Bogleheads: Asset-Allocation and Rebalancing

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Taylor Larimore
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Bogleheads: Asset-Allocation and Rebalancing

Postby Taylor Larimore » Thu Aug 11, 2016 5:17 pm

Bogleheads:

S&P 500, Dow, Nasdaq Hit Records Together First Time Since 1999

This is today's headline on Bloomberg Finance. It means it is time to re-think and perhaps rebalance to our desired portfolio stock/bond allocation.

As most Bogleheads know, it is our stock/bond allocation, more than anything else, that determines our expected risk and expected return. A good rule of thumb is that we should expect our portfolio to decline at least 50% of our stock allocation in the next bad bear market.

Now may be a good time to set and maintain (within 10%) our desired stock/bond allocation.

With an appropriate stock/bond allocation, knowledgeable investors will not worry, not sell, and will sleep like a baby.

Best wishes.
Taylor

Edit in red
Last edited by Taylor Larimore on Tue Aug 16, 2016 7:52 pm, edited 2 times in total.
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Re: Bogleheads: Rebalancing and Asset Allocation

Postby cfs » Thu Aug 11, 2016 5:22 pm

With a suitable portfolio knowledgeable investors will not worry and will sleep well.

Thanks.

Thanks to our shipmate Taylor for all the good recommendations. Maintaining proper course and speed, steady as she goes on my side of the house. To all our shipmates, good luck with your investments.

Thanks for reading.
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Re: Bogleheads: Rebalancing and Asset Allocation

Postby nedsaid » Thu Aug 11, 2016 5:29 pm

Okay, okay. I have added rebalancing to my daily hygiene routine. Shave, shower, brush my teeth, use deodorant, call my mother, and rebalance my portfolio.

Way back in 2013 or so, I posted about my rather relaxed attitude towards rebalancing. Well, I heard from my fellow Bogleheads and have to report that shaming works and that I have reformed my formerly wayward ways.

Since 2013, I have been in a program of mildly rebalancing my portfolio from stocks to bonds. I held steady at 69% stocks for a while but since then I have taken my stocks down to about 66-67 percent. I also have been buying bond funds/EFTs from dividends in my brokerage account for some time. When it comes to bonds, I have hit the buzzer and I buy, buy, buy. Not too enthusiastic about bonds here but I am 57 now and need to start derisking.

Had I just let my portfolio ride, I would be at probably 73% stocks now. I remembered during the 2008-2009 bear market that I had missed a rebalancing opportunity in 2007 and early 2008 and swore I wouldn't let that happen again. In 2008, I let stocks run to 72% of my portfolio.

So when the market hits new highs, I perform another round of mild rebalancing from stocks to bonds. Better to panic at market highs than market lows.

All the input from fellow Bogleheads sinks in even for me.
A fool and his money are good for business.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby cfs » Fri Aug 12, 2016 6:43 am

The Market Trifecta.

I was searching for the last time we had a "Market Trifecta" -- the last time we had a record day for all three major US Indexes was back on 31 December 1999. And we know what happened next, but the good thing is that I was told by a friend that "This Time It's Different." Good luck with your investments [with or without the market trifecta].

Thanks for reading.
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby KlangFool » Fri Aug 12, 2016 7:29 am

Taylor,

This Monday was my annual rebalancing date. I had re-balanced.

Thanks for the reminder.

KlangFool

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby MSDOGS1976 » Fri Aug 12, 2016 7:43 am

I rebalanced a couple of days ago too. That sounds soooo much better than market timing. :)

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby lostdog » Fri Aug 12, 2016 8:36 am

I am still well within my bands according to my IPS.
"Our life is frittered away by detail. Simplify, simplify." -Thoreau

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Da5id » Fri Aug 12, 2016 9:19 am

Taylor Larimore wrote:This is today's headline on Bloomberg Finance. It means it is time to re-think and rebalance our desired portfolio stock/bond allocation.

As most Bogleheads know, it is our stock/bond allocation, more than anything else, that determines our expected risk and expected return. A good rule of thumb is that we should expect our portfolio to decline at least 50% of our stock allocation in the next bad bear market.

Now is a good time to set and maintain (within 10%) our desired stock/bond allocation.

With an appropriate stock/bond allocation, knowledgeable investors will not worry, not sell, and will sleep like a baby.


