Bogleheads: Asset-Allocation and Rebalancing

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Leif
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Leif » Mon Aug 15, 2016 6:13 pm

I'm not yet retired. I'm using re-balance bands 5%/25%. In retirement I'm planning to re-balance within equities, but I'm planning to NOT sell bonds (or use cash) to buy equities. However, I will sell equities, when a high point is reached to fund bonds/cash (asymmetric re-balancing). I may miss some upside potential by not buying low, but I lessen the risk of using a low risk asset to buy a high risk asset that does not recover for a long while (Japan). The other risk reduction technique I use is to diversity my equities widely across asset classes and internationally.
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

Random Walker
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Random Walker » Mon Aug 15, 2016 8:42 pm

Malabargold,
When I was younger I was 100% equities as well. As I've aged and learned, I would not recommend 100% to anyone. Now I know you mentioned 95%, but that's close enough. Even if you can stomach 50% loss, this is why I would not recommend 100% stocks. If the market tanks, you want some dry powder to buy equities at lower prices. Even just 10% bonds can help tremendously in that department. If stocks lose 50%, you will need to make 100% to break even on all equities. If you can sell some bonds to buy the stocks when they are cheaper, you will need less than 100% gain to break even because you'll have more equity shares to subsequently increase in value. Volatility is a portfolio killer.
Perhaps more importantly is what having a small % bonds will do for you behaviorally. The small % bonds will help instill the psychological muscles and stomach to buy low and sell high. Instilling that quality in yourself will pay off more than the extra 5-10% increase in equity allocation over the long run.

Dave

wfromm
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby wfromm » Mon Aug 15, 2016 10:13 pm

Thank you Taylor for reminding us that we may want to check or at least not forget about re-balancing. I just checked my portfolio and I need more bonds. Most of my life I invested in equities only. Now I feel that even young people should have 25 percent bonds. I like the idea of re-balancing because it forces one to sell high and buy low. We all have or should have our methods of re-balancing. I am thinking about a method whereby I adjust at a certain time interval and also adjust if the portfolio is out of limits by a certain percentage. Any thoughts?

Case59
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Case59 » Mon Aug 15, 2016 11:03 pm

However one reacts (or doesn't) to the current market conditions, I'd like to thank Taylor for his always steady and sensible insight.
"Most quotations on the internet are incorrect."-Mark Twain

Ari
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Ari » Tue Aug 16, 2016 12:04 am

Random Walker wrote:When I was younger I was 100% equities as well. As I've aged and learned, I would not recommend 100% to anyone. Now I know you mentioned 95%, but that's close enough. Even if you can stomach 50% loss, this is why I would not recommend 100% stocks. If the market tanks, you want some dry powder to buy equities at lower prices.

This is not a good argument, as it relies on market timing to be effective, and market timing is very difficult. Keeping some money out of stocks will earn you a lower return in the long run. The returns you're missing out on are NOT compensated by the extra returns you get when you're "buying low". If that were the case, you'd be even better off staying in 100% bonds until the market tanks, then investing it into stocks. It doesn't work.

I keep seeing this "dry powder" argument again and again on Bogleheads and it's nonsense. It's bad advice and it goes against Boglehead principles. By all means, recommend keeping some money in bonds for behavioral reasons, or to lower risk. Those are sensible, valid arguments and good reasons to not be 100% stocks. But any talk about how it's better to have some dry powder left in the keg is simply market timing.
All in, all the time.

Rodc
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Rodc » Tue Aug 16, 2016 9:47 am

spammagnet wrote: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?


Can you clarify exactly what you are proposing? A moving average of what? And how applied?
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.

spammagnet
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby spammagnet » Tue Aug 16, 2016 9:57 am

Rodc wrote:
spammagnet wrote: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?


Can you clarify exactly what you are proposing? A moving average of what? And how applied?

I was referring to a moving average of stock:bond ratios. My intent was to allow for drift. But, thinking about it more, bands do the same and probably are easier to measure.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby MrDogg » Tue Aug 16, 2016 11:32 am

My Equity allocation has been creeping outside the top end of my preset band. I had planned on waiting until January 2017 to rebalance because my IPS says to periodically monitor and rebalance once a year which I've set as the end of each January. Based on Taylor's advise I have re-thought this and changed my IPS to say "periodically monitor and rebalance when band limits are reached" irrespective of any fixed time of year. I am now back within my AA ranges. Thanks to Taylor for keeping me and others straight.

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Taylor Larimore
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Taylor Larimore » Tue Aug 16, 2016 11:47 am

MrDogg wrote:Thanks to Taylor for keeping me and others straight.

I try. :happy

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

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siamond
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby siamond » Tue Aug 16, 2016 12:07 pm

spammagnet wrote:
Rodc wrote:
spammagnet wrote: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?

Can you clarify exactly what you are proposing? A moving average of what? And how applied?

I was referring to a moving average of stock:bond ratios. My intent was to allow for drift. But, thinking about it more, bands do the same and probably are easier to measure.

