A 4-5% rebalance to bonds barely budges risk/return

[Admiral]

Like many, due to this run up I'm now 5% from my target asset allocation (or 75/25 instead of my target 70/30).

Interestingly, using Vanguard's Portfolio Tester tool, if I exchange $35k worth of TSM for $35k of Total Bond, here are the results:

Your current allocation
Average return 9.3%
Best year 43.5% (1933)
Worst year –33.0% (1931)
Years with a loss 22 of 90 (24.4%)

Your hypothetical allocation
Average return 9.2%
Best year 41.4% (1933)
Worst year –31.1% (1931)
Years with a loss 22 of 90 (24.4%)

In other words, a 5% move to bonds results in some very, very small changes in terms of loss and gain, and overall risk (caveat: history doesn't always repeat. Though it does rhyme.)

This has surprised me and made me reconsider if this is even worth it. I am 11-12 years from FI, age 46.

Thoughts?

[simplesimon]

What's considered meaningful to you? Where do you draw the line?

[livesoft]

You might enjoy looking at the performances of the various Vanguard LifeStrategy funds for the past 3-, 5-, 10-years by using morningstar.com to compare them on the Performance tab.

[Admiral]

What's considered meaningful to you? Where do you draw the line?

Well I think, in general, a .1 percent delta in average return is a rounding error. Though the difference in the worst possible year is a bit more meaningful.

livesoft: to what end?

[simplesimon]

It's important to stick to a plan.

[Alexa9]

Rebalancing is helpful in a turbulent but flat market or before a bear market. It is not helpful in a strong bull market. This is why many people choose the Lifestrategy Funds to auto rebalance for them so they don't have to buy boring bonds with their hot stocks. The rebalancing bonus is somewhat exaggerated. It is more of a way to maintain your risk profile than to increase gains.

[livesoft]

livesoft: to what end?

You will see that asset allocation does not matter that much.

[sambb]

past performance has no bearing on future results, i dont know if it matters what the difference was in the past

[Pinotage]

livesoft: to what end?

You will see that asset allocation does not matter that much.

Agree, especially if your new contributions are still a significant portion of your total portfolio.

I do *suspect* that a 5% move from 75/25 to 70/30 is less impactful than the same % move at an overall lower equity allocation, say 30/70 -> 25/75. Have not run any confirmatory analysis and fully acknowledge I could be wrong.

[Garco]

If you're really concerned, then you can consider a larger rebalance. As I moved to retirement in my late 60's, I definitely did that b/c my income flow depended increasingly on returns from my investments. But a dinky 4-5% rebalance while you're still employed and in your 40's doesn't change your risk/return profile meaningfully now. Of course if the market makes a sharp reversal, we will all examine what we could have done to minimize the loss. But your best course now is probably to do nothing.

[Admiral]

past performance has no bearing on future results, i dont know if it matters what the difference was in the past

This seems to overstate it a bit. It's imperfect but it's all we've got. SOMETHING has to drive our asset allocation strategies and if not historical returns, then what? Phases of the moon?

[delamer]

There is a reason that these Vanguard charts show allocation changes in increments of 10 percentage points; differences much smaller than that don’t affect returns significantly:

https://personal.vanguard.com/us/insigh ... llocations

[JBTX]

Like many, due to this run up I'm now 5% from my target asset allocation (or 75/25 instead of my target 70/30).

Interestingly, using Vanguard's Portfolio Tester tool, if I exchange $35k worth of TSM for $35k of Total Bond, here are the results:

Your current allocation
Average return 9.3%
Best year 43.5% (1933)
Worst year –33.0% (1931)
Years with a loss 22 of 90 (24.4%)

Your hypothetical allocation
Average return 9.2%
Best year 41.4% (1933)
Worst year –31.1% (1931)
Years with a loss 22 of 90 (24.4%)

In other words, a 5% move to bonds results in some very, very small changes in terms of loss and gain, and overall risk (caveat: history doesn't always repeat. Though it does rhyme.)

This has surprised me and made me reconsider if this is even worth it. I am 11-12 years from FI, age 46.

Thoughts?

In 2008 100% stocks lost about 50% top to bottom. A 60/40 or 50/50 blend lost about half that.

That is in line with your results. A 5% drop in equities resulted in 2% points less worse loss.