This in part sounds like a suggestion to change ones asset-allocation in response to market "noise" like today's headlines, doesn't seem typical boglehead philosophy which would likely involving mostly re-balancing to IPS levels. Perhaps I'm not understanding the suggestion to "re-think" and "set" based on the new market highs?

Mind you, I think changing one's IPS in response to good investing results isn't a bad idea. If your need to take risk to achieve your goals has changed, your target asset allocation can of course change too... But should IPS reconsideration be based on reaching a market high, or today's news?

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby TonyDAntonio » Fri Aug 12, 2016 9:55 am

I last rebalanced my Fidelity held 401k portfolio a year and a half ago. It is 80/20 between DFA funds (slice and dice), one Vanguard intermediate term treasury bond fund and PCRIX (ugh). I checked today...my bond fund is 19.63% of my portfolio.

Not only are stocks at an all time high but bonds are almost there too. Maybe I should rebalance (some more) into PCRIX? :(

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby chicagoan23 » Fri Aug 12, 2016 10:18 am

Not to hijack this thread, but this is a very timely post and I was wondering what other investors were doing. Can we also use it to see where our asset allocations are now given the market conditions outlined by Taylor? I just rebalanced this week and am now at:

US Equities: 63.14%
Non-US Equities: 10.43%
Bonds: 18.37%
Cash: 7.54%
"Other": 0.52%

I know everyone has different goals, life stages, etc. but I was hoping for a sampling of some other asset allocations from experienced investors. Thanks!

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Kenkat » Fri Aug 12, 2016 10:27 am

I have been funneling new money 100% to International (Total Intl Stock Index) for awhile now.

Bonds are surprisingly mostly keeping up this year. I have yet to hit any rebalancing targets.

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Re: Bogleheads: Rebalancing and Asset Allocation

Postby Engineer250 » Fri Aug 12, 2016 10:30 am

nedsaid wrote:Way back in 2013 or so, I posted about my rather relaxed attitude towards rebalancing. Well, I heard from my fellow Bogleheads and have to report that shaming works and that I have reformed my formerly wayward ways.


Boglehead shaming got me to move from 100% equities to 95% equities with the intention of probably 90% before the end of the year. Yes shaming works. :P

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby livesoft » Fri Aug 12, 2016 10:35 am

chicagoan23 wrote:I know everyone has different goals, life stages, etc. but I was hoping for a sampling of some other asset allocations from experienced investors. Thanks!

Our asset allocation is described in this thread posted in 2014: viewtopic.php?t=150267

And today it is still the same:
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Taylor Larimore
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Is Rebalancing Market Timing?

Postby Taylor Larimore » Fri Aug 12, 2016 12:51 pm

MSDOGS1976 wrote:I rebalanced a couple of days ago too. That sounds soooo much better than market timing. :)

MSDOGS1976:

"Rebalancing" is not market-timing. It is maintaining our desired asset-allocation.

"Market-timing" is making portfolio changes based on market forecasts.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby malabargold » Fri Aug 12, 2016 12:51 pm

Sticking with 95+ % stocks, I just don't care if my
holdings get whacked by 50% or more.
Bring it on.
More buying opportunities!

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Taylor Larimore
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Our stock/bond allocation?

Postby Taylor Larimore » Fri Aug 12, 2016 2:35 pm

malabargold wrote:Sticking with 95+ % stocks, I just don't care if my
holdings get whacked by 50% or more.
Bring it on.
More buying opportunities!


malabargold:

In my opinion, most investors cannot watch their life savings lose "50% or more" (not knowing how much more they will lose). They either sell or lose sleep worrying. I think it is usually wise to add bonds to our "sleeping point."

A portfolio will likely lose about half its percentage of stocks in a bad bear market. In other words, a 60%/40% stock/bond portfolio will lose about 30% of its value. This can be devastating to many retirees.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby NMJack » Fri Aug 12, 2016 2:57 pm

malabargold wrote:Sticking with 95+ % stocks, I just don't care if my
holdings get whacked by 50% or more.
Bring it on.
More buying opportunities!


:beer

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby FrugalFrida » Fri Aug 12, 2016 3:08 pm

I keep my AA but will direct new monthly contributions more to bonds as HY savings could lose to inflation this year.

30% DNB Global Indeks (total world stock)
30% SPP Aktiefond Global A (total world stock)
20% Öhman Obligationsfond A (3-4year bonds)
15% Öhman Realobligationsfond (7-9year TIPS)
5% Öhman Realräntefond A (<25year TIPS)

These are local funds I use.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby dfitz247 » Fri Aug 12, 2016 3:21 pm

malabargold wrote:Sticking with 95+ % stocks, I just don't care if my
holdings get whacked by 50% or more.
Bring it on.
More buying opportunities!



