Rebalancing / Market timing

[VINNY]

Here is our dilemma. I've been investing on behalf of my spouse and I since 1997. We have never sold a single share of our mutual funds except for some gnma in a taxable account when we needed to raise some cash. This happened very infrequently.

Because of our very strong beliefs in buy and hold, we are struggling with whether or not we should sell some of total stock market index funds in our retirement account so that we'll have some "dry powder" to take advantage of the next bear market. I don't know when that will be but I've seen enough cycles to know that it will happen.

We really can't come up with an asset allocation because we will have DB pensions and never gave it very serious thought, but its currently 75/25 stocks to bonds.

My gut is telling me to lock in some of these gains in order to take advantage of the next bear.

I know what the board here recommends. Stick to your AA and rebalance when it gets out of whack back to the desired AA

Do we just need to decide on AA and stick to that so we don't engage in market timing?

We never panicked in the last bear and did nothing, we ignore all the noise, we have a high tolerance for risk, yet we can't decide on a suitable AA. I just feel like I should lock in some of these gains so I can take advantage of the next gloom and doom bear market.

Any suggestions, I'm guessing we really need an AA so that can guide us, otherwise we'd be market timing, right?

[livesoft]

Stick to your AA. If stocks have gone up a lot, then your current ratio of stocks:bonds should not match your desired asset allocation. In that case what are you gonna do?

If you can't come up with an asset allocation, but want to change your current asset allocation, isn't that the same as coming up with an asset allocation?

[sport]

I'm guessing we really need an AA so that can guide us, otherwise we'd be market timing, right?

Right. Not only that, but you are "flying by the seat-of-your-pants". You are making decisions based on how you feel at the moment rather than having specific targets and goals. A specified asset allocation and rebalancing plan provides the discipline you need to avoid the timing mistakes that are bound to occur otherwise.

Jeff

[harikaried]

It sounds like you would like to have an overall asset allocation with a portion in cash. Maybe you're looking for something like 75stock/20bond/5cash or 70stock/20bond/10cash. So whenever stocks or bonds go up, the process of returning to your asset allocation might automatically sell stocks/bonds to hold as cash. You could probably count your net pension income as increasing your cash portion to also lead to purchasing of stocks/bonds when rebalancing.

[Goalie50]

My basic take is that you should pick and stick to an AA.

[VINNY]

Thanks for the suggestions, we really need to figure out an AA.

Monkeyroar, what I was contemplating was selling some VTSAX now at these highs and when "the sky was falling" reinvest it back into VTSAX, in the meantime I would park it in the total bond market, this would all take place within our retirement accounts.

If I did that right now, and sold the amount of VTSAX I was thinking about, it would make my AA about 40% Stocks and 60% bonds. I would leave it alone until I saw a significant drop in the market like hopefully the next bear market. When and if that happened I would sell some of the total bond and buy back into the total stock market.

These were my thoughts. Keeping in mind I am a long term investor and haven't sold anything since 1997 with the exception of a few GNMA shares, I thought this might be a good way to lock in some of the huge gains we've made, BUT more importantly have cash/bonds on hand to reinvest when it looks like the "world is coming to an end" scenario.

I know, that I need an AA to use as my compass otherwise like one poster mentioned, i'll be making decisions based on my emotions and flying by the seat of my pants.

But had to ask if what I was thinking of doing could be considered a strategic move or am I just grasping for straws here and looking for an excuse to market time?

[livesoft]

So you would go from 75:25 stocks:bonds to 40:60? That is quite a drastic change unless you have have less than $100,000 in this account.

Why not go to 70:30 or 65:35 and see how that turns out for a month or so?


Going from 75:25 to 40:60, letting market tank 50%, so you end up at 25:75, then going back to 75:25 is really market timing. I enjoy market timing, but even I wouldn't do that.

[VINNY]

Livesoft,

It's approximately 900k. Yes it would definately be a drastic change in AA. But, I do like your suggestion of a more moderate move, I even mentioned this to my wife, why does it have to be all or nothing?

Perhaps gradual shifts. This has really got me thinking about our AA. But it really isnt easy beacuse on one hand we have DB pensions (teacher and cop) and on other other we have a high tolerance for risk, I can say that after seeing my portfolio drop about 45-50%. We stayed the course, no big deal.

Part of me says we can take this risk because we have pensions and the other says, we don't need to take this much risk because we have pensions! This is why we can not decide on our AA.

Maybe split it down the middle, 50/50?

I can't decide which way to go, I just can't, it's very frustrating to say the least!.

[livesoft]

I fall into the trap of doing things when my portfolio reaches a "round number". Maybe you do, too? It is only a few more percent when you get to a million. I'd ride it out and see what happens.

[sport]

Part of me says we can take this risk because we have pensions and the other says, we don't need to take this much risk because we have pensions! This is why we can not decide on our AA.