It seems fairly intuitive. For every percentage point less in equities you reduce the downside about a half percent.

At what point does rebalancing become “worth it”?

[dbr]

1. Rebalancing is for the purpose of keeping in the ballpark of where one wants to be. It is true that 5% is perhaps barely noticeable threshold.

2. There are probably only three asset allocations worth considering most of the time for most people 75/25, 50/50, 25/75. If someone wants to adopt 100/0, then if it suits, why not? Even 0/100 is not impossible in some cases. If someone wants that 75 and 25 to be 70 and 30, then that is the same thing.

[randomizer]

Stick to the plan. Keep emotions out of it. It's too easy to underappreciate the risk when you're buoyed by a 10-year bull market.

[KlangFool]

OP,

What is the point of having a plan that you cannot execute?

A) If your plan call for rebalancing at 5%, do it.

B) If you are not willing to commit to a 5% rebalancing plan, switch to a plan with a bigger band.

C) One of the reasons why I put 40% of my portfolio into Wellington fund is it rebalances for me whether I like it or not. Because of that, the market has to change by 30% before I have to rebalance.

KlangFool

[jebmke]

My re-balancing is done to maintain risk level not adjust returns. I don't even look at historical or expected returns.

[Sandtrap]

Some thoughts and helpful questions to ask yourself and answer to yourself that might be helpful.

You can rebalance to 70/30
. . .
or you can leave it alone at 25/75
. . .
if you leave it alone then you are changing your target allocation, (IPS you have. . . right?)

But, if you rebalance then you are following your IPS statement (plan).

So. . do you want to modify your IPS statement?
and, how often are you going to modify it?

What is your target allocation 10 years from now per your IPS Statement?

Are you moving toward that or away from that?

Define General Investment Goals and Objectives (what is your plan?)
https://www.bogleheads.org/wiki/Invest ... statement

mahalo,
j

[am]

Is there anything wrong with not rebalancing at all? Losing 30 versus 40 percent of piortfolio would be just as painful but I would keep buying like I did in 2008 (although now I have 10x more).

[dbr]

Is there anything wrong with not rebalancing at all? Losing 30 versus 40 percent of piortfolio would be just as painful but I would keep buying like I did in 2008 (although now I have 10x more).

If you never reblance then eventually over time the highest returning and riskiest assets will dominate the portfolio. That would mean, for example, retiring with perhaps 95/5 stock over bond portfolio. If that is what one wants, then by chance one would get that, but it would be good because it is the right asset allocation and not because it is good to not rebalance. There is discussion to be had that retirees might benefit from an asset allocation that increases in stocks as one ages. Not rebalancing might trend in that direction.

A point of confusion is that if the result of not rebalancing is a more risky portfolio over time that would also be a higher returning portfolio over time. That does not mean not rebalancing produces more return; it means taking more risk produces more return.

[marklar13]

Is there anything wrong with not rebalancing at all? Losing 30 versus 40 percent of piortfolio would be just as painful but I would keep buying like I did in 2008 (although now I have 10x more).

I would say there is nothing wrong with it as long as:

1. It is part if your documented plan... and presumably it makes sense for your situation

2. You are sure you won't change your mind when a bear market comes and shift away from equities at exactly the wrong time (sell low out of fear).

[dbr]

There is also the concept of rebalancing out of stocks too high but not rebalancing in to stocks too low. The general trend of that strategy is to bias away from risk and also reduce return.

[kenyan]

I'm not sure why you say that 30% vs 40% of a portfolio loss would be just as painful. If I had a million dollars (cue the music), and then during a crash it fell to $600k, I'm sure I'd much rather have $700k.

For the OP, the question is whether you were wrong when you made your plan to be at 70/30. It sounds more to me like there's recency bias at work, and you're looking for excuses to keep riding the equity train than any profound determination that you were wrong in your original assessment.

Stick to your plan if you want it to be effective.

FWIW, I'm at 70/30, recently found myself at close to 75/25 and hit a rebalancing trigger. I bought a bunch of bonds.

[ThePrince]

Like many, due to this run up I'm now 5% from my target asset allocation (or 75/25 instead of my target 70/30).

