors and as I learned from experience. What I found was that I pretty much stuck to the core beliefs that I learned early on in my investing career.

So I have learned as an investor. I haven't really changed in most ways, I have learned more and refined my methods. I am still doing what I was doing from the beginning, my methods have changed and I am better at it than I was before. My mix of investments that I own have changed over the years and also the investment vehicles but my investing personality hasn't changed at all.

I also believe that posting has sharpened my thinking. Having to put things down in writing and defending what I had written. Bogleheads has also improved me as an investor. Thanks everyone.
A fool and his money are good for business.
Topic Author
Austintatious
Posts: 878
Joined: Thu Sep 13, 2012 7:01 pm

Re: The dangerous practice of rebalancing...

Post by Austintatious »

flyingaway wrote:There are risks in either rebalancing or not rebalancing. If we believe a bear market will recover and a bull market will crash eventually, then blind rebalancing does not matter. Only we know when the market is at bottom (or close to bottom) or at top (or close to top), does rebalancing bring the most benefits. This looks like market timing to me. In addition, buying (or rebalancing) into a down market needs courage.
Since the market stock price is high these days, selling stokes to cash is called market timing, and selling stokes to bonds is called rebalancing. (If interest rises as expected, then the one holding cash will probably be happier).
But, if we're right in our most basic of assumptions, the one that motivates us to invest in the first place, it's not going to be that zero sum gain over the long haul where the dips and the gains cancel each other out and rebalancing doesn't matter. That belief we all (almost all?) base our determination to invest on is the same basic building block Jack Bogle has based his professional life on, that being the faith he has in good old American capitalism. Read one of his books and you'll know he genuinely expects the stock market to continue its ultimate upward trend, just as we all (almost all?) do. We have faith in the ever-upward trending of the market and isn't that why, at least in general, the idea of rebalancing is the better way?Yes, there probably are situations where, based on circumstances, it would be unwise for some to rebalance into a severely dropping stock market, but that doesn't mean rebalancing as a general concept is either dangerous or unwise. And I'm not even sure that one actually in retirement ought to reject the idea of rebalancing in such a situation, given that thirty year retirements are, more and more, a reality to contend with.
User avatar
nedsaid
Posts: 19275
Joined: Fri Nov 23, 2012 11:33 am

Re: The dangerous practice of rebalancing...

Post by nedsaid »

JoMoney wrote:Wow. I'm a bit taken back by the shift in this thread. It started out being sarcastic and dismissive about anything other than constant-mix portfolio rebalancing, highlighting a few extreme points taken out of context from the article. Then we started bashing rebalancing... rebalancing isn't necessarily bad either, it might be an important part of your portfolio if your goal is to dampen the volatility or maintain your allocations "risk profile" between assets. It's not bad, but it's not necessarily the "perfect plan" either, nothing is. To borrow a phrase, "There's more than one road to Dublin"
I find myself doing the same exact things. Leeraar had some fun at my expense quoting seemingly contradictory things that I had said in different threads. Part of it is "thinking aloud". Part of it is seeing both sides of the argument. Part of it is a genuine tension that exists in all of us as we grapple with investment decisions. Part of it is talking about the same topic but in different contexts. For example, what I tell a 24 year old and a 60 year old on the same topic might be a lot different. Part of it is reading contrary opinions and having the light go on in my head that the other guy/gal might be on to something. I might then comment on where I think the other person is right.

I picked the Charlie Brown avatar in part because my posts might at times seem "wishy-washy." It reflects angst that I sometimes feel as an investor. It reveals contradictions in my own investing personality. I am mostly a conservative and cautious investor but I have done some pretty wild stuff in my portfolio. I seem to have a conservative side and an aggressive pedal to the medal side. I have a side that wants to stay the course with the tried and true; I have another side that wants to set sail and venture out.

I can't be the only poster on this forum who is like that. It is refreshing in a way to see the thread thrash around as people come across things that perhaps they had not considered before. So I see this as a good thing and not as a bad thing. Good to see that I am not the only investor out there that experiences wishy-washiness, we see this in the thread as a whole.
A fool and his money are good for business.
Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Re: The dangerous practice of rebalancing...