I will gladly sink as well for more opportunity!
Best Regards, | Devin R. Fitzgerald

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Re: Bogleheads: Asset-Allocation and Rebalancing Near Retirement

Postby Sandman62 » Sat Aug 13, 2016 11:41 am

I've been considering changing the AA on our $925k retirement portfolio from 60/30/10 to maybe 50/40/10 or 40/50/10. The 10% cash was the result of us taking some stock profits off the table at the end of 2014. This wasn't timing though, as I don't plan to buy back in with these funds. Rather, I chose to setup a cash bucket for us to eventually start out drawing against in retirement without having to sell stocks or bonds at a potentially bad time. I don't really think we'll even need to tap our retirement accounts the first few years though due to our pension income.

I plan to retire at 55 at the end of next year and will receive a non-COLA pension of 62k/yr from a very stable private company. My wife may retire around the same time from her teaching position and also receive a pension around 48k (with slight chance of COLA every 5 yrs). That combined 110k/yr in pensions, while non-COLA, should cover our pre-tax annual expenses, including an estimated $8k/yr budgeted for sporadic big purchases, like cars and home maintenance.

I've roughly calculated our annual expense needs by simply removing expenses from our current income that won't be there once retired and now that both kids are out on their own: paid off mortgage on 350k valued home before we turned 50, no more retirement savings, SS contributions, college expenses, kids' auto insurance & cell phones, reduced commuting gasoline, less groceries with just DW and me, and my wife's union and pension dues. The remainder represents the upper end, I believe, of what we'll need to live on, as we already live on what's left, and I suspect there's a lot more fat in our current expenses related to what we spend on our kids but don't stand out like major recurring expenses. Of course, some of that could eventually be replaced with grandchildren, but not for at least several years, seeing our 24YO daughter just got married two weeks ago. :)

Other retirement income will eventually come from SS. Even with my wife's GPO offset and both of our reduced years of service due to retiring in mid-50s, anyPIA software tells me we should receive $40k/yr combined at FRA of 67 (though one or both of us may delay til 70).

We'll also be all set with health insurance: my wife, as a retired teacher, will get her normal medical coverage FREE til MediCare. And I am able to stay in my employer plan til then too for the same cost as now (under $2k/yr for one person). Then I have access to MediCare supplemental insurance through my employer too.

Our current retirement portfolio is just over $925k and we'll contribute over 31k/yr between now and retirement at the end of next year. With any luck, we should be close to $1m at retirement. Or if the stock market tanks before then, perhaps a lot less - which is the point of my post. I'm still searching for a fee-only planner to confirm my thoughts, but I really feel like we've "won the game" and we don't have the need or desire to chase more upside; we just have the ability. In our younger days, we were 100% stock, and as I said earlier, we were still 70/30 a couple years ago. So we've been pretty risk-tolerant. But as we can now see the finish line (of working), our risk tolerance is diminishing.

So what do you suggest for an AA for us? 50/40/10 or 40/50/10 or something else? I'd like to think that, though I changed our AA from 70/30 to 60/30/10 a couple years ago, this next change should hold steady for a good 5-10 years. I just don't want us to end up "Sequence of Returns" victims when we're so close to FIRE'ing.

Thanks for your thoughts.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Random Walker » Sat Aug 13, 2016 12:53 pm

Hi Sandman 62,
Sounds like you are in a great position with your two pensions. I've seen Monte Carlo analysis for my own portfolio (another advantage of an advisor) and have been surprised at how little the likelihood of success changes between 70/30 and 50/50. Given today's low interest environment, low future expected equity returns, your tremendously valuable pension, and your pondering between 40/60 and 60/40, it would be hard to argue with 50/50. What I've been pondering lately is that the standard deviation of equities is always large, around 15-20%, but expected returns vary with current valuations. With current valuations where they are, I don't see a lot of reward for additional volatility risk.
Can't emphasize enough how valuable I think your pensions are. They provide tremendous flexibility. They can provide you the strength to tolerate an aggressive AA or the cushion to not require such an aggressive AA.
I think Monte Carlo simulations are tremendously valuable. They let you look at different end points such as minimizing likelihood of running out of money, maximizing likelihood of achieving certain net worth, effects of changes in spending, effects of changes of AA on achieving goals. Larry has talked a lot about mean expected returns with a wide dispersion of outcomes surrounding the mean. MCS really gives an excellent visual display of that mean and dispersion.

