Explain why Rebalancing isn't Market Timing?

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qwertyjazz
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Re: Re:

Post by qwertyjazz » Thu Dec 08, 2016 5:22 pm

rbaldini wrote:
qwertyjazz wrote: Given the give and take, I realized that the signal is hidden in the concept of having an AA model - had not realized that before
Signal to what? Usually market timing means you think you have a signal to future returns. Rebalancing needn't concern itself with such things - I don't take the fact that my low bond allocation is a "signal" of higher future returns. That's irrelevant.
Signal that bonds are higher than a ratio of bonds to stock that is predetermined (a rule on when to buy based on market conditions - timing it)

Your definition is why you do it - my definition is functional not related to reason why

I think both definitions are reasonable. I just prefer definitions that do not require me to determine the logic of the person. If we use your definition, then we need to ascertain why someone did something - I think.

So not only do this - but do it for the right reasons

My argument is not about rebalancing is the correct thing to do but rather definitions.
Last edited by qwertyjazz on Thu Dec 08, 2016 5:25 pm, edited 1 time in total.
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aboose
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Re: Explain why Rebalancing isn't Market Timing?

Post by aboose » Thu Dec 08, 2016 5:24 pm

HomerJ wrote:Sounds like he too is thinking rebalancing is all about increasing returns.

I don't rebalance to increase returns. I rebalance because I don't want 90% of my money in stocks. Which is what would happen if I never rebalanced.
At first, I was going to refute you, but I think you might be somewhat right.

Essentially the argument against scenario 1 and scenario 2 are as follows.

Scenario 1 exposes you to potentially more risk as you are using a time-based strategy. You are not market timing since you are doing it at controlled, non-market reactive intervals. However this means during your interval, the market could move far from your set asset allocation and you could be exposed to more risk than you like.

Scenario 2 exposes you to potentially less returns are you are market timing (buying and selling in a time relation to the market). Market timing certainly reduces returns, but by using asset allocation band %s, you prevent yourself from ever moving into a risk zone that you don't want to be in.

I think that makes a lot of sense to me and I understand more. This is the crux of my original post I would say.

protagonist
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Re:

Post by protagonist » Thu Dec 08, 2016 5:25 pm

HomerJ wrote:
Not doublespeak - I believe we are making good faith efforts to come up with legitimate definitions. Doublespeak sounds like you think we are being tricky on purpose.
My bad. That is how it came out, but not what I intended. Bad choice of word. You are not being tricky.
Let me ask you this. Are you saying that rebalancing is the same as market-timing? Is going to from 100% stocks to 100% cash and back again 6 months later based on a signal rebalancing? Or is that market-timing? Can we agree that some actions are market-timing, but NOT rebalancing?

I think you are saying that rebalancing is a limited subset of market-timing. Correct me if I'm wrong. But rebalancing is it's own special case, right?
Yes. Rebalancing is a form of market timing. Much market timing has nothing to do with rebalancing.
I submit we focus on a different action instead of buying and selling to tell the difference between rebalancing and market-timing. I suggest that if one CHANGES their AA, that is not rebalancing, but market-timing.

Of course, that can also be confusing. Since one can change their AA for other reasons, like getting closer to retirement, or getting a big inheritance, etc. Let's say market-timing is changing one's AA based on what the market is doing.

Like this: At THIS time because of what the market is doing, I'm going to be 80% stocks, but if the market was doing something different (like maybe next month, a different time), I might be 40% stocks.

THAT is market-timing.

Rebalancing is: I'm going to be 50% stocks REGARDLESS of what the market is doing. The act of buying and selling happens because of what the market just did, but setting your Asset Allocation has nothing to do with what the market just did.

Can you see the difference?
I do, but I see it as an argument of semantics. In both cases, when the market goes up you sell and when it goes down you buy. Or at least that is the consequence. Rebalancing to me might be thought of as a specific, disciplined approach, the consequence of which is a form of market timing.

It seems to me that the term "market timing" is distasteful to many and thus they see it as something entirely different.

There is nothing wrong with believing in rebalancing and still opposing other methods of timing the market. Ultimately the whole argument is just one of semantics, and is probably of little consequence. (smiling...)

rbaldini
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Re: Re:

Post by rbaldini » Thu Dec 08, 2016 5:26 pm

qwertyjazz wrote: Your definition is why you do it - my definition is functional not related to reason why

I think both definitions are reasonable. I just prefer definitions that do not require me to determine the logic of the person. If we use your definition, then we need to ascertain why someone did something - I think.

