Just confirming....."stay the course"?

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JD2775
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Just confirming....."stay the course"?

Post by JD2775 » Fri Aug 21, 2015 3:55 pm

Local news site has a Breaking News red banner flying: "Market hammered for 2nd day. DOW down over 500" and then subtitle:
"Fears over global slowdown hammer US stocks for 2nd day"

I shouldn't run and change anything in my 401k because of this right, right? Dumb question maybe.

Quick snapshot:
40 years old
80/20 Stocks/Bonds

40% Large Cap Index
30% International Index
10% Small-Cap Index
20% Bond Index

all low ER fees (0.01-0.04)

Thanks!

Erwin
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Re: Just confirming....."stay the course"?

Post by Erwin » Fri Aug 21, 2015 3:57 pm

Time to buy?
Erwin

livesoft
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Re: Just confirming....."stay the course"?

Post by livesoft » Fri Aug 21, 2015 3:57 pm

JD2775 wrote:I shouldn't run and change anything in my 401k because of this right, right? Dumb question maybe.
It is possible that "stay the course" means you should be rebalancing from fixed income into equities now. And if you do not rebalance, then you are not doing the "stay the course" thing.
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JD2775
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Re: Just confirming....."stay the course"?

Post by JD2775 » Fri Aug 21, 2015 3:58 pm

mpt follower wrote:Time to buy?
I'll take that as a yes :)

401k is maxed out as it is, so I really can't buy more into it....

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JD2775
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Re: Just confirming....."stay the course"?

Post by JD2775 » Fri Aug 21, 2015 3:59 pm

livesoft wrote:
JD2775 wrote:I shouldn't run and change anything in my 401k because of this right, right? Dumb question maybe.
It is possible that "stay the course" means you should be rebalancing from fixed income into equities now. And if you do not rebalance, then you are not doing the "stay the course" thing.

Not sure what this means? sorry.... I am a newbie to this kinda stuff. Are you saying to go less bonds, more stock?

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Re: Just confirming....."stay the course"?

Post by livesoft » Fri Aug 21, 2015 4:03 pm

JD2775 wrote:Not sure what this means? sorry.... I am a newbie to this kinda stuff. Are you saying to go less bonds, more stock?
You wrote that your desired asset allocation is 20% bonds. What if tomorrow you calculate that your portfolio is now 22% bond fund? Would that not mean that you have to sell 2% of your portfolio value out of the bond funds and buy equities to move them from 78% back to 80%?
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Kevin M
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Re: Just confirming....."stay the course"?

Post by Kevin M » Fri Aug 21, 2015 4:04 pm

What is your rebalancing policy? Bands, annual, other?

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Re: Just confirming....."stay the course"?

Post by RadAudit » Fri Aug 21, 2015 4:08 pm

JD2775 wrote:I shouldn't run and change anything in my 401k because of this right, right?
Correct.

If you were happy with your asset allocation at the beginning of August, what has changed in your life in the last 21 days that suggests you should change that allocation now? Hint: The answer is not that the stock market dropped 2% or 3% in one day. Stay the course.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

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Re: Just confirming....."stay the course"?

Post by mephistophles » Fri Aug 21, 2015 4:10 pm

I shouldn't run and change anything in my 401k because of this right.
Right.

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JD2775
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Re: Just confirming....."stay the course"?

Post by JD2775 » Fri Aug 21, 2015 4:11 pm

livesoft wrote:
JD2775 wrote:Not sure what this means? sorry.... I am a newbie to this kinda stuff. Are you saying to go less bonds, more stock?
You wrote that your desired asset allocation is 20% bonds. What if tomorrow you calculate that your portfolio is now 22% bond fund? Would that not mean that you have to sell 2% of your portfolio value out of the bond funds and buy equities to move them from 78% back to 80%?
ah, gotcha. that makes sense.

My rebalancing policy really is aged based. Ill prob keep it as its for a couple more years, then go more bonds. It wont be anything dramatic though. The other method would be to check that the fluctuation (like the poster above mentioned) remains close to my 80/20 rule for now

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Re: Just confirming....."stay the course"?

Post by livesoft » Fri Aug 21, 2015 4:12 pm

RadAudit wrote: Hint: The answer is not that the stock market dropped 2% or 3% in one day. Stay the course.
I grant you that, but the stock market dropped more than 8% in a month and bond funds went up 1%, so it might be time for rebalancing.