Dave

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Sandman62 » Sat Aug 13, 2016 1:53 pm

Random Walker wrote:Can't emphasize enough how valuable I think your pensions are. They provide tremendous flexibility. They can provide you the strength to tolerate an aggressive AA or the cushion to not require such an aggressive AA.
Thanks for the feedback, Dave. This is a good "problem" to have, but I still wrestle with the two approaches one can take when in this fortunate situation. In the end though, I think I'd be a lot more upset if we lost ~$275k (50% stock drop on 60% of our total) within the next few years than if we miss out on an extra $50-100k (10-20%) of potential gains. Though I don't have a crystal ball, I do tend to think the former is more likely to occur than the latter. That's why I'm even considering 40/50/10. A 50% stock loss on that would "only" be $185k; thereby salvaging up to $90k of losses. Thanks again.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby oldzey » Sat Aug 13, 2016 1:58 pm

Thanks for the reminder, Taylor!

I did shift some equities to fixed income during the past month.

Best,
oldzey
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby tennisplyr » Sat Aug 13, 2016 2:28 pm

I'm 66, retired, no pension and at 50/50....plan to stay there for a while, have nerves of steel.
Those who move forward with a happy spirit will find that things always work out.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby baw703916 » Sat Aug 13, 2016 2:48 pm

There have actually been many times over the past couple years (and even some in 2007) when the S&P and Dow have both set new highs. The only difference is that this time the NASDAQ did also.

So it might be a rebalancing signal if you own a lot of QQQQ (NASDAQ ETF) and DIA (Dow ETF--30 stocks, what diversification! :) ).

Of course the share price of TBM (11.12) is also very close to its all-time high (11.22)...
Most of my posts assume no behavioral errors.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Random Walker » Sat Aug 13, 2016 4:29 pm

Sandman62,
I think the classic behavioral finance literature says that the pain of a given loss is twice as great as the happiness derived from an equal sized gain. I think it also states that as one looks at individuals of increasing net worth, the 2:1 ratio goes up from there! And I agree with you that given current US valuations, a bad market may be significantly more likely than a really good market in the future. Put it all together, and I think your reasoning is sound. I've made similar moves. At age 53, I'm increasing my bond allocation from 30% to 40% and increasing my % equities international from 40% to 50%.

Dave

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Peter Foley » Sat Aug 13, 2016 8:30 pm

I had just drifted to 56% equities where my IPS states 50/50 with 5% bands. I rebalanced about 2% 10 minutes before the market closed on Thursday in a regular IRA account.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby jwillis77373 » Sat Aug 13, 2016 8:45 pm

I dunno.. a 50% market "correction" dropping my investments that low, with jobs plummeting and hysteria breaking out everywhere.

I think I'd be euphoric

Probably the best move would be to cancel the Internet and let it ride for the next five years.

If I were out of work, it would be a good time to tour the National Parks and stay out of the cities.

What would probably happen though is we'd inflate our way out of another crisis.. essentially bail out investors and consumers alike, by diluting the money supply equally. And give banks more money to encourage economic commerce. Too Big to fail bailouts have proven "successful" by some opinions.. so they would use that tool again.. its inevitable. Anything to calm panic.. people like having something to "do" so we'd be unhappy but get on with life. People with nothing to do.. would "sell" and "regret" just like normal. After five years musical chairs would start all over again. -- there's a good reason 5/7/11 are magical numbers covering cycles, investments and "lost decades"

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby veena9111 » Sat Aug 13, 2016 9:13 pm

Good evening,
I don't know if I should be posting in the asset allocation and rebalancing thread. I would like to rebalance my portfolio but 95% of my portfolio is in stocks. I am a little worried about selling them and rebalancing for the following reasons,
1.What if my tax rate goes up( if the market falls 15%~30%)then I will be utilizing a lot of valuable time trying to figure out the cost basis . Won't I be paying more in taxes
2.Majority of my portfolio is in dividend stocks
3.What if the Dow does moves to 20,000 and I am unable to get back in ?
4.Since joining the bogleheads our individual 401K in the last 2 years has been invested in the 3 fund portfolio as recommended and will continue to do so in the future.
I hope you all can make some sense of what I am trying to convey
Thank You

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby J295 » Sat Aug 13, 2016 9:22 pm

We review allocations quarterly. Respect Taylor immensely and appreciate his reminder but under our IPS market events don't trigger our review.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Dick D » Sat Aug 13, 2016 10:04 pm

Age 70- 50/50. Rebalance one time per year to maintain 50/50

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby jwillis77373 » Sat Aug 13, 2016 11:14 pm

veena9111 wrote:Good evening,
I don't know if I should be posting in the asset allocation and rebalancing thread. I


Its not the right forum area, but the admins will probably move it for you.