Maybe split it down the middle, 50/50?

A compromise AA is a good idea. Small differences in AA make little difference in results. Also, no one knows, in advance, what the best AA will be going forward. Just give it your best shot. Even if you are not exactly right, you will not be too far off, and it will be better than no AA decision at all. A number of cliches come to mind here: "paralysis by analysis" "a perfect plan is the enemy of a good plan".

Jeff

[livesoft]

What was your asset allocation in mid-March 2009?

At that time did you take from your fixed income assets and buy equity funds? If you didn't, but road it down and then road it back up, then don't you wonder if you will do it in the future? OTOH, if you did move drastically from bonds to stocks in March-June 2009, then I have more hope for you. So how did you really act?

[Kevin M]

You haven't mentioned anything about your investment goals. If your goal is simply to have enough money to last the rest of your lives, and If a lower risk portfolio plus your pensions is enough to meet that goal, then why take more risk than you need to take? On the other hand, if you have some aspirational goals that require higher returns, then perhaps more risk is appropriate.

You appear to have high willingness and ability to take risk, but relatively low need to take risk. One approach is to let the factor the results in the lowest risk dominate your decision. Due to my relatively low need to take risk, my target allocation to equities is only 30% (my current allocation is approaching 35%, which will trigger rebalancing). There's a saying: once you've won the game, why keep playing?

Consider that if your willingness to take risk is really that high, then you would have rebalanced from bonds to stocks during 2008/2009. Did you? If not, why not?

Kevin

[VINNY]

Kevin and Livesoft you made good points. In March 2009, I did nothing. Sat on my hands and just continued to contribute to our various plans. And instead of buying more equities, I funneled new contributions to our bond investments trying to raise that AA allocation, when I should have been doing exactly the opposite!

I do have hope this time around that I will buy stocks when the next bear comes around because I realize what potential opportunity it presents. Considering that we have or will have pensions, this money can be theoretically be for my three kids. I've never tinkered with our portfolio since 1997 because I simply bought and held never even rebalanced once.

I do believe this time I will have the intestinal fortitude to make that tough decision and buy stocks when there is a fire sale because I've seen the potential for doing so, as long as you have the time frame to hold on, I do. Our home has been paid off and we have no debt. Our pensions should easily cover our expenses. I didn't rebalance in 2009 out of fear but I believe I can do so this time around. As far as that saying goes....Once you won the game why keep playing....I can't determine if I've won.

I ask myself this question, if next week my portfolio went from 900k to 600k how would that make me feel. Answer: not happy but I wouldn't sell stocks out of fear, so my idea is to try and lock some of these gains so I can buy on the next bear, but I'll first have to determine my AA so I can use that as a guideline.

I just have to figure that out and can't. My wife isn't much help, she doesn't understand this stuff and it's all on my shoulders and after doing a pretty good job for 15 years of simply buying and holding, I don't want to screw this up. Your right, I'm in analysis paralysis right now. Thanks for all the input, really appreciate it!

[mcse37]

Why not just do "Age in Bonds" and be done with it.

[epictetus]

If you did age in bonds or some variant (age + 10 in bonds; age - 10 in bonds, etc) and rebalanced on your birthday it would take a lot of the stress out of it and make it less likely that you tinker around too much.

making the allocation and rebalancing that mechanical reduces the emotional strain. and reduces the temptation to overthink, overact, etc. based on emotional factors

epictetus

[livesoft]

....
I do believe this time I will have the intestinal fortitude to make that tough decision ....
[...]
I'm in analysis paralysis right now. Thanks for all the input, really appreciate it!

Sorry, but I have to laugh.

If you "have the intestinal fortitude" you would not have started this thread and would have done the deed already without any help from us.

[letsgobobby]

....
I do believe this time I will have the intestinal fortitude to make that tough decision ....
[...]
I'm in analysis paralysis right now. Thanks for all the input, really appreciate it!

Sorry, but I have to laugh.

If you "have the intestinal fortitude" you would not have started this thread and would have done the deed already without any help from us.

And you would have bought stocks in 09. Lots and lots of em. Your stated and actual risk tolerances are not equivalent.

[Kevin M]

As far as that saying goes....Once you won the game why keep playing....I can't determine if I've won.

Again, it depends on your goals. If your goal is to have enough money to live on in retirement, it sounds like you've won the game already. If your goal is to give money to your kids (either before or after death), then whether or not you've won depends on how much you want to give them. It seems to me that I would think about how much risk is appropriate based on your goal of leaving money to your kids.

In your situation, I don't see age in bonds as a meaningful guideline, since your pensions are essentially enough bond-like assets to fully fund your retirement (I'm trusting that your pensions really are enough, on an inflation-adjusted basis). Given this, I think you could go anywhere from 0% to 100% in equities. If you can't decide, why not just go 50/50?