Post by Rodc »

nedsaid wrote:
JoMoney wrote:Wow. I'm a bit taken back by the shift in this thread. It started out being sarcastic and dismissive about anything other than constant-mix portfolio rebalancing, highlighting a few extreme points taken out of context from the article. Then we started bashing rebalancing... rebalancing isn't necessarily bad either, it might be an important part of your portfolio if your goal is to dampen the volatility or maintain your allocations "risk profile" between assets. It's not bad, but it's not necessarily the "perfect plan" either, nothing is. To borrow a phrase, "There's more than one road to Dublin"
I find myself doing the same exact things. Leeraar had some fun at my expense quoting seemingly contradictory things that I had said in different threads. Part of it is "thinking aloud". Part of it is seeing both sides of the argument. Part of it is a genuine tension that exists in all of us as we grapple with investment decisions. Part of it is talking about the same topic but in different contexts. For example, what I tell a 24 year old and a 60 year old on the same topic might be a lot different. Part of it is reading contrary opinions and having the light go on in my head that the other guy/gal might be on to something. I might then comment on where I think the other person is right.

I picked the Charlie Brown avatar in part because my posts might at times seem "wishy-washy." It reflects angst that I sometimes feel as an investor. It reveals contradictions in my own investing personality. I am mostly a conservative and cautious investor but I have done some pretty wild stuff in my portfolio. I seem to have a conservative side and an aggressive pedal to the medal side. I have a side that wants to stay the course with the tried and true; I have another side that wants to set sail and venture out.

I can't be the only poster on this forum who is like that. It is refreshing in a way to see the thread thrash around as people come across things that perhaps they had not considered before. So I see this as a good thing and not as a bad thing. Good to see that I am not the only investor out there that experiences wishy-washiness, we see this in the thread as a whole.
Tis the curse of being thoughtful and open minded.
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.
User avatar
Jazztonight
Posts: 1339
Joined: Tue Feb 27, 2007 11:21 pm
Location: Lake Merritt

Re: The dangerous practice of rebalancing...

Post by Jazztonight »

Please forgive me for sounding (or being) simplistic. I've been accused of this before.

After years of screwing around with my personal finances, I finally found peace a number of years ago as a Boglehead.

Two things:

1. One of the overriding aspects of the BH philosophy is to set an allocation that "allows you to sleep at night." If I come to a reasoned and rational decision that my comfortable "sleep at night" AA is 40/60, and the stock market has a run up causing that allocation to become 50/50, then why am I suddenly able to sleep just fine with this new allocation? Regardless of the fact that I may have more assets! Hey, maybe I had "enough" before the market rose?

Isn't Jack Bogle one of the voices of reason telling me about the concept of Enough?

2. I was under the impression that when you rebalance, you're "Selling high, and buying low." Did we suddenly decide that's not as good an idea as it used to be, simply because if we don't rebalance, it may go even higher?

Sorry, but I'm personally comfortable with my asset allocation, an occasional rebalancing, and a simple 4 fund portfolio.

(When you're me, good sleep at night is hard enough to come by.) :wink:
"What does not destroy me, makes me stronger." Nietzsche
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: The dangerous practice of rebalancing...

Post by Leeraar »

Jazztonight wrote:Please forgive me for sounding (or being) simplistic. I've been accused of this before.

After years of screwing around with my personal finances, I finally found peace a number of years ago as a Boglehead.

Two things:

1. One of the overriding aspects of the BH philosophy is to set an allocation that "allows you to sleep at night." If I come to a reasoned and rational decision that my comfortable "sleep at night" AA is 40/60, and the stock market has a run up causing that allocation to become 50/50, then why am I suddenly able to sleep just fine with this new allocation? Regardless of the fact that I may have more assets! Hey, maybe I had "enough" before the market rose?

Isn't Jack Bogle one of the voices of reason telling me about the concept of Enough?

2. I was under the impression that when you rebalance, you're "Selling high, and buying low." Did we suddenly decide that's not as good an idea as it used to be, simply because if we don't rebalance, it may go even higher?

Sorry, but I'm personally comfortable with my asset allocation, an occasional rebalancing, and a simple 4 fund portfolio.

(When you're me, good sleep at night is hard enough to come by.) :wink:
Jazz,

You are exactly correct.

Go to bed, and sleep well.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: The dangerous practice of rebalancing...

Post by Leeraar »

Browser wrote:William Sharpe on rebalancing:
William Sharpe (WS): I think, by and large, people probably shouldn’t do it. In particular, rebalancing
by selling winners and buying losers. Basically, if you’re going to sell your winners and buy your losers,
then you have to trade with someone. And that person has to take the other side of the trades. If you’re
smart doing that, then the other person must be dumb to trade with you. So the questions are: Why is
that a good thing to do, and what’s the matter with the other person for trading with you?