This is the "Theory" area which discusses ideas and "actionable" things you would or could do.

Personal advice is in another section.

Re-balancing will [-always-] cost, it is a type of "market timing", no one disputes that.. its a given.

Its used to manage fears and behavior in a market correction or downturn.

Its encouraged because most people don't know how they will react and the general expectation is lack of experience will cause anyone to exit the market if their allocation to stocks is too high and that they will overreact.. so the safest "guess" is to curb your appetite for risk before that happens and "rebalance".. you will pay taxes, you will pay transaction fees (moving out and moving back in to stocks or bonds), you will loose the opportunity in taking greater risk.. no doubt about it, no way to avoid it.

You go in understanding you have two bad choices and do the best you can to manage decisions between the two.

No one here has a magic formula, encantation.. or answer for avoiding loss be it taxes, or realized losses from exiting the market.. or staying in the market in a bad investment.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Rodc » Sun Aug 14, 2016 9:03 am

jwillis77373 wrote:
veena9111 wrote:Good evening,
I don't know if I should be posting in the asset allocation and rebalancing thread. I


Its not the right forum area, but the admins will probably move it for you.

This is the "Theory" area which discusses ideas and "actionable" things you would or could do.

Personal advice is in another section.

Re-balancing will [-always-] cost, it is a type of "market timing", no one disputes that.. its a given.

Its used to manage fears and behavior in a market correction or downturn.

Its encouraged because most people don't know how they will react and the general expectation is lack of experience will cause anyone to exit the market if their allocation to stocks is too high and that they will overreact.. so the safest "guess" is to curb your appetite for risk before that happens and "rebalance".. you will pay taxes, you will pay transaction fees (moving out and moving back in to stocks or bonds), you will loose the opportunity in taking greater risk.. no doubt about it, no way to avoid it.

You go in understanding you have two bad choices and do the best you can to manage decisions between the two.

No one here has a magic formula, encantation.. or answer for avoiding loss be it taxes, or realized losses from exiting the market.. or staying in the market in a bad investment.


I suggest this is not quite correct. More to the point it is used to target a level of risk one can live with.

One reason is above - behavioral. If risk shows up they may behave badly.

But at least as important, people have real honest to goodness reasons to avoid taking on too much risk - if the risk shows up they can't pay their bills.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby blevine » Sun Aug 14, 2016 9:17 am

While I have followed AA based rebalancing for the purpose of risk (set to my risk tolerance),
the timing of the suggestion to rebalance, linked to market highs, does cause me to worry about
my strategy.

Since I am still working and in accumulation mode, I "rebalance" by purchasing mostly,
into the asset class falling under my AA target. Right now that means buying bonds,
but I have not sold stocks often, despite the highs, since my buying has been able to keep me close
enough to my AA (well within the 10%). With annual 401k and other deposits going all to bonds,
I have made a few equity sales in the last few months, but not as much as if I was done accumulating.
Makes me nervous to NOT be selling more of equity, but then again, bonds don't give much comfort at
near zero yields either....

Sticking with my plan, will continue buying what needs more allocation, selling only when the variance from target is "large".
Just saying, while I know this was a well intentioned reminder, it also reminded me of my worries, just not enough to
change my strategy. The strategy has served me well so far, minimizing taxes, and simplifying (as much as one can
simplify when you take advantage of the many accts necessary for 401k, 529 etc).

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby John151 » Sun Aug 14, 2016 1:25 pm

My stock funds are slightly above my bands, but all of my stock funds are in taxable accounts, and selling shares to rebalance would cost me a lot in capital gains taxes.

So I’m practicing what I think of as “passive” rebalancing. I’ve stopped adding to stocks, and I’m putting new money (including my stock dividends) into my tax-exempt bond fund. It will take me awhile to rebalance this way, but I think I’ll get there eventually.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby lazydavid » Mon Aug 15, 2016 1:02 pm

Already rebalanced last week. Would have done it sooner but for the mandatory 89-day holding period for two of my 401k funds (US and International Stock indexes).