Kevin

[dbr]

In your situation, I don't see age in bonds as a meaningful guideline, since your pensions are essentially enough bond-like assets to fully fund your retirement

Kevin

I would restate the language to say that the pensions are enough income . . .

Age in bonds is not a meaningful guideline because the investments assets are not needed to supply income in retirement rather than because pensions are bond-like assets. This age in bonds thing seems to arise from a need to reduce all concepts about financial planning to asset allocation while ignoring the primary role of cash flow in a financial plan before investigating assets. Cash flow means during accumulation the fundamental roles of LBYM and saving and during disaccumulation the fundamental roles of LBYM and establishing income streams.

[ResNullius]

Trying to time the next bear market is a losing proposition, at least in my opinion. I know a lot of people who sold at the market bottom in March 2009, only to still be in cash today and wondering when it's safe to move back into equities. I'm 62, with a 60% fixed allocation. I'm comfortable with this level of fixed versus equities. On the other hand, if there is another 50% drop in the equity market, I probably would move a chunck of money from fixed into equities in order to hopefully enjoy the snap-back that usually happens, then return to my normal allocation. I don't know. I'm a buy and holder, have been for decades, but I'm not oblivious to the current market positions. Personally, I'm tired of this huge equity drops we've had over the past 12 years, particularly since I no longer am bringing in any earned income.

[PacNorWest]

[Political comments removed by admin LadyGeek]

I have to ask myself, "Am I getting caught up in the rising market fever because it fits a perceived "long term" game plan?"
Accordingly, I've been "averaging out" just small amounts (5% on Friday) in order to lock in some gains.

[letsgobobby]

But the OP isn't rebalancing, he doesn't even have a set AA. I wonder does he have an IPS?

[mickeyd]

In the original OP this is stated:

its currently 75/25 stocks to bonds.

My simple Q is~How did you arrive at this AA?

[VINNY]

Thanks for all the responses, they've been helpful in making me think about my options.

Livesoft, it's not that I don't have the guts to do it now, I am trying to decide on my AA before I do.

As far as our IPS, it lacks a written AA obviously. The way we arrived at our current AA was by investing heavily in equities for about the first decade, pretty much 100%. In the last few years we've been making contributions to fixed income to increase our exposure there. We did this because when we first started investing we were younger and knowing that we had pensions, we felt okay with 100% equities.

900k later, I am reassessing. I realize after giving this alot of thought, I just need to come to an AA based on some of the helpful responses and advice that I was given.

I am leaning to a 50/50 allocation, gonna discuss it with the wife, but I have to do something! Just splitting it down the middle, considering we don't really have goals for the money. Our pensions are inflation adjusted and will be about 100K a year combined. This money will most likely generate income to supplement our pensions and if something comes along that we want to but and we need to dip into it, we will but no plans for what that will or could be.

For any newbies learn from me and have an AA from the get go!

At least I am trying to decide on one otherwise, I would be making decisions based on my emotions and that's a train wreck waiting to happen.

Again, I sincerely thank all those that contributed because it has made me think about my options

[livesoft]

I think you are lucky in that you can try out different stock:bond ratios going forward. You are starting now apparently with 75:25 and feel uncomfortable about it, so go with 70:30, 65:35, or 60:40 for a while. If you still feel uncomfortable, then change again. At some point you will arrive where you want to be.

However, an AA is not jumping from 75:25 to 40:60 back to 75:25 and then back to 40:60 based on how you feel the market is doing. That written, I would not quibble with shifting from 60:40 to 65:35 and back depending on whether a ReallyBadDay happens, but only if you have that written into your IPS.

[letsgobobby]

I didn't see your age... Might consider an IPS that allows AA to shift with age.

[VINNY]

I am 42, she is 38. I agree Livesoft. By having an AA written in place and following it, holds your feet to the fire and makes you stick to the plan and takes out emotions. Which is so darn important, people who invest with emotions are doomed to fail. Going to work on an actual written IPS and stick to it, haven't done it in 15 years and it's time. We've come along way, started in 1997 with our first IRA contributions of 2,000.00 each. Thanks

[letsgobobby]

another consideration - given your young ages, pensions may or may not provide their promised benefits.

[VINNY]

Very true! We live in Illinois and the state pensions are billions in the red. I'm counting on some possible reduction in benefits, the current system isn't sustainable.

[Dandy]

Feelings are not a reliable source for taking investment action. In fact they are usually something to avoid. You have no idea what the market is going to do and neither does anyone else. You need to establish a target allocation for stocks and fixed income. If you have been a buy and hold investor for a long time you have probably seen your risk rise as your equity investments have risen.

Set an allocation and rebalance based on a non emotional factor. e.g. date, bands etc. and I believe you will be better off.