We can’t all rebalance, because rebalancing to pre-selected proportions means selling relative winners
and buying relative losers. Since we can’t all do that, the question is: If this is the obvious thing to do,
with whom are you going to trade? Who is it? And why should the other person trade with you? In an
efficient, sensible or informed market, such rebalancing will not be a good strategy.
http://www.aaii.com/journal/issue/september-2014
I know I did tell the moderators I'd try to calm down, but this is one of the most inane statements I have ever heard. Possibly Linus Pauling is the only other competitor I know of for the most idiotic statements by a Nobel Laureate. (But then, the Economics prize is not a real Nobel.)

The logical conclusion of this statement is you should sell your losers, and go 100% with your winners.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
berntson
Posts: 1366
Joined: Mon Oct 29, 2012 12:10 pm

Re: The dangerous practice of rebalancing...

Post by berntson »

Jazztonight wrote: One of the overriding aspects of the BH philosophy is to set an allocation that "allows you to sleep at night." If I come to a reasoned and rational decision that my comfortable "sleep at night" AA is 40/60, and the stock market has a run up causing that allocation to become 50/50, then why am I suddenly able to sleep just fine with this new allocation? Regardless of the fact that I may have more assets! Hey, maybe I had "enough" before the market rose?
You've got a great plan going there. Stick with it! Good sleep is harder to get than you might think. :D

The issue is that different things help different people sleep well at night. Some people are ratio investors. They sleep best knowing that 50% of their portfolio is in bonds, whatever the value of 50% turns out to be. Regardless of whether they have $10,000 or $1,000,000, they want 50% of whatever they have in cash and bonds. Bucket investors like having a safety bucket. They like knowing that x dollars are invested in safe assets that will be guaranteed to be there. This sort of investor might sleep well knowing that she has $200,000 in cash and bonds, regardless of how much she has in stocks.

The ratio investor defines her risk tolerance in terms of percentages, so not rebalancing after a crash would leave her with too little risk. The bucket investor defines her risk tolerance in terms of the dollar value of her safe bucket. Rebalancing for her would mean holding a riskier portfolio, since she would have a smaller safe bucket.

Sounds like you're a ratio investor, so you've got the right strategy!
JustinR
Posts: 1451
Joined: Tue Apr 27, 2010 11:43 pm

Re: The dangerous practice of rebalancing...

Post by JustinR »

What if the answer to rebalancing in a falling market to double your rebalancing schedule?

For example, if you rebalance every year, do it every two years. If you rebalance every 6 months, do it every 12 months. Etc.
User avatar
dodecahedron
Posts: 6607
Joined: Tue Nov 12, 2013 11:28 am

Re: The dangerous practice of rebalancing...

Post by dodecahedron »

nedsaid wrote:
JoMoney wrote:Wow. I'm a bit taken back by the shift in this thread. It started out being sarcastic and dismissive about anything other than constant-mix portfolio rebalancing, highlighting a few extreme points taken out of context from the article. Then we started bashing rebalancing... rebalancing isn't necessarily bad either, it might be an important part of your portfolio if your goal is to dampen the volatility or maintain your allocations "risk profile" between assets. It's not bad, but it's not necessarily the "perfect plan" either, nothing is. To borrow a phrase, "There's more than one road to Dublin"
I find myself doing the same exact things. Leeraar had some fun at my expense quoting seemingly contradictory things that I had said in different threads. Part of it is "thinking aloud". Part of it is seeing both sides of the argument. Part of it is a genuine tension that exists in all of us as we grapple with investment decisions. Part of it is talking about the same topic but in different contexts. For example, what I tell a 24 year old and a 60 year old on the same topic might be a lot different. Part of it is reading contrary opinions and having the light go on in my head that the other guy/gal might be on to something. I might then comment on where I think the other person is right.

I picked the Charlie Brown avatar in part because my posts might at times seem "wishy-washy." It reflects angst that I sometimes feel as an investor. It reveals contradictions in my own investing personality. I am mostly a conservative and cautious investor but I have done some pretty wild stuff in my portfolio. I seem to have a conservative side and an aggressive pedal to the medal side. I have a side that wants to stay the course with the tried and true; I have another side that wants to set sail and venture out.