When I last "rebalanced" a little over three months ago, I had a major goof in that I neglected to include my wife's very sizeable IRA in calculating desired AA for the 401k, so I had been way off--primarily under-allocated in International. I got a bit closer to my desired AA in the interim by contributing 100% to International until bonds came down to my target of 30%, then did 70/30 until I was past the holding period. Rebalanced--correctly this time--and changed my contributions to be 49/21/30, which is my target. I'll keep watching, and correct drift as it happens, but I'm good for now.

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Re: Our stock/bond allocation?

Postby akblizzard » Mon Aug 15, 2016 1:24 pm

Taylor Larimore wrote:I think it is usually wise to add bonds to our "sleeping point."


I'm not sure I've seen it put this way before Taylor, but I like it...

I'm 59 and currently 52/48. My IPS calls for me to be at 50/50 until 2020 when I must review my plan. I haven't needed to rebalance for quite a while as new money is easily changed so it goes where it needs to. Sleeping well.

Random Walker
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Random Walker » Mon Aug 15, 2016 2:15 pm

Akblizzard,
You are rebalancing, just doing it with new money. That's the most efficient way to do it if you are in that position.

Dave

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Leif
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Leif » Mon Aug 15, 2016 2:24 pm

Taylor Larimore wrote:A good rule of thumb is that we should expect our portfolio to decline at least 50% of our stock allocation in the next bad bear market.
Best wishes.
Taylor

Perhaps I'm parsing your words too finely.

A bear market is defined as a decline of 20% or more. A 50% decline would be unusual and very severe. I think we should "be prepared" for that large a decline, but I don't think "we should expect" such a decline in the "next" bad bear market.

We've had 25 bear markets since 1929. 3 of those bear markets were > 50%. S&P 500.

1931-1932 -61.81%
1937-1938 -54.47%
2007-2008 -51.93%
Last edited by Leif on Mon Aug 15, 2016 2:44 pm, edited 2 times in total.
Investors should diversify across many asset-classes so that whatever happens, we will not have all our investments in underperforming asset classes and thereby fail to meet our goals-Taylor Larimore

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Elsebet
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Elsebet » Mon Aug 15, 2016 2:39 pm

At age 40 I'm comfy with my AA and not going to rebalance at the moment.

49% domestic stock (target 50%)
21% international stock (target 20%)
30% bonds (target 30%)

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The US Markets Trifecta

Postby cfs » Mon Aug 15, 2016 3:08 pm

The US Markets Trifecta

S&P 500, Dow, Nasdaq Hit Records Together

The US Markets Trifecta. Well, shipmates, they did it again today . . . first time since last week . . .

Proceed with caution, good luck with your investments.

Thanks for reading.
~Member of the Active Retired Force || Black swan ready portfolio, withdrawal and spending rate 0%~

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby roflwaffle » Mon Aug 15, 2016 3:28 pm

cfs wrote:The Market Trifecta.

I was searching for the last time we had a "Market Trifecta" -- the last time we had a record day for all three major US Indexes was back on 31 December 1999. And we know what happened next, but the good thing is that I was told by a friend that "This Time It's Different." Good luck with your investments [with or without the market trifecta].

Thanks for reading.

I think there's a chance this time is different. In 2000, the S&P 500 was more or less at the same place it is today in 2015 dollars, but US GDP was at a real ~$14.42 trillion compared to ~$18 trillion last year. The PE ratio of the S&P 500 on the other hand, was at 120+ compared to 25+ today. I'm guessing that the value of an index is proportional to the value of what it represents (eg some or most of the US and International economy), and the divergence of those metrics is more notable than when they reach a particular value.

Of course, it's till a good idea to rebalance based on how much risk someone is comfortable with as well as their target allocation.
:beer

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Rodc » Mon Aug 15, 2016 3:39 pm

Leif wrote:
Taylor Larimore wrote:A good rule of thumb is that we should expect our portfolio to decline at least 50% of our stock allocation in the next bad bear market.
Best wishes.
Taylor

Perhaps I'm parsing your words too finely.

A bear market is defined as a decline of 20% or more. A 50% decline would be unusual and very severe. I think we should "be prepared" for that large a decline, but I don't think "we should expect" such a decline in the "next" bad bear market.