I can see that the OP has an age-based asset allocation, but that does not speak to a rebalancing policy.
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Re: Just confirming....."stay the course"?

Post by JD2775 » Fri Aug 21, 2015 4:16 pm

livesoft wrote:
RadAudit wrote: Hint: The answer is not that the stock market dropped 2% or 3% in one day. Stay the course.
I grant you that, but the stock market dropped more than 8% in a month and bond funds went up 1%, so it might be time for rebalancing.

I can see that the OP has an age-based asset allocation, but that does not speak to a rebalancing policy.
I guess technically I dont have a "rebalancing policy" then. What would be an example of one?

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Re: Just confirming....."stay the course"?

Post by livesoft » Fri Aug 21, 2015 4:20 pm

JD2775 wrote:I guess technically I dont have a "rebalancing policy" then. What would be an example of one?
http://www.bogleheads.org/wiki/Rebalancing

Add it to your IPS. Don't have an IPS? Then get one:
http://www.bogleheads.org/wiki/Investme ... _statement
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JD2775
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Re: Just confirming....."stay the course"?

Post by JD2775 » Fri Aug 21, 2015 4:23 pm

livesoft wrote:
JD2775 wrote:I guess technically I dont have a "rebalancing policy" then. What would be an example of one?
http://www.bogleheads.org/wiki/Rebalancing

Add it to your IPS. Don't have an IPS? Then get one:
http://www.bogleheads.org/wiki/Investme ... _statement

I see. That makes sense. My age based allocation wouldnt account for that. Thanks for the tip! Link has been saved.

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Re: Just confirming....."stay the course"?

Post by ccdoc » Fri Aug 21, 2015 4:29 pm

livesoft wrote:
RadAudit wrote: Hint: The answer is not that the stock market dropped 2% or 3% in one day. Stay the course.
I grant you that, but the stock market dropped more than 8% in a month and bond funds went up 1%, so it might be time for rebalancing.

I can see that the OP has an age-based asset allocation, but that does not speak to a rebalancing policy.

If he has an annual rebalancing policy (I know he doesn't, but hypothetically) and did so already earlier in the year, should he be rebalancing again now based on market performance??

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Re: Just confirming....."stay the course"?

Post by livesoft » Fri Aug 21, 2015 4:30 pm

No, he should then ditch his calendar-based rebalancing policy and use a rebalancing-bands-market-performance-based rebalancing strategy.
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Re: Just confirming....."stay the course"?

Post by dwickenh » Fri Aug 21, 2015 4:36 pm

livesoft wrote:No, he should then ditch his calendar-based rebalancing policy and use a rebalancing-bands-market-performance-based rebalancing strategy.
+1 for Livesoft
Band rebalance makes more sense than once a year (no matter what happens during the year)
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Re: Just confirming....."stay the course"?

Post by JD2775 » Fri Aug 21, 2015 4:45 pm

dwickenh wrote:
livesoft wrote:No, he should then ditch his calendar-based rebalancing policy and use a rebalancing-bands-market-performance-based rebalancing strategy.
+1 for Livesoft
Band rebalance makes more sense than once a year (no matter what happens during the year)
That is starting to make more sense now that I am reading what the "band rebalance" entails. Good information, thanks guys.

So, what I am guessing here is....for Target Date Funds, they only rebalance based on date/age, correct? You lose the flexibility of band rebalance with target date funds because they are on auto-pilot?

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Re: Just confirming....."stay the course"?

Post by rustymutt » Fri Aug 21, 2015 4:50 pm

Here's my theory on why the market is headed down recently. Wall Street really believes they can stop rate hikes, by semi crashing markets, and winning over public support for keeping rates low. And that's the worst thing that could happen for investors.
Let the damn market alone, and raise rates.
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Re: Just confirming....."stay the course"?

Post by unclescrooge » Fri Aug 21, 2015 4:54 pm

Time to rebalance!

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Re: Just confirming....."stay the course"?

Post by livesoft » Fri Aug 21, 2015 5:17 pm

JD2775 wrote:So, what I am guessing here is....for Target Date Funds, they only rebalance based on date/age, correct? You lose the flexibility of band rebalance with target date funds because they are on auto-pilot?
Target date funds rebalance more or less daily by using rebalacing bands to stay close to their desired age-based asset allocation. You get rebalancing for free which helps prevent behavorial finance mistakes.
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Re: Just confirming....."stay the course"?