I was one of the posters involved in such a discussion, and this is indeed exactly what I do now, I have a Google Sheet spreadsheet that grabs current prices twice a day, computes if my rebalancing bands are reached, and sends me an e-mail as needs be. Then yes, I'll rebalance as soon as possible. And then there is no real need to rebalance at specific intervals (I still have a reminder to check the numbers every 2 years, but I may not act on it).

To be clear though, such trigger-based system only presented a tiny advantage in the backtesting tests that I ran, compared to annual rebalancing. Same outcome was found by academic studies. This is just more intellectually satisfying for me, more of a behavioral thing.

spammagnet
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby spammagnet » Tue Aug 16, 2016 12:10 pm

MrDogg wrote:I have re-thought this and changed my IPS to say "periodically monitor and rebalance when band limits are reached" irrespective of any fixed time of year.

Assuming use of bands that are not too strict, that makes much more sense to me than doing so on some fixed long interval. Can someone offer insight as to why it might not be so?

I understand that it's not ideal to play with it constantly, as that can increase taxes and transaction costs, but doesn't rebalancing back to your target within a broad band prevent that? It should take awhile before another adjustment would be called for.

Edit: I composed this message before the direct reply posted immediately above.
Last edited by spammagnet on Tue Aug 16, 2016 10:45 pm, edited 2 times in total.

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siamond
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby siamond » Tue Aug 16, 2016 12:25 pm

spammagnet wrote:
MrDogg wrote:I have re-thought this and changed my IPS to say "periodically monitor and rebalance when band limits are reached" irrespective of any fixed time of year.

Assuming use of bands that are not too strict, that makes much more sense to me than doing so on some fixed long interval. Can someone offer insight as to why it might not be so?

Frankly, the difference between the various approaches (when using sensible parameters) is so small that you really should do whatever works well with your psychology. Some people prefer the simplicity of annual rebalancing. Others see triggers as more intellectually satisfying. Take your pick!

spammagnet wrote:I understand that it's not ideal to playing with it constantly can increase taxes and transaction costs, but doesn't rebalancing back to your target within a broad band prevent that? It should take awhile before another adjustment would be called for.

Yes, exactly. My bands are pretty wide, and when I backtested the approach, rebalancing events were few and far between (well, there were a couple of rare occasions where we had a few rebalancing events in a given year). I actually chose my bands so that, in the past, I would have rebalanced roughly once a year on average.

Now, just to tease Taylor a little bit, I don't think it is a good strategy to rebalance on market highs (too frequent) or some event trifecta (too rare). Yes, I know, this isn't what he truly meant, I'm just being facetious...

Incendiary
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Incendiary » Tue Aug 16, 2016 1:38 pm

If rebalancing can be automated and is free (no taxes or other transaction costs b/c is inside a 401k), is there any reason not to set your portfolio to rebalance more frequently, i.e. daily?

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby jrbdmb » Tue Aug 16, 2016 3:16 pm

John151 wrote: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.


I am in a similar situation, and as I'm not expecting to add new funds to my taxable account for a bit, I decided to rebalance out of equity funds and into bonds. On the one hand I obviously don't enjoy the tax hit, but I also realized I shouldn't let the tax "tail" wag the dog. Now my taxable account is back where it should be and I won't be kicking myself if an equity correction starts next week.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby jrbdmb » Tue Aug 16, 2016 3:36 pm

Ari wrote:
Random Walker wrote:When I was younger I was 100% equities as well. As I've aged and learned, I would not recommend 100% to anyone. Now I know you mentioned 95%, but that's close enough. Even if you can stomach 50% loss, this is why I would not recommend 100% stocks. If the market tanks, you want some dry powder to buy equities at lower prices.

This is not a good argument, as it relies on market timing to be effective, and market timing is very difficult. Keeping some money out of stocks will earn you a lower return in the long run. The returns you're missing out on are NOT compensated by the extra returns you get when you're "buying low". If that were the case, you'd be even better off staying in 100% bonds until the market tanks, then investing it into stocks. It doesn't work.

I keep seeing this "dry powder" argument again and again on Bogleheads and it's nonsense. It's bad advice and it goes against Boglehead principles. By all means, recommend keeping some money in bonds for behavioral reasons, or to lower risk. Those are sensible, valid arguments and good reasons to not be 100% stocks. But any talk about how it's better to have some dry powder left in the keg is simply market timing.


Putting say an 80-20 stock-bond split in your IPS, and rebalancing into equities when stocks are down and your current ratios don't match your IPS, is generally not considered market timing by Bogleheads. This is different than keeping some unknown amount of "dry powder" on the sidelines until you have a hunch that the market is underpriced.

And stocks do not always return more than bonds; there have been long periods in the United States (ex. the 30 years between 1981 and 2011) where bonds have outperformed stocks. Having bonds in your portfolio hedges your bets in case you happen to hit one of these periods.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Johnnie » Tue Aug 16, 2016 4:29 pm

Maybe this has been said, but shouldn't rebalancing be done according to a predetermined formula rather on an event-driven basis? That formula could be either a fixed date every quarter, year or two years, or based on not exceeding a pre-defined AA band (which may well happen due to events, like these new highs).