We've had 25 bear markets since 1929. 3 of those bear markets were > 50%. S&P 500.

1931-1932 -61.81%
1937-1938 -54.47%
2007-2008 -51.93%


Summer 2000 to summer 2002 dropped (with reinvested dividends) 46% so close.

Severe, even very severe, yes. Something guaranteed to happen in your investing life time, no. But it certainly likely enough you should not be at all surprised if it did happen. Should not be surprised if it happens twice in as short a time as a decade as it did once and almost did twice, in living memory.

It happened so recently I am rather surprised anyone would question they idea that the possibility should be considered possible. Whether one should "expect" or merely "plan for just in case" I leave up to others. But if it happens it is hardly surprising.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Leif » Mon Aug 15, 2016 4:05 pm

Rodc wrote:
It happened so recently I am rather surprised anyone would question they idea that the possibility should be considered possible.

Who is questioning that the "that the possibility should be considered possible"? That is certainly a LONG, LONG way from what I was trying to point out.
Investors should diversify across many asset-classes so that whatever happens, we will not have all our investments in underperforming asset classes and thereby fail to meet our goals-Taylor Larimore

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Rodc » Mon Aug 15, 2016 5:15 pm

Leif wrote:
Rodc wrote:
It happened so recently I am rather surprised anyone would question they idea that the possibility should be considered possible.

Who is questioning that the "that the possibility should be considered possible"? That is certainly a LONG, LONG way from what I was trying to point out.


So what were you saying?
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby save4kollege » Mon Aug 15, 2016 5:30 pm

There are multiple references in this thread to "IPS". Who can clue me in on what this acronym is? Thanks!

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Leif
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Leif » Mon Aug 15, 2016 5:36 pm

Rodc wrote:
Leif wrote:
Rodc wrote:
It happened so recently I am rather surprised anyone would question they idea that the possibility should be considered possible.

Who is questioning that the "that the possibility should be considered possible"? That is certainly a LONG, LONG way from what I was trying to point out.


So what were you saying?

That I believe the original statement from Taylor is overstated. My interpretation is in parenthesis.

"we should expect (if I expect, then I rate that as > even chance) our portfolio to decline at least 50% (Really? It has happened 3 times out of 25 in the past since 1929) of our stock allocation in the next bad bear market (market declines > 20%).

Just saying I think that is overstated, not that it could not happen, or as you say "possible". Of course it is possible. Should I hunker down and change my AA because I "expect" the "next" bad bear market will be > 50% decline. I don't think so. Should I plan that it MAY happen, of course.
Investors should diversify across many asset-classes so that whatever happens, we will not have all our investments in underperforming asset classes and thereby fail to meet our goals-Taylor Larimore

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby spammagnet » Mon Aug 15, 2016 5:39 pm

Related to this topic, I read here of many Bogleheads that use bands to guide rebalancing. Among those who do, does anyone use a moving average? Perhaps tolerance bands serve the same purpose of the moving average, where the moving average limits should be narrower, since it's less sensitive? Both would allow drift but bands may be easier to monitor?

Also, I vaguely recall mention elsewhere of the use of spreadsheets in Google Finance (or whatever it's called) with formulae that do automatic NAV lookups. In that scenario, is there any reason for your IPS to set rebalancing to specific intervals? If using bands and Google Finance notifies you automatically when you exceed your tolerance, why would you not rebalance immediately?
Last edited by spammagnet on Mon Aug 15, 2016 5:46 pm, edited 1 time in total.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby spammagnet » Mon Aug 15, 2016 5:42 pm

save4kollege wrote:There are multiple references in this thread to "IPS". Who can clue me in on what this acronym is? Thanks!

IPS refers to your Investment Policy Statement. (Link to Wiki.) It documents how you plan to invest, the point being to have a plan, and to follow it consistently.
Last edited by spammagnet on Mon Aug 15, 2016 5:43 pm, edited 1 time in total.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby cfs » Mon Aug 15, 2016 5:42 pm

roflwaffle wrote: . . . I think there's a chance this time is different . . .

Eureka!

Here is ONE difference . . . we had a Trifecta in 1999 and it took another 16 plus years for a repeat. This time we had TWO Trifectas in three market days.

Good luck with your investments [with or without the market Trifecta].

Thanks for reading.
~Member of the Active Retired Force || Black swan ready portfolio, withdrawal and spending rate 0%~


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