So not only do this - but do it for the right reasons
I'm saying by neither definition can rebalancing be considered market timing.
That my bonds have dropped below their prior % is simply due to the fact that they returned less than stocks (as expected). This is, of course, *necessarily* due to recent market behavior, which I don't believe is a signal of future returns. Since it provides no signal, rebalancing (at least as I do it) is not market timing, by your definition. QED.

qwertyjazz
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Re: Re:

Post by qwertyjazz » Thu Dec 08, 2016 5:30 pm

rbaldini wrote:
qwertyjazz wrote: Your definition is why you do it - my definition is functional not related to reason why

I think both definitions are reasonable. I just prefer definitions that do not require me to determine the logic of the person. If we use your definition, then we need to ascertain why someone did something - I think.

So not only do this - but do it for the right reasons
I'm saying by neither definition can rebalancing be considered market timing.
That my bonds have dropped below their prior % is simply due to the fact that they returned less than stocks (as expected). This is, of course, *necessarily* due to recent market behavior, which I don't believe is a signal of future returns. Since it provides no signal, rebalancing (at least as I do it) is not market timing, by your definition. QED.
I said signal - not signal of future returns - that would assume I used a model of looking at why you did something
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rbaldini
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Re: Re:

Post by rbaldini » Thu Dec 08, 2016 5:31 pm

protagonist wrote: I do, but I see it as an argument of semantics. In both cases, when the market goes up you sell and when it goes down you buy. Or at least that is the consequence.
If you're defining "market timing" as " when the market goes up you sell and when it goes down you buy", then you're wrong. Lots of people believe in momentum - they're more likely to buy when it's increasing, or when the price is above some moving average. This is market timing. So, again, the consequence of rebalancing cannot be the same as market timing in general, because there is no single form of market timing.
protagonist wrote: Rebalancing to me might be thought of as a specific, disciplined approach, the consequence of which is a form of market timing.
We can keep repeating this. Again, let's be precise: by the usual definition, market timing means something like "changing one's investing behavior in response to changes in the expected returns in the future." Since rebalancing in general is not concerned with future returns, it cannot be market timing.

If you have a different definition of market timing, share it. Then show that rebalancing fits the definition.
Last edited by rbaldini on Thu Dec 08, 2016 5:34 pm, edited 1 time in total.

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Re: Re:

Post by rbaldini » Thu Dec 08, 2016 5:33 pm

qwertyjazz wrote: I said signal - not signal of future returns - that would assume I used a model of looking at why you did something
So your definition of market timing is "using a signal of something to do something" ?

Fine: I take the fact that my bonds are below their target allocation as a "signal" that they are below their target allocation. I then rebalance to my target allocation. Market timing, I guess...

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FactualFran
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Re: Explain why Rebalancing isn't Market Timing?

Post by FactualFran » Thu Dec 08, 2016 5:37 pm

Because this is a Bogleheads forum, some quotes from the Vanguard Best Practices For Portfolio Rebalancing document are relevant.
The primary goal of a rebalancing strategy is to minimize risk relative to a target asset allocation, rather than to maximize returns. Over time, asset classes produce different returns that can change the portfolio’s asset allocation. To recapture the portfolio’s original risk-and-return characteristics, the portfolio should therefore be rebalanced.
Vanguard research has found that there is no optimal frequency or threshold for rebalancing, since risk-adjusted returns do not differ meaningfully from one rebalancing strategy to another.

qwertyjazz
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Re: Re:

Post by qwertyjazz » Thu Dec 08, 2016 5:38 pm

rbaldini wrote:
qwertyjazz wrote: I said signal - not signal of future returns - that would assume I used a model of looking at why you did something
So your definition of market timing is "using a signal of something to do something" ?

Fine: I take the fact that my bonds are below their target allocation as a "signal" that they are below their target allocation. I then rebalance to my target allocation. Market timing, I guess...
Not a personal signal but one of the market in total - you equally could consider it you look at the relationship of the bond market to stock market

The fact you look at your account balance versus the newspaper to get the same info is irrelevant
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rbaldini
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Re: Re:

Post by rbaldini » Thu Dec 08, 2016 5:43 pm

qwertyjazz wrote:
Not a personal signal but one of the market in total - you equally could consider it you look at the relationship of the bond market to stock market

The fact you look at your account balance versus the newspaper to get the same info is irrelevant
Let me put it another way: what signal do you think I'm getting? What inferences do you think I'm making from the "signal" that my bond allocation is lower than its prior target? What is it a signal of? Because I assure you it's not (for me) a signal of future returns, which is how pretty much everyone defines market timing.
qwertyjazz wrote: The fact you look at your account balance versus the newspaper to get the same info is irrelevant
It's not the same info: the newspaper can't tell me what my current allocation is. That's not public knowledge.