Post by Kevin M » Fri Aug 21, 2015 5:27 pm

JD2775 wrote:So, what I am guessing here is....for Target Date Funds, they only rebalance based on date/age, correct? You lose the flexibility of band rebalance with target date funds because they are on auto-pilot?
If your investment policy is to use only a Target date fund, then you do not need a rebalancing policy, and staying the course for you is to do nothing but keep adding to your fund per your policy. So I wouldn't say you lose the flexibility, but you lose the need.

Whether or not using rebalancing bands with separate funds is more beneficial is another question.

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Re: Just confirming....."stay the course"?

Post by sawhorse » Fri Aug 21, 2015 5:28 pm

Has just 7 years distorted our memory of some aspects of the 2008 crash? Here is a refresher:

http://www.usatoday.com/story/money/bus ... n/2779515/

Do you see any resemblance between the events then and the events now? I don't.

Yesterday was the worst one day drop since February 2014. Anyone still traumatized from that day? Anyone even remember that day? This week is the worst since 2011. Anyone still traumatized from that?

That's not to say that things won't turn into 2008, but rather that such speculation, and the emotions that accompany it, are premature.

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Re: Just confirming....."stay the course"?

Post by Erwin » Fri Aug 21, 2015 11:56 pm

The big question is not if, but when to rebalance. in the past, I have waited a bit until the market stabilizes and then rebalance if necessary. So, I feel that the time is not yet here.
Erwin

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Re: Just confirming....."stay the course"?

Post by edge » Sat Aug 22, 2015 3:22 am

If you have a weak stomach and are wavering after this minor correction you need to rethink your asset allocation in the long term.

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Re: Just confirming....."stay the course"?

Post by Hodor » Sat Aug 22, 2015 5:43 am

Don't do something, just stand there!

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Re: Just confirming....."stay the course"?

Post by gvsucavie03 » Sat Aug 22, 2015 6:44 am

http://www.vanguard.com/pdf/icrpr.pdf

Read this. Annual/semi-anual rebalancing is fine. More often (quarterly, monthly, bands) creates more in fees and taxes, but it sounds like yours is all in tax-deferred accounts. My IPS states that 5%+/- is a trigger or 25% beyond original allocation, but all of my investments are tax-deferred.

As others have said, your IPS is the only way you can possibly "stay the course." We're human, and our emotions play into most of our life's decisions... which is the worst possible thing to do as an investor.

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Re: Just confirming....."stay the course"?

Post by indexonlyplease » Sat Aug 22, 2015 7:12 am

Is it wise to rebalace when the market drops or should you wait and do your annual rebalancing. I asume the market could just back nest week and then you would have to rebalance again.

Also, what is considered a good drop (how many points) to add to your stocks buy that is with cash from fixed account?


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Re: Just confirming....."stay the course"?

Post by gvsucavie03 » Sat Aug 22, 2015 7:29 am

indexonlyplease wrote:Is it wise to rebalace when the market drops or should you wait and do your annual rebalancing. I asume the market could just back nest week and then you would have to rebalance again.

Also, what is considered a good drop (how many points) to add to your stocks buy that is with cash from fixed account?


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Re: Just confirming....."stay the course"?

Post by Angelus359 » Sat Aug 22, 2015 7:37 am

I'd call this stocks being on sale, and rebalance
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Re: Just confirming....."stay the course"?

Post by Swampy » Sat Aug 22, 2015 7:56 am

I love "Really Bad Days."
They fall right in line with my long term plans.

If we could have a month's worth of bad days, I'd be ecstatic!
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Re: Just confirming....."stay the course"?

Post by The Wizard » Sat Aug 22, 2015 8:26 am

We're supposed to be answering the OP's question, not raving about how RBDs are really fun.

It seems like the OP might be in a target-date fund in his 401k, based on preceding posts.
If so, then as mentioned, the fund takes care of rebalancing on an approximate daily basis.

If the OP has $$ in four individual funds instead, then he needs to manage the rebalancing. Easiest way to do that is to adjust where contributions from subsequent paychecks go, to get back closer to target percentages...
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Re: Just confirming....."stay the course"?

Post by Penn State Bob » Sat Aug 22, 2015 9:48 am

mpt follower wrote:Time to buy?
+1

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Re: Just confirming....."stay the course"?

Post by CantPassAgain » Sat Aug 22, 2015 10:08 am

For those of you out there with 5% bands, have they broken yet?