I can't be the only poster on this forum who is like that. It is refreshing in a way to see the thread thrash around as people come across things that perhaps they had not considered before. So I see this as a good thing and not as a bad thing. Good to see that I am not the only investor out there that experiences wishy-washiness, we see this in the thread as a whole.
nedsed, I loved this comment for so many reasons (including the fact that my late husband, a finance professor, also identified with Charlie Brown). After his death, I found a few special treasured books in his closet in our bedroom--several books were collections of Charlie Brown comics that he had kept from his teenage years. I think we humans are all fundamentally wishy-washy. I am an economist and I know lots of finance professors are wishy-washy as well. Indeed, the WSJ article cited by the OP is written by a finance professor who has written books *advocating rebalancing* and he now has second thoughts and doubts about the practice, going so far as to say that rebalancing is "dangerous." I know for a fact that there are quite a few finance professors who *teach and write research papers* that say modern portfolio theory/asset allocation are optimal but who don't actually follow that practice in their personal lives. (I suppose that is similar to the fact that there are doctors who say not to smoke or consume a lot of junk food or skimp on sleep or neglect exercise, but who do that in their own lives anyway.)

I do think that this forum is a remarkably comforting and civilized place in which to "thrash around" ideas with a remarkable group of intelligent and articulate folks and come to a comfortable and workable set of guidelines for proceeding, with the idea that it is healthy to periodically reexamine those guidelines in the face of changing circumstances. (E.g., approaching retirement, major changes in net worth due to large market movements, inheritances, lawsuits or other catastrophes, etc.)
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: The dangerous practice of rebalancing...

Post by YDNAL »

Jazztonight » Sun Sep 14, 2014 9:33 pm wrote: Please forgive me for sounding (or being) simplistic. I've been accused of this before.

After years of screwing around with my personal finances, I finally found peace a number of years ago as a Boglehead.

Two things:

1. One of the overriding aspects of the BH philosophy is to set an allocation that "allows you to sleep at night." If I come to a reasoned and rational decision that my comfortable "sleep at night" AA is 40/60, and the stock market has a run up causing that allocation to become 50/50, then why am I suddenly able to sleep just fine with this new allocation? Regardless of the fact that I may have more assets! Hey, maybe I had "enough" before the market rose?
The reason is that not everyone chooses 40/60 for the exact reason.
  • 1. You may choose it because that particular split may provide the *hoped-for* return necessary to meet all your retirement goals and objectives.

    2. I may choose it because the 60% does the same for me. The 40% is invested with the goal to transfer wealth to others - over a much different timeframe than my expected retirement period.

    3. Then, why should 40% --> 50% impact - in any way - the other side (60%)?
It shouldn't!!!
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Re: The dangerous practice of rebalancing...

Post by Rodc »

Jazztonight wrote:Please forgive me for sounding (or being) simplistic. I've been accused of this before.

After years of screwing around with my personal finances, I finally found peace a number of years ago as a Boglehead.

Two things:

1. One of the overriding aspects of the BH philosophy is to set an allocation that "allows you to sleep at night." If I come to a reasoned and rational decision that my comfortable "sleep at night" AA is 40/60, and the stock market has a run up causing that allocation to become 50/50, then why am I suddenly able to sleep just fine with this new allocation? Regardless of the fact that I may have more assets! Hey, maybe I had "enough" before the market rose?

Isn't Jack Bogle one of the voices of reason telling me about the concept of Enough?

2. I was under the impression that when you rebalance, you're "Selling high, and buying low." Did we suddenly decide that's not as good an idea as it used to be, simply because if we don't rebalance, it may go even higher?

Sorry, but I'm personally comfortable with my asset allocation, an occasional rebalancing, and a simple 4 fund portfolio.

(When you're me, good sleep at night is hard enough to come by.) :wink:
I think the key is there are at least two situations that are different.

Early in accumulation one may have a goal of amassing enough money to fund some future goal like retiring.

Later once you have enough one may shift to preserving capital so you always have enough.

If in the later situation one keeps shifting from safe assets to risky assets one may increase the odds of having more, at the risk of dropping below enough.