If so, shouldn't the OP's message be, "If you are using AA bands to trigger rebalancing, this new-highs-times-three news may be reason to check if your bands have been exceeded."

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Taylor Larimore » Tue Aug 16, 2016 7:54 pm

Johnnie wrote:Maybe this has been said, but shouldn't rebalancing be done according to a predetermined formula rather on an event-driven basis? That formula could be either a fixed date every quarter, year or two years, or based on not exceeding a pre-defined AA band (which may well happen due to events, like these new highs).

If so, shouldn't the OP's message be, "If you are using AA bands to trigger rebalancing, this new-highs-times-three news may be reason to check if your bands have been exceeded."

Johnnie:

You are correct. I have edited my OP (Opening Post) message.

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

spammagnet
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby spammagnet » Tue Aug 16, 2016 10:47 pm

siamond wrote:I was one of the posters involved in such a discussion, and this is indeed exactly what I do now, I have a Google Sheet spreadsheet that grabs current prices twice a day, computes if my rebalancing bands are reached, and sends me an e-mail as needs be.

Would you mind sharing the technical details, or a link back to a thread that does? It might be appropriate to spin this topic off Taylor's original subject.

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siamond
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby siamond » Tue Aug 16, 2016 11:14 pm

spammagnet wrote:
siamond wrote:I was one of the posters involved in such a discussion, and this is indeed exactly what I do now, I have a Google Sheet spreadsheet that grabs current prices twice a day, computes if my rebalancing bands are reached, and sends me an e-mail as needs be.

Would you mind sharing the technical details, or a link back to a thread that does? It might be appropriate to spin this topic off Taylor's original subject.

I knew you would ask... So let me give you quite some reading to do... :wink:

First, if you didn't do so yet, please check our Wiki page on the rebalancing topic. And I would recommend that you check the Daryanani article referenced in Note 2 of the Wiki page.

Next, please check this thread and that thread:
- in the first thread, the article being discussed proved quite misleading, but this is the thread where you'll find posts about Google Sheets and automation, and where I started to run various backtests
- in the second thread, there is an interesting variant about rebalancing triggers being discussed, and more backtesting results.

spammagnet
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby spammagnet » Tue Aug 16, 2016 11:16 pm

siamond wrote:I knew you would ask...

:)
Edit: to me, automation is simplification. I'm not looking for it to do anything better than other approaches, but I do prefer to be prompted by objective information to act, rather than to have to remember to do something periodically.

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siamond
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby siamond » Tue Aug 16, 2016 11:27 pm

spammagnet wrote:to me, automation is simplification. I'm not looking for it to do anything better than other approaches, but I do prefer to be prompted by objective information to act, rather than to have to remember to do something periodically.

I would tend to agree. Plus hey, it's more fun to do a little bit of programming and have the satisfaction to see the computer do the work for you afterwards! :happy

Please take a look at the pointers I gave you, then it might be a good idea to open a new thread solely dedicated to such automation ideas, as you're not the first one who asked, and the threads I referred to are probably short on details in this respect.

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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby AlohaJoe » Tue Aug 16, 2016 11:33 pm

spammagnet wrote:
siamond wrote:I was one of the posters involved in such a discussion, and this is indeed exactly what I do now, I have a Google Sheet spreadsheet that grabs current prices twice a day, computes if my rebalancing bands are reached, and sends me an e-mail as needs be.

Would you mind sharing the technical details, or a link back to a thread that does? It might be appropriate to spin this topic off Taylor's original subject.


I do the same thing. I wrote a very (very!) brief explanation of how to do it a little while ago: https://medium.com/@justusjp/how-to-not ... .akocwcamm

Ari
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Re: Bogleheads: Asset-Allocation and Rebalancing

Postby Ari » Wed Aug 17, 2016 3:35 am

jrbdmb wrote:Putting say an 80-20 stock-bond split in your IPS, and rebalancing into equities when stocks are down and your current ratios don't match your IPS, is generally not considered market timing by Bogleheads. This is different than keeping some unknown amount of "dry powder" on the sidelines until you have a hunch that the market is underpriced.

If you do it to lower risk compared to a 100% stock portfolio, it's sensible and it's not market timing. If you expect it to give you a higher return than 100% stocks, you're relying on the stocks to perform better by being out of the market until a drop, then rebalancing into it. That's market timing.

And stocks do not always return more than bonds; there have been long periods in the United States (ex. the 30 years between 1981 and 2011) where bonds have outperformed stocks. Having bonds in your portfolio hedges your bets in case you happen to hit one of these periods.

Sure. That's why I said "long term". I was just talking about averages and expectations. The expected return on stocks will normally be higher than the expected return on bonds.
All in, all the time.

MSDOGS1976
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Re: Is Rebalancing Market Timing?

Postby MSDOGS1976 » Thu Aug 25, 2016 1:55 pm

Taylor Larimore wrote:
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


Semantics.

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Re: Is Rebalancing Market Timing?

Postby gkaplan » Thu Aug 25, 2016 8:02 pm

MSDOGS1976 wrote:
Taylor Larimore wrote:
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


Semantics.



No, it isn't.
Gordon


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