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Re: Just confirming....."stay the course"?

Post by Erwin » Sat Aug 22, 2015 10:50 am

My target equity is 30-35%. Looking at August first to today, the change in equality allocation in my portfolio has been minimal.
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Re: Just confirming....."stay the course"?

Post by Sidney » Sat Aug 22, 2015 11:24 am

CantPassAgain wrote:For those of you out there with 5% bands, have they broken yet?
Not even close. But my equity target is 40% and I was a couple points above at the peak - now just under target. Long way down before I hit a band.
I always wanted to be a procrastinator.

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Re: Just confirming....."stay the course"?

Post by ofcmetz » Sat Aug 22, 2015 11:27 am

I just checked last night and my US large cap and International are both below my desired asset allocations. I'm not at a rebalance point yet, but I will direct my new contributions into those two funds to rebalance with new money. If this continues then I'll sell some fixed income and rebalance that into the equity funds per my original plan. I'm going to accelerate some taxable and ROTH contributions that I planned to make later in the year to give me the feeling that I'm doing something now. OP, if I were you I'd be still doing this as well.
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Re: Just confirming....."stay the course"?

Post by Toons » Sat Aug 22, 2015 11:43 am

Stand there and do Nothing :happy
Regain your equilibrium after all this noise fades away :happy
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Re: Just confirming....."stay the course"?

Post by stockcerts » Sat Aug 22, 2015 11:47 am

I have a Vanguard Lifestrategy mutual fund 60% bonds, 40% stocks. I'm a big fan as I'm comfortable with the asset allocation, and no rebalancing is needed. I had some cash on the sidelines as well in my IRA. Yesterday before the close of market I added $50K to my Lifestrategy fund from my cash position. The market may go down further, no one knows. If there are a few more bad days I'll add to my mutual fund with my remaining cash balance.

I hated seeing my overall balance go down, but at the same time I decided to take advantage of the lower price for my retirement mutual fund. I have some co-workers that got very uptight about the past weeks events, but I say...stay the course.

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Re: Just confirming....."stay the course"?

Post by arcticpineapplecorp. » Sat Aug 22, 2015 12:49 pm

The image below shows the U.S. Total stock market index for the year to date is down by what 2.8%? Is this really any thing to freak out about? Yes it may be in correction territory...meaning a 10% loss from the previous high peak reached, but so what?

Image

The image below shows that average intra-year losses were 14% during one of the greatest bull markets in the history of the U.S. market. Would you have bailed out and sold throughout 1980-1999 just because every single year there were losses at some point during the year? If so, you would have given up on earning 17.56% per year from 1980-1999 just from the S&P500 index fund. Losses are imminent. But that doesn't mean they can't erase and become gains later on. This is the reason buy and hold works. Stay the course.

Image

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Re: Just confirming....."stay the course"?

Post by theunknowntech » Sat Aug 22, 2015 12:53 pm

Toons wrote:Stand there and do Nothing
No better advice has ever been given.

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Re: Just confirming....."stay the course"?

Post by Kevin M » Sat Aug 22, 2015 1:31 pm

indexonlyplease wrote:Is it wise to rebalace when the market drops or should you wait and do your annual rebalancing. I asume the market could just back nest week and then you would have to rebalance again.

Also, what is considered a good drop (how many points) to add to your stocks buy that is with cash from fixed account?
I think these both are similar questions--at least the are based on the way I manage my portfolio. Cash is fixed income, just as are bonds and CDs. My top level allocation is stocks and fixed income. So my answer to the second question is the same as my answer to the first.

There is no rebalancing policy that we know will be optimal. I personally think it's more optimal to use rebalancing bands, since this maintains ones AA in a range that has been determined to be appropriate based on ability, willingness and need to take risk. Bands are based on percentage point change in allocation, not on how many points a certain index has dropped (assume you are talking about something like Dow or S&P500).

So with a policy of 70% stocks and 30% bonds/cash/CDs, and a rebalancing band of +/-5% (really 5 percentage points), you would rebalance from bonds/cash/CDs to stocks if your AA hit or dropped below 65/35, and vice versa if it hit or went above 75/25.

It actually can take quite large moves in stocks to hit these rebalancing band edges with a +/-5% band, as explained in this blog post by forum member tfb: +/- 5% Rebalancing Bands. According to tfb, with 70/30 +/-5%, it takes a drop in stocks of about 20% to trigger rebalancing from bonds to stocks. This relationship is not symmetrical, since it requires a rise of 29% in stocks to trigger rebalancing from stocks to bonds.