Would you sleep better at night as a retiree by (A) having just enough in a stock/bond portfolio, say $1M in a 50/50 portfolio and a need for $20K in income per year and a desire for $40K per year, or (B) an inflation indexed annuity for $20K per year, and $500K in stocks? In (A) you have "safe" assets of $500,000 and in (B) you have "safe" assets of $500,000, but in B you have more safety than in A. In A there is a non-trivial chance you will run out of money if you stick to $40K per year, or you will have to adjust as you go along. In B you will not run out of money (income), and you will also likely have to adjust discretionary spending, but you will always have your needs covered.

The tradeoff, there is always a tradeoff, is that in B the additional safety comes at the cost of not have as much to leave as an inheritance.

So, for a retiree with enough, but not a ton extra, which approach is safer and let's you sleep better at night, keeping to a somewhat risky approach that might give a bit more income and more to your heirs or one with a near guarantee of never running out of income but less for your heirs?
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.
Leesbro63
Posts: 10638
Joined: Mon Nov 08, 2010 3:36 pm

Re: The dangerous practice of rebalancing...

Post by Leesbro63 »

JustinR wrote:What if the answer to rebalancing in a falling market to double your rebalancing schedule?

For example, if you rebalance every year, do it every two years. If you rebalance every 6 months, do it every 12 months. Etc.
How would that have saved the 40,000 to 8,000 over 20 years Japanese investor?
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: The dangerous practice of rebalancing...

Post by YDNAL »

JustinR wrote:What if the answer to rebalancing in a falling market to double your rebalancing schedule?

For example, if you rebalance every year, do it every two years. If you rebalance every 6 months, do it every 12 months. Etc.
Rebalancing while accumulating - in contrast to consuming - is supposed to control risk. OBVIOUSLY, controlling risk has nothing to do with the calendar.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
User avatar
dodecahedron
Posts: 6607
Joined: Tue Nov 12, 2013 11:28 am

Re: The dangerous practice of rebalancing...

Post by dodecahedron »

Jazztonight wrote:Please forgive me for sounding (or being) simplistic. I've been accused of this before.

After years of screwing around with my personal finances, I finally found peace a number of years ago as a Boglehead.

Two things:

1. One of the overriding aspects of the BH philosophy is to set an allocation that "allows you to sleep at night." If I come to a reasoned and rational decision that my comfortable "sleep at night" AA is 40/60, and the stock market has a run up causing that allocation to become 50/50, then why am I suddenly able to sleep just fine with this new allocation? Regardless of the fact that I may have more assets! Hey, maybe I had "enough" before the market rose?

Isn't Jack Bogle one of the voices of reason telling me about the concept of Enough?

2. I was under the impression that when you rebalance, you're "Selling high, and buying low." Did we suddenly decide that's not as good an idea as it used to be, simply because if we don't rebalance, it may go even higher?

Sorry, but I'm personally comfortable with my asset allocation, an occasional rebalancing, and a simple 4 fund portfolio.

(When you're me, good sleep at night is hard enough to come by.) :wink:
I totally buy Jack Bogle's notion of the importance of "enough." (Even though, as a card-carrying economist, I teach my students about economic models based on optimization, not satiation!)

But I don't get why "enough" is fundamentally or necessarily about asset allocation *percentages*. To me, at this stage in my life, "enough" means nothing about percentages, but rather "enough" real inflation-protected *dollars* in my fixed income accounts that I can more than comfortably cover my needs AND wants with a comfortable cushion. I have that and more, so the *dollar amount* of the "more" can go to my equity holdings. Que sera, sera with the stock portion of my portfolio, which will most likely go to my daughters and to charities (barring some long-term care disaster or similar catastrophe.)

If the stock market explodes, then I will consider giving more of those appreciated equity assets to charity (which--if done during my lifetime--could be considered a way to change my asset allocation, though I wouldn't view it that way.) But I don't see a need to obsess about the percentage allocation to bonds and stocks as the fundamental metric for measuring "enough." Enough is about the kind of lifestyle I want to live. I am not interested in expensive jewelry or clothes or extravagant flashy consumption. Simple healthy food, enjoying the multitude of free or low-cost cultural events in my community, modest cost travel, ability to pay my property taxes and utilities and home repairs, ability to volunteer my time, talent, and treasure to the larger world, what more do I need or want in life that money can buy?
Leesbro63
Posts: 10638
Joined: Mon Nov 08, 2010 3:36 pm

Re: The dangerous practice of rebalancing...