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HomerJ
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Re: Re:

Post by HomerJ » Thu Dec 08, 2016 5:46 pm

protagonist wrote:I do, but I see it as an argument of semantics. In both cases, when the market goes up you sell and when it goes down you buy. Or at least that is the consequence. Rebalancing to me might be thought of as a specific, disciplined approach, the consequence of which is a form of market timing.

It seems to me that the term "market timing" is distasteful to many and thus they see it as something entirely different.

There is nothing wrong with believing in rebalancing and still opposing other methods of timing the market. Ultimately the whole argument is just one of semantics, and is probably of little consequence. (smiling...)
I hear you, but I think the term "market-timing" is distasteful to many for a good reason. It may be just a matter of semantics, but I believe there could be large consequences from the misunderstanding.

If a new poster asks if Bogleheads believe in market-timing, you will say yes. And that could be confusing and dangerous.

protagonist
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Re: Re:

Post by protagonist » Thu Dec 08, 2016 5:52 pm

HomerJ wrote:
protagonist wrote:I do, but I see it as an argument of semantics. In both cases, when the market goes up you sell and when it goes down you buy. Or at least that is the consequence. Rebalancing to me might be thought of as a specific, disciplined approach, the consequence of which is a form of market timing.

It seems to me that the term "market timing" is distasteful to many and thus they see it as something entirely different.

There is nothing wrong with believing in rebalancing and still opposing other methods of timing the market. Ultimately the whole argument is just one of semantics, and is probably of little consequence. (smiling...)
I hear you, but I think the term "market-timing" is distasteful to many for a good reason. It may be just a matter of semantics, but I believe there could be large consequences from the misunderstanding.

If a new poster asks if Bogleheads believe in market-timing, you will say yes. And that could be confusing and dangerous.
Good point.

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aboose
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Re: Re:

Post by aboose » Thu Dec 08, 2016 5:53 pm

rbaldini wrote:I'm saying by neither definition can rebalancing be considered market timing.
That my bonds have dropped below their prior % is simply due to the fact that they returned less than stocks (as expected). This is, of course, *necessarily* due to recent market behavior, which I don't believe is a signal of future returns. Since it provides no signal, rebalancing (at least as I do it) is not market timing, by your definition. QED.
It is market timing in my view. You waited X amount of time to rebalance to your desired risk allocation, allowing your portfolio to drift a certain amount. For example, imagine a stock / bond allocation where stocks have risen in values. Instead of using cash funding money progressively to prevent your allocation from going off, you have allowed your stocks go up. Therefore, you changed your asset allocation, even if it was not intended. You are now selling and buying in order to change the amount of stocks and bonds you have to get back to your target. Therefore, you are timing your investment based on when the market moves in certain ways. It's exactly as you say, you are reacting to the markets movements because you want your future return to fall into the risk profile you desire, but were not able to maintain and are now market timing (eg: Now is a good time to buy bonds, because I need to fix my risk, because I feel I am currently too exposed to risk in the current market given future possibilities) to correct.
Last edited by aboose on Thu Dec 08, 2016 5:54 pm, edited 1 time in total.

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Re: Re:

Post by boglephreak » Thu Dec 08, 2016 5:53 pm

protagonist wrote:In both cases, when the market goes up you sell and when it goes down you buy.
except thats not always the case for rebalancing. assume 100% stock, 75% TSM/25% SCV. the market crashes, and SCV gets hit significantly harder than TSM. because it went down more for SCV, I have to sell TSM in order to rebalance. i am selling TSM at a low to rebalance SCV which is at a low. i am selling low, and buying low.

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aboose
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Re: Re:

Post by aboose » Thu Dec 08, 2016 5:55 pm

boglephreak wrote:
protagonist wrote:In both cases, when the market goes up you sell and when it goes down you buy.
except thats not always the case for rebalancing. assume 100% stock, 75% TSM/25% SCV. the market crashes, and SCV gets hit significantly harder than TSM. because it went down more for SCV, I have to sell TSM in order to rebalance. i am selling TSM at a low to rebalance SCV which is at a low. i am selling low, and buying low.
TSM and SCV aren't necessarily correlated so your point is just one hypothetical situation among many. You could just as easily be selling low buying high. Or, the stock market could never go back up again, so you would be selling high buying low.

protagonist
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Re: Explain why Rebalancing isn't Market Timing?

Post by protagonist » Thu Dec 08, 2016 5:55 pm

I'm going to backtrack on my above comments.

I looked up "market timing" on Wikipedia, and their definition: "Market timing is the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements."