You can read about different rebalancing strategies here: Rebalancing - Bogleheads.

Some believe that less frequent rebalancing is more optimal, since it takes more advantage of momentum, and avoids the kind of back and forth rebalancing that you mentioned (although in a tax-advantaged account I would consider that a good thing). William Bernstein has mentioned rebalancing no more often than once every four years or so, but I personally think that leaves too much room to deviate too far from the AA I have determined is appropriate for me.

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Re: Just confirming....."stay the course"?

Post by Kevin M » Sat Aug 22, 2015 1:42 pm

CantPassAgain wrote:For those of you out there with 5% bands, have they broken yet?
No. My stock/fixed target is 30/70, and now I'm at 28.65/71.35. As a retiree, using fixed income for living expenses will tend to move that back toward target, but I also may use some cash from a maturing CD to add to international stocks, with a bit more going to emerging markets than to developed markets.

As posted in my last reply, read this blog post by tfb to see how much stocks have to rise or fall to trigger a +/-5% band: +/- 5% Rebalancing Bands.

With an 80/20 portfolio, it requires a fall of 25% or an increase of 42% to trigger +/-5% rebalancing. Unless your entire stock portfolio is in emerging markets, it's unlikely that this has happened.

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Re: Just confirming....."stay the course"?

Post by watchnerd » Sat Aug 22, 2015 2:08 pm

CantPassAgain wrote:For those of you out there with 5% bands, have they broken yet?
Nope, not even halfway there.
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Re: Just confirming....."stay the course"?

Post by Artsdoctor » Sat Aug 22, 2015 2:12 pm

^ Good article. It certainly SEEMS that way as well, in my personal experience.

For most people, I'm going to guess that rebalancing usually takes the form of adding new money to a fallen class, and taking dividends and putting them where they're needed.

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Re: Just confirming....."stay the course"?

Post by OffGridder » Sat Aug 22, 2015 3:08 pm

IPS; Rebalance annually on my birthday, but only if current value is outside 5% rebalancing band.
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Re: Just confirming....."stay the course"?

Post by patrick013 » Sat Aug 22, 2015 3:57 pm

JD2775 wrote:Local news site has a Breaking News red banner flying: "Market hammered for 2nd day. DOW down over 500" and then subtitle:
"Fears over global slowdown hammer US stocks for 2nd day"

I shouldn't run and change anything in my 401k because of this right, right? Dumb question maybe.
Well the market PE dropped from 21 to 19 at the same time they appear
to acknowledge a 5% decrease in EPS. So.......down goes the S&P 500.

But that index has strong earnings still forecast for 2016, not 2015 till Q4.
I'd stay the course. Even put some extra in domestic stocks. That's how,
right.
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Re: Just confirming....."stay the course"?

Post by indexonlyplease » Sun Aug 23, 2015 5:59 am

If you rebalance now with new money or fixed income what happens when the market goes back up this week. Do you now have to rebalance again? Does that make sense to rebalance with every change?

So I just checked my 3 fund portfolio. I am down around 2% around $ 10,000 on the stocks. So I did not trigger the 5%.. If I have $10,000 extra would I add this to the stocks to bring my portfolio back up to the 60/40.

How would this help me and is it worth to add the money? Also, if the market goes back up, do I now sell and put the money back in cash.


Just asking because I never rebalance before and now plan on doing it with the 3 fund portfolio. I thought once a year would be ok.


Cliff

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Re: Just confirming....."stay the course"?

Post by indexonlyplease » Sun Aug 23, 2015 6:26 am

Just read the article Kevin M. posted.

I belive there is nothing to do after reading it. Even looks like once a year of rebalacing may not needed.



Cliff

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Re: Just confirming....."stay the course"?

Post by packet » Sun Aug 23, 2015 7:59 am

indexonlyplease wrote:...I belive there is nothing to do after reading it. Even looks like once a year of rebalacing may not needed. ...
Same here (80/20).
I was all excited that I might get to do some re-balancing... but I looked and things had barely moved (79/21)... :(

After reading that post, I would need a 25% drop in equities (assuming zero movement in bonds) to require a re-balance. Not to mention the 42% rise required!

oh well, back to boring.

To OP... yes, stay the course. As long as you have a good course set (Investment Policy Statement).

:beerCheers,
packet
First round’s on me.

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