Post by Leesbro63 »

dodecahedron wrote:To me, at this stage in my life, "enough" means nothing about percentages, but rather "enough" real inflation-protected *dollars* in my fixed income accounts
Exactly how do you do this?
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: The dangerous practice of rebalancing...

Post by Browser »

For me it comes down to figuring out how much I want to be holding in my "savings", or long-term living expenses account, and the rest can be gambled in the Wall Street Casino in the hopes that the risk premium Gods will smile down on me. The savings account is comprised of low-risk assets, tilted toward those that are inflation-indexed such as I-Bonds or TIPS. The amount I want in my savings depends on how much safe income I expect from social security, pensions, or annuities, and also how much "human capital" or earning power I think I've got left. If I'm pretty young and dumb, I figure I've got a lot of gas in the tank and don't need much in my long term income "savings" account. If I'm in my 50s and running out of gas, and my marketability in the work world is declining (should I be downsized) I need a whole bunch more in "savings", so I need to be moving my assets in that direction. At every point in my lifecycle, I hold just what I need in "savings" and progressively ramp that up as necessary to replace my human capital estimate. The rest I hold in growth assets such as stocks. No rebalancing, no age in bonds, no glidepath funds, none of that hooey. It isn't hard.
We don't know where we are, or where we're going -- but we're making good time.
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: The dangerous practice of rebalancing...

Post by YDNAL »

Leesbro63 » Mon Sep 15, 2014 9:43 am wrote:
dodecahedron wrote:To me, at this stage in my life, "enough" means nothing about percentages, but rather "enough" real inflation-protected *dollars* in my fixed income accounts...

Exactly how do you do this?
Presumably a serious question.

If you need $1000 monthly "real inflation-protected dollars," and also want a lower than Trinity Study withdrawal (25 times in savings), you may consider "enough" to represent $600K -- 50 times saved in "real inflation-protected" products.

ps. I purposely didn't mention "percentages." :)
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
Leesbro63
Posts: 10638
Joined: Mon Nov 08, 2010 3:36 pm

Re: The dangerous practice of rebalancing...

Post by Leesbro63 »

YDNAL wrote:
Leesbro63 » Mon Sep 15, 2014 9:43 am wrote:
dodecahedron wrote:To me, at this stage in my life, "enough" means nothing about percentages, but rather "enough" real inflation-protected *dollars* in my fixed income accounts...

Exactly how do you do this?
Presumably a serious question.

If you need $1000 monthly "real inflation-protected dollars," and also want a lower than Trinity Study withdrawal (25 times in savings), you may consider "enough" to represent $600K -- 50 times saved in "real inflation-protected" products.

ps. I purposely didn't mention "percentages." :)
Yes I was serious. But you answered a different question. How does one get real inflation-protected dollars in fixed income accounts? TIPS only work in tax-sheltered accounts because of the tax-flation potential in non-sheltered accounts.
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: The dangerous practice of rebalancing...

Post by YDNAL »

Leesbro63 wrote:
YDNAL wrote:
Leesbro63 » Mon Sep 15, 2014 9:43 am wrote:
dodecahedron wrote:To me, at this stage in my life, "enough" means nothing about percentages, but rather "enough" real inflation-protected *dollars* in my fixed income accounts...

Exactly how do you do this?
Presumably a serious question.

If you need $1000 monthly "real inflation-protected dollars," and also want a lower than Trinity Study withdrawal (25 times in savings), you may consider "enough" to represent $600K -- 50 times saved in "real inflation-protected" products.

ps. I purposely didn't mention "percentages." :)
Yes I was serious. But you answered a different question. How does one get real inflation-protected dollars in fixed income accounts? TIPS only work in tax-sheltered accounts because of the tax-flation potential in non-sheltered accounts.
Perhaps not very serious to pose a general question, then follow-up with a different question (even if *somewhat* related). Is that a.k.a. bait and switch in some circles?

So, now my questions..... Do you have all savings in a Taxable account? Do you have sufficient tax-advantaged savings to provide all/most/some of your retirement needs? (rhetorical, I don't care to know)
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: The dangerous practice of rebalancing...

Post by Leeraar »

Exactly how do you do this?
FWIW, I have 3 years cash flow in tax-advantaged accounts in each of VFSUX and VBILX, 6 years total. That said we are withdrawing about 2% pa, and that comes from our tax-advantaged VSMGX account. The pure bond funds are an emergency stash we can tap if we need to.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Post Reply