5/25 and Annual Rebalancing -> Recommendation

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Topic Author
KlangFool
Posts: 16639
Joined: Sat Oct 11, 2008 12:35 pm

5/25 and Annual Rebalancing -> Recommendation

Post by KlangFool » Mon Mar 16, 2020 9:28 am

Hi,

This is an unusual time. As per my IPS, I do both 5/25 and annual rebalancing on the first weekend of August. My 5/25 band based rebalancing only triggered once every few years. Now, it looks like it may be triggered twice in a year.

My basic information

A) AA = 60/40.

B) Portfolio size of 21 times annual expense

C) An emergency fund of 1 1/2 times annual expense.

D) The fIxed income portion of the portfolio = 9 times annual expense.

My IPS says that I would rebalace until my Fixed income portion is 5 times annual expense.

My current thinking is

Rebalance if the 5/25 band trigger this week. Then, rebalance again during my annual rebalancing time.

My question is

What do I do if the 5/25 trigger twice between now and August? Do I rebalance 3 times until I reach my limit?

The further complication here is I may lose my job in June if the economic environment does not improve.

Please provide your opinion and your thinking process behind your opinion.

KlangFool

furwut
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Re: 5/25 and Annual Rebalancing -> Recommendation

Post by furwut » Mon Mar 16, 2020 9:33 am

The further complication here is I may lose my job in June if the economic environment does not improve.
I would ensure a reasonable amount of cash/ low volatility investments are present to ensure basic needs are met and then, and only then, consider rebalancing into stocks.

Topic Author
KlangFool
Posts: 16639
Joined: Sat Oct 11, 2008 12:35 pm

Re: 5/25 and Annual Rebalancing -> Recommendation

Post by KlangFool » Mon Mar 16, 2020 9:39 am

furwut wrote:
Mon Mar 16, 2020 9:33 am
The further complication here is I may lose my job in June if the economic environment does not improve.
I would ensure a reasonable amount of cash/ low volatility investments are present to ensure basic needs are met and then, and only then, consider rebalancing into stocks.
furwut,

1) I have 1 1/2 year of the emergency fund now. It probably increases to 2 years by June.

2) Even after rebalancing, I would have another 5 years in fixed income.

So, with 5 + 2 = 7 years, it should be more than enough.

KlangFool

Pikel
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Joined: Sat Jan 04, 2020 9:55 am

Re: 5/25 and Annual Rebalancing -> Recommendation

Post by Pikel » Mon Mar 16, 2020 9:44 am

Broadly, 10 year expected returns are not too different at 60/40 or 50/50. Put your monthly/paycheck contributions into 100% equity and postpone rebalancing until August if that helps you sleep at night.

MnD
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Re: 5/25 and Annual Rebalancing -> Recommendation

Post by MnD » Mon Mar 16, 2020 9:45 am

Seems like a lot of fear/speculation about having to rebalance again, given you are only rebalancing for the first threshold likely this week.
If you have a band rebalancing IPS then you would rebalance twice if need be.

I rebalanced twice in 2008/09 and the 2nd time was a lot harder to do than the first one but in retrospect it was a few days from the bottom so very profitable. Not sure what your annual rebalance on top of bands is trying to accomplish. Seems like needless complexity and transactions.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

deikel
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Re: 5/25 and Annual Rebalancing -> Recommendation

Post by deikel » Mon Mar 16, 2020 9:48 am

If you are at risk of loosing your job AND expect to tap into your funds - you should not re balance and preserve the cash in bonds for your personal emergency.

If either is a very low probability, I think you should follow your ISP and re-balance as often as it is calling for - does not matter how many times that might be. Your emergency fund seems to suggest you will be fine.

I don't have the reference anymore, but I read a while back a study of re-balancing 1x a year vs 4x a year and the 4x a year was slightly more effective then 2x and better then 1x. Fixed dates and in hindsight (backtesting) of course, but suggesting that multiple times a year makes sense.
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.

dbr
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Re: 5/25 and Annual Rebalancing -> Recommendation

Post by dbr » Mon Mar 16, 2020 9:54 am

I would not have both time triggered and a bands triggered scheme. To me the bands trigger is most logical. That doesn't mean you have to look twice a day or something. In practice you can still just check once a month even when there are big changes like now.

dknightd
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Re: 5/25 and Annual Rebalancing -> Recommendation

Post by dknightd » Mon Mar 16, 2020 10:03 am

KlangFool wrote:
Mon Mar 16, 2020 9:28 am
Hi,

This is an unusual time. As per my IPS, I do both 5/25 and annual rebalancing on the first weekend of August. My 5/25 band based rebalancing only triggered once every few years. Now, it looks like it may be triggered twice in a year.

My basic information

A) AA = 60/40.

B) Portfolio size of 21 times annual expense

C) An emergency fund of 1 1/2 times annual expense.

D) The fIxed income portion of the portfolio = 9 times annual expense.

My IPS says that I would rebalace until my Fixed income portion is 5 times annual expense.

My current thinking is

Rebalance if the 5/25 band trigger this week. Then, rebalance again during my annual rebalancing time.

My question is

What do I do if the 5/25 trigger twice between now and August? Do I rebalance 3 times until I reach my limit?