Interestingly, using Vanguard's Portfolio Tester tool, if I exchange $35k worth of TSM for $35k of Total Bond, here are the results:

Your current allocation
Average return 9.3%
Best year 43.5% (1933)
Worst year –33.0% (1931)
Years with a loss 22 of 90 (24.4%)

Your hypothetical allocation
Average return 9.2%
Best year 41.4% (1933)
Worst year –31.1% (1931)
Years with a loss 22 of 90 (24.4%)

In other words, a 5% move to bonds results in some very, very small changes in terms of loss and gain, and overall risk (caveat: history doesn't always repeat. Though it does rhyme.)

This has surprised me and made me reconsider if this is even worth it. I am 11-12 years from FI, age 46.

Thoughts?

Stop second-guessing your plan and pull the trigger on the trade.

[ThePrince]

past performance has no bearing on future results, i dont know if it matters what the difference was in the past

This seems to overstate it a bit. It's imperfect but it's all we've got. SOMETHING has to drive our asset allocation strategies and if not historical returns, then what? Phases of the moon?

+1

[am]

I'm not sure why you say that 30% vs 40% of a portfolio loss would be just as painful. If I had a million dollars (cue the music), and then during a crash it fell to $600k, I'm sure I'd much rather have $700k.

When the next bear hits, I don’t think being 70/30 versus 80/20 would matter for me. It will be painful either way with losses in the hundreds of thousands. But I am a high income accumulator and would keep buying like I did in 2008. Maybe recency bias subconsciously, but I am having a real hard time trading into bonds knowing I’ll be investing for decades. Seems like the only payoff for rebalancing is behavioral but, like I said, I don’t think 70/30 or 80/20 would matter much on the downside.

[dbr]

past performance has no bearing on future results, i dont know if it matters what the difference was in the past

This seems to overstate it a bit. It's imperfect but it's all we've got. SOMETHING has to drive our asset allocation strategies and if not historical returns, then what? Phases of the moon?

+1

Of course. There is past performance as in the long term assessment of the risks and returns of various asset classes and there is the meaningless choosing of one fund over another based on last year's return. I guess there is enough of the latter that people need to be warned against. It is still true that we rely on the former for decision making. Since the assessment includes risk it would seem clear that one is attending to how to make investing decisions in the presence of variability of results. Assessments that do not include risk and ignore variability won't be very helpful.

[JPH]

Is there anything wrong with not rebalancing at all? Losing 30 versus 40 percent of piortfolio would be just as painful but I would keep buying like I did in 2008 (although now I have 10x more).

I did this throughout my entire career and accumulation phase. I had read that asset allocation is the most important factor in determining return, but I had no idea what the "best" allocation was so I ignored it. I discovered Bogleheads very near to my retirement and only then discovered that AA is about controlling risk. I did try to be diversified and didn't try to time the market. I had my retirement account with an insurance company, and once in a while I changed things up on the advice of the salesman/advisor. I still have a broad tolerance for the equities/fixed income ratio and am never sure if it really matters much.

[KlangFool]

I'm not sure why you say that 30% vs 40% of a portfolio loss would be just as painful. If I had a million dollars (cue the music), and then during a crash it fell to $600k, I'm sure I'd much rather have $700k.

When the next bear hits, I don’t think being 70/30 versus 80/20 would matter for me. It will be painful either way with losses in the hundreds of thousands. But I am a high income accumulator and would keep buying like I did in 2008. Maybe recency bias subconsciously, but I am having a real hard time trading into bonds knowing I’ll be investing for decades. Seems like the only payoff for rebalancing is behavioral but, like I said, I don’t think 70/30 or 80/20 would matter much on the downside.

am,

Only if you are employed. What if you lose your job?

KlangFool

[randomguy]

1. Rebalancing is for the purpose of keeping in the ballpark of where one wants to be. It is true that 5% is perhaps barely noticeable threshold.

2. There are probably only three asset allocations worth considering most of the time for most people 75/25, 50/50, 25/75. If someone wants to adopt 100/0, then if it suits, why not? Even 0/100 is not impossible in some cases. If someone wants that 75 and 25 to be 70 and 30, then that is the same thing.

I think you can justify 80/20, 70/30, 60/40,40/60, and 30/70 just as much as any of those. What isn't worth while is debating if you should be 75/25 or 70/30. That difference isn't large enough.

