Psychology of re-balancing during small portfolio drop

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olliema
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Psychology of re-balancing during small portfolio drop

Post by olliema » Tue Dec 03, 2019 8:16 am

Looking for feedback from seasoned investors who have re-balanced their portfolio when it was slightly off peak value.

For example, re-balancing your portfolio if it was valued 1% less on the day you were ready to re-balance than from the day you planned the re-balance, (a few trading days prior).

I just had this come up and chose to press forward, my reasoning being a 1% drop does not change the validity of my new portfolio mix, nor will it materially change when I can retire or how much money I will have in retirement, but delaying a re-balance or trying to chase a market high could.

The re-balance details are here (viewtopic.php?f=1&t=296384)

Curious how others have handled this scenario - thanks.

retiredjg
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Re: Psychology of re-balancing during small portfolio drop

Post by retiredjg » Tue Dec 03, 2019 8:36 am

You apparently have decided on the band method of rebalancing. When you see that your portfolio has wandered outside the bands that you set, your plan tells you to rebalance.

Peak value and being off peak value are not relevant.

livesoft
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Re: Psychology of re-balancing during small portfolio drop

Post by livesoft » Tue Dec 03, 2019 9:05 am

If you do it enough times, then it won't bother you. Habituation does wonders. But you could also be flexible as these rebalancing decisions usually don't affect outcomes unless you have perfect market timing.
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retiredjg
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Re: Psychology of re-balancing during small portfolio drop

Post by retiredjg » Tue Dec 03, 2019 9:10 am

Why do you think "small portfolio drop" or "slightly off peak value" makes a difference?

If your portfolio was worth $10,000 a few days ago and it is now worth $9,900, why does that make a difference?

Sounds like you may be "anchoring" to the peak value and thinking that is the "real" value of your portfolio. Even when it is not.

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goingup
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Re: Psychology of re-balancing during small portfolio drop

Post by goingup » Tue Dec 03, 2019 9:21 am

From your prior post it looks like you've decided to change to a 70/30 portfolio from a 90/10 one. That's not really a rebalance; it's changing your asset allocation. No, I wouldn't be dissuaded by this current dip in the market. Make your changes.

retiredjg
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Re: Psychology of re-balancing during small portfolio drop

Post by retiredjg » Tue Dec 03, 2019 10:01 am

Agreed. If you are actually changing your asset allocation (stock to bond ratio), that is NOT a rebalance at all. It is a re-allocation and this is not done using bands.

Nevertheless, the answer is the same. "Off peak value" is not relevant. Just sell some stocks and buy some bonds to get to your chosen ratio.

CoastalWinds
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Re: Psychology of re-balancing during small portfolio drop

Post by CoastalWinds » Tue Dec 03, 2019 10:24 am

Do you re-balance just enough to get back within the band, or do you re-balance back to the midpoint of the band?

For example, if your target equities is 80% +/- 5%, and your portfolio drifts to 74%, do you rebalance to 75% or to 80%?

retired@50
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Re: Psychology of re-balancing during small portfolio drop

Post by retired@50 » Tue Dec 03, 2019 11:36 am

livesoft wrote:
Tue Dec 03, 2019 9:05 am
If you do it enough times, then it won't bother you. Habituation does wonders. But you could also be flexible as these rebalancing decisions usually don't affect outcomes unless you have perfect market timing.
+1
The trouble most folks have is that they wait too long, which makes it seem like a bigger decision. You could try once per year, even if you're not outside of your perfect asset allocation by very much. That might help develop the re-balancing muscles you need.

Regards,
This is one person's opinion. Nothing more.

livesoft
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Re: Psychology of re-balancing during small portfolio drop

Post by livesoft » Tue Dec 03, 2019 12:00 pm

retired@50 wrote:
Tue Dec 03, 2019 11:36 am
That might help develop the re-balancing muscles you need.
muscles ... I like it.
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JaySayms
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Re: Psychology of re-balancing during small portfolio drop

Post by JaySayms » Tue Dec 03, 2019 4:47 pm

I add new money every month. I usually use it and dividends, to nudge my portfolio back to "center". Using this method I almost never have had to rebalance as my portfolio typically doesn't drift outside my rebalance bands (5%).

Seems to work. Somebody else can chime in and tell me I'm all wet....

Flyer24
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Re: Psychology of re-balancing during small portfolio drop

Post by Flyer24 » Tue Dec 03, 2019 4:51 pm

JaySayms wrote:
Tue Dec 03, 2019 4:47 pm
I add new money every month. I usually use it and dividends, to nudge my portfolio back to "center". Using this method I almost never have had to rebalance as my portfolio typically doesn't drift outside my rebalance bands (5%).

Seems to work. Somebody else can chime in and tell me I'm all wet....
I do the same thing. My 401K funds are directed into a brokerage account. I just buy whatever is needed to balance twice a month.

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grabiner
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Re: Psychology of re-balancing during small portfolio drop

Post by grabiner » Tue Dec 03, 2019 11:04 pm

JaySayms wrote:
Tue Dec 03, 2019 4:47 pm
I add new money every month. I usually use it and dividends, to nudge my portfolio back to "center". Using this method I almost never have had to rebalance as my portfolio typically doesn't drift outside my rebalance bands (5%).

Seems to work. Somebody else can chime in and tell me I'm all wet....
I have done the same thing. My taxable account is all stock, so all my new taxable investments go to stock, but the choice of stock funds keeps things in balance. If I am under my target weight in international stock, the new investment goes to an international stock fund. I do a full rebalance every January when I make my IRA contribution. And I do get my bond investments when needed, because part of my employer plan contribution goes to bonds, so that if the market doesn't move, my stock/bond ratio will stay the same all year.

I have only hit rebalancing bands twice, with too much in bonds in October 2008, and too much in REITs in September 2009 after I did my annual rebalance near the market bottom.
Wiki David Grabiner

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