The further complication here is I may lose my job in June if the economic environment does not improve.

Please provide your opinion and your thinking process behind your opinion.

KlangFool
I suggest you keep with your plan. That is why you have a plan
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.

Streptococcus
Posts: 377
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Re: 5/25 and Annual Rebalancing -> Recommendation

Post by Streptococcus » Mon Mar 16, 2020 10:37 am

KlangFool wrote:
Mon Mar 16, 2020 9:39 am
furwut wrote:
Mon Mar 16, 2020 9:33 am
The further complication here is I may lose my job in June if the economic environment does not improve.
I would ensure a reasonable amount of cash/ low volatility investments are present to ensure basic needs are met and then, and only then, consider rebalancing into stocks.
furwut,

1) I have 1 1/2 year of the emergency fund now. It probably increases to 2 years by June.

2) Even after rebalancing, I would have another 5 years in fixed income.

So, with 5 + 2 = 7 years, it should be more than enough.

KlangFool
If I were you, I would just stick to the IPS. Rebalance as many times as needed till you reach your limit.
And I understand that the prospect of losing your job adds a higher level of anxiety. But you already have a pretty solid security plan, which is to stop rebalancing at some point and have 7 years of “e-fund”. That is way more security blanket than what I have.

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siamond
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Re: 5/25 and Annual Rebalancing -> Recommendation

Post by siamond » Mon Mar 16, 2020 11:40 am

OP, just stick to your plan. Now is just about the worst possible time to question yourself and make on-the-fly decisions.

You may want to take a note to reflect on the topic later on, when things will have calmed down. I don't see any reason why, but if this troubled you, then it might be a good thing to do. Live and learn!

junior
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Re: 5/25 and Annual Rebalancing -> Recommendation

Post by junior » Mon Mar 16, 2020 11:54 am

You should probably stick to your plan with the qualifier that if it helps you sleep at night, you are welcome not to rebalance or call off rebalancing for the next two years, or whatever.

You might be slightly wealthier if you sell bonds to buy stock on discount when you rebalance, but only you can decide whether it's worth the stress (if you are stressed).

Topic Author
KlangFool
Posts: 16639
Joined: Sat Oct 11, 2008 12:35 pm

Re: 5/25 and Annual Rebalancing -> Recommendation

Post by KlangFool » Mon Mar 16, 2020 12:10 pm

Folks,

Thanks for all the responses.

KlangFool

Topic Author
KlangFool
Posts: 16639
Joined: Sat Oct 11, 2008 12:35 pm

Re: 5/25 and Annual Rebalancing -> Recommendation

Post by KlangFool » Mon Mar 16, 2020 7:18 pm

Folks,

So, my 5/25 band triggered today. I will be rebalancing from the bond to the stock tomorrow. The amount that I need to be rebalanced from the bond to the stock is only around 5% of my portfolio.

KlangFool

Dontridetheindexdown
Posts: 124
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Re: 5/25 and Annual Rebalancing -> Recommendation

Post by Dontridetheindexdown » Mon Mar 16, 2020 8:37 pm

I have greatest respect for you, KlangFool.

Our re-balance band is somewhat higher.

We re-balanced from 67% equity/33% stable assets on 01 DEC 19 to 55/45 by 01 JAN 20.

Due to market movement we were at 53/47 01 FEB 20, 50/50 01 MAR 20, and 49/51 equity/stable assets last weekend (15 MAR 20).

We typically only check once/month but atypically we did a mid-month check.

We continue to automatically reinvest dividends every month, weighted average 6.1% yield into equities, and 2.12% yield into stable assets.

Our equities are far more concentrated than typical (don't ask) and our stable assets are indeed stable (Treasuries of various flavors, and cash).

We would be comfortable with 33% equity/67% stable assets, or even 20/80 during a prolonged depression (let us hope that is not in the future).

At the same time, we believe equities are essential for protection against inflation, and because they are the only passive instrument to grow wealth.

As always, your mileage may vary.

Wishing you all the best!

Topic Author
KlangFool
Posts: 16639
Joined: Sat Oct 11, 2008 12:35 pm

Re: 5/25 and Annual Rebalancing -> Recommendation

Post by KlangFool » Fri Mar 20, 2020 4:36 pm

Folks,

Just an update.

1) I rebalance 1/2 year of expense from Intermediate-Term Treasury to stock index earlier this week.

2) I rebalance 1/2 year of expense from the total bond index fund to SmallCapValue today.

3) I have 1 1/2 year of expense in EF and 8 years of expense in the bond

4) My current project completed in June 2020. My follow-on project had been suspended indefinitely. So, my likelihood to be be laid off after June 2020 increases.

I need all the prayers that I can get.

KlangFool

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WoodSpinner
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Re: 5/25 and Annual Rebalancing -> Recommendation

Post by WoodSpinner » Fri Mar 20, 2020 8:06 pm

KlangFool,

Take a look at this post on a similar topic. I rebalanced from VGIT —> VTI last week. I have held off on rebalancing VXUS since it seems to cross and in-cross my thresholds (5/20) almost every day.

I have a similar dilemma on when next to rebalance ...

My fingers are crossed and you have my best wishes. I think you will be just fine—you are one of the most prepared people I have read on the BH forum.

WoodSpinner

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