Personally I am not sure I have ever sold to rebalance. Between incoming cash/dividends I rarely stray more than a couple of percentage points from where I want to be. Granted I was 100/10 in 2008:). Now adays at a conservative 70/30, I have to imagine I would have had to sold bonds to buy stocks.

[am]

I'm not sure why you say that 30% vs 40% of a portfolio loss would be just as painful. If I had a million dollars (cue the music), and then during a crash it fell to $600k, I'm sure I'd much rather have $700k.

When the next bear hits, I don’t think being 70/30 versus 80/20 would matter for me. It will be painful either way with losses in the hundreds of thousands. But I am a high income accumulator and would keep buying like I did in 2008. Maybe recency bias subconsciously, but I am having a real hard time trading into bonds knowing I’ll be investing for decades. Seems like the only payoff for rebalancing is behavioral but, like I said, I don’t think 70/30 or 80/20 would matter much on the downside.

am,

Only if you are employed. What if you lose your job?

KlangFool

Definitely a risk but I am an MD, wife has income to cover relatively low fixed expenses, no debt. Sometimes I think I sgould be 90-100 stocks.

[nedsaid]

I have been doing much smaller rebalance moves than 4%-5%. I have been in a program of mild rebalancing from stocks to bonds since July 2013. I have 66% stocks now but had I let things ride, my guess is that my portfolio would be at about 75% stocks now. I have de-risked a bit, I was at 69% stocks when I started this program and I am at 66% stocks now. My largest rebalance has been 1% of my portfolio, and I have done that twice. But mostly, I have been running in place. Small amounts here and there really add up. Pretty much, I am doing this as risk control.

[indexonlyplease]

I keep thinking if you have enough why take the risk. If you are still working on the FI you will need to take more risk to get there. I have beat myself up on the AA. But once I relized I have enough I lowed the AA to reduce the risk. I will not make as much but who cares, I will not lose as much.

So, I still think the risk is based on getting to the FI. Ok course within reason that allows you to sleep at night.

[Agggm]

livesoft: to what end?

You will see that asset allocation does not matter that much.

Asset allocation explains about 90% of portfolio variability. That seems like "much" to me.

[livesoft]

Asset allocation explains about 90% of portfolio variability. That seems like "much" to me.

That's an idea from a misquote of the study that people tend to be aware of. I think the misrepresentation has taken on a life of its own. Variability in a portfolio is just how much it goes up and down and not what it's average annual performance over years might be. Think of it this way: Two completely different portfolios could have the same compound annual growth rate, but get there by many different ways. For instance, one portfolio could be all in CDs while the other can be all stocks. Yet can they end up at the same final number. One can probably say though that the all-CD portfolio didn't have much variability over the years, while the all-stock portfolio could have gone up and down and down and up to get to the same final value.

Here is something to read: https://blogs.cfainstitute.org/investor ... llocation/

It’s clear that the BHB study has been both poorly understood and widely misrepresented. In 2010 Roger G. Ibbotson, in “The Importance of Asset Allocation,” noted an unpublished 1998 study by Jennifer A. Nuttall and John Nuttall that found 49 of 50 surveyed citations of the BHB study to be inaccurate!

Yes, asset allocation matters, but it may not matter that much when one looks at CAGR.

[aristotelian]

I am 75/25 at age 42. I am not surprised that 5% difference in allocation doesn't have much effect.

70/30 is believed to reduce annual returns by about 10% in exchange for reducing volatility by 30% compared to 100% stock. It stands to reason that increasing stock by only 5% is going to incrementally increase risk/return by a fraction of that difference.

[OldSport]

I've read that 70/30 to 75/25 is the ideal AA for a long-term retirement portfolio to last indefinitely with a 3.5% SWR. Higher bond % are either for those with lower risk tolerances or those who want to spend larger % of portfolio over a shorter period of time. For example, someone that retired at 75 that only needs the portfolio to last 20 years, where 3.5% WR is not enough would want higher bonds. Or a 529 where the funds are spent over 4 years, sometime up to 8 years would want much higher bonds.

[OldSport]

I've also read somewhere that it might make sense to have AA down to 60/40 or 50/50 for the first few years of retirement to minimize sequence of return risk and then glide back up to 70/30 indefinitely I'm not sure which is the better strategy.

This is assuming someone with high risk tolerance trying to mathematically maximize chance for long-term portfolio success.

[Agggm]

Asset allocation explains about 90% of portfolio variability. That seems like "much" to me.

That's an idea from a misquote of the study that people tend to be aware of. I think the misrepresentation has taken on a life of its own. Variability in a portfolio is just how much it goes up and down and not what it's average annual performance over years might be. Think of it this way: Two completely different portfolios could have the same compound annual growth rate, but get there by many different ways. For instance, one portfolio could be all in CDs while the other can be all stocks. Yet can they end up at the same final number. One can probably say though that the all-CD portfolio didn't have much variability over the years, while the all-stock portfolio could have gone up and down and down and up to get to the same final value.

Here is something to read: https://blogs.cfainstitute.org/investor ... llocation/

It’s clear that the BHB study has been both poorly understood and widely misrepresented. In 2010 Roger G. Ibbotson, in “The Importance of Asset Allocation,” noted an unpublished 1998 study by Jennifer A. Nuttall and John Nuttall that found 49 of 50 surveyed citations of the BHB study to be inaccurate!

Yes, asset allocation matters, but it may not matter that much when one looks at CAGR.

Here's my source: Vanguard, The Global Case for Strategic Asset Allocation (Wallick et al., 2012).
Agree to disagree. I rest my case lol.

[rkhusky]

In other words, a 5% move to bonds results in some very, very small changes in terms of loss and gain, and overall risk (caveat: history doesn't always repeat. Though it does rhyme.)

This has surprised me and made me reconsider if this is even worth it. I am 11-12 years from FI, age 46.

Thoughts?

Once you've determined your AA, how many seconds does it take to rebalance? My question would be - why not rebalance? Is it really that burdensome? Is the recent stock market run tempting you to reach for more?

[rkhusky]

I've also read somewhere that it might make sense to have AA down to 60/40 or 50/50 for the first few years of retirement to minimize sequence of return risk and then glide back up to 70/30 indefinitely I'm not sure which is the better strategy.

This is assuming someone with high risk tolerance trying to mathematically maximize chance for long-term portfolio success.

As a counterpoint, Vanguard's Target Retirement funds hit 50/50 (stock/bond) at their target date and then glide to 30/70 over the next 7 years. I imagine their glide path is meant for the average investor and that some have atypical needs. Being able to articulate a good argument for why one is not following the expert advice of Vanguard (and most of the other large target date providers who have similar glide paths) would seem to me to be a useful exercise to make sure, for one, that you are not overly influenced by recency bias.

[H-Town]

Like many, due to this run up I'm now 5% from my target asset allocation (or 75/25 instead of my target 70/30).

Interestingly, using Vanguard's Portfolio Tester tool, if I exchange $35k worth of TSM for $35k of Total Bond, here are the results:

Your current allocation
Average return 9.3%
Best year 43.5% (1933)
Worst year –33.0% (1931)
Years with a loss 22 of 90 (24.4%)

Your hypothetical allocation
Average return 9.2%
Best year 41.4% (1933)
Worst year –31.1% (1931)
Years with a loss 22 of 90 (24.4%)

In other words, a 5% move to bonds results in some very, very small changes in terms of loss and gain, and overall risk (caveat: history doesn't always repeat. Though it does rhyme.)

This has surprised me and made me reconsider if this is even worth it. I am 11-12 years from FI, age 46.

Thoughts?

Rome isn't built over night. The premium of buy low/sell high is a result of rebalancing winning funds to losing funds over a long period of time. I would just do it according to your plan like Klangfool suggested above. I can't stress enough the beauty of having an IPS and stick to the plan.

[CnC]

Honestly anything from 60/40 to 90/10 are basically the same. You are talking about average growth differences of ±1% between a 100/0 and a 60/40 portfolio.


Bonds are to hedge bets, they are for when the risk of loss outweighs the benifits of gain.


Squeamish stomach risk of loss outweighs the benifits of gain. = Add bonds

Near retirement and beginning of withdrawal. risk of loss outweighs the benifits of gain. =Add bonds.


That's it there is no more magic to it than that.

[Noobvestor]

I rebalanced today - just 62/38 back to 60/40. It's not called for in my IPS, but permitted. As I see it, that's 2% of my portfolio that is now on the 'safe' side of things. Feels good looking at the dollar value - 'whew, I don't have to worry about that money' - even though it's just a small percent.