By that definition, I was wrong. Rebalancing is not market timing, since it does not (at least directly) involve attempts at prediction.

That said, I believe the attempted consequences (buying low, selling high) are very similar. When stocks drop and your portfolio loses value, you are poorer, and thus more vulnerable, which is to say at a higher risk. When you then buy more stock to maintain your original AA, you are taking on more risk by selling a less risky product to buy a more risky one, in hopes of greater reward in the long run.

The market rebounded in spades following the 2008 crash. But it could have followed a much different trajectory....slow decline....in which case repeated rebalancing to maintain AA would have left many of us poor. What were the odds? Impossible to say.
Last edited by protagonist on Thu Dec 08, 2016 5:59 pm, edited 1 time in total.

Dirghatamas
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Re: Explain why Rebalancing isn't Market Timing?

Post by Dirghatamas » Thu Dec 08, 2016 5:57 pm

protagonist wrote: To say that rebalancing "controls risk" without hoping for higher returns....I am not sure I understand that. I get that stocks are riskier than bonds, and you are trying to maintain a set stock/bond ratio. Sure, it reduces risk if you are rebalancing OUT OF a riskier product (stocks) and INTO a less risky product (bonds). But if you have already lost a lot of money in stock , you are already in a more vulnerable (eg less wealthy and thus more risky) position than you were when you started, and then by putting more money into stock you are investing in the riskier product in hopes of receiving a better return . Risk and reward are almost always (if not always) positively correlated.
Ding, ding. I think there is a fair bit of vague/subjective thinking on this subject in this forum. Our ability to take risk doesn't stay constant as markets move so why is a fixed % or rebalancing bands sensible? Consider the last financial crisis. Lets say your risk tolerance before that was 80% stocks/20% bonds. During that year, lets say stocks lost 50% of their value. You also lost your job in the crisis. Your ability to pay your mortgage was now in jeopardy. You couldn't sell your house because it had lost most of its perceived value.

So, now you are supposed to deploy most of your bonds into stocks to get back to 80/20? Does that make sense? You are suddenly now half as wealthy as you were a year ago, you just lost your job and you are NOW supposed to be putting your little remaining money into the risky assets? I suspect a lot of people on this board who rebalance, DIDN'T actually do this during the depth of the crisis. Most people were frightened (justifiably so).

The reverse is also true. Lets say stocks go up 2X. You are now much wealthier. So now your ability to take risk is higher. So, now should you sell a bunch of your stocks? Why?

My strategy is much simpler. Do nothing. Just buy every month and never sell. Yes, I continued to buy stocks during the financial crisis but that was because that is exactly what I do every month, just like I did after Brexit or recent US elections or after 9/11.

If there is only one investment to make (world cap of stocks), there isn't much/any complexity to investing :wink: It is more boring that watching paint dry.

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Re: Explain why Rebalancing isn't Market Timing?

Post by cherijoh » Thu Dec 08, 2016 5:57 pm

aboose wrote:By buying and selling in reaction to movements in your allocation band, you are buying and selling in reaction to sentiment, which is inherently forward thinking / predictive. Therefore, market timing.
.

Nope, I disagree completely. If I have an investment policy statement that says I will maintain a 60/40 allocation and I will rebalance every year on Jan 1, where is there any sentiment involved? There is absolutely no assumptions about what will happen in the future. Rebalancing is in fact a correction based on what has already happened inside my portfolio that caused my allocation to deviate from a target that was set based on my need, ability and willingness to take risk.

The same goes if my IPS says if my stocks creep up to x% above my target I will adjust them 50% of the way back to target. Where is there any sentiment or prediction of what will happen in the future? I set my rebalancing bands well before I actually used them so current market conditions have zip to do with my decision process.

If you are selling based on sentiment instead of solely on you current allocation relative to your target, then I agree that is market timing. However, then it is NOT rebalancing.

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Re: Re:

Post by rbaldini » Thu Dec 08, 2016 6:01 pm

aboose wrote: You are now selling and buying in order to change the amount of stocks and bonds you have to get back to your target. Therefore, you are timing your investment based on when the market moves in certain ways.
I have not change my allocation based on what I believe the market will do in the future. Since that is the common definition of market timing (I have not seen any reasonable alternative given here), it is not market timing.
aboose wrote: It's exactly as you say, you are reacting to the markets movements because you want your future return to fall into the risk profile you desire, but were not able to maintain and are now market timing (eg: Now is a good time to buy bonds, because I need to fix my risk, because I feel I am currently too exposed to risk in the current market given future possibilities) to correct.
No. Read my definition more carefully. Market timing is about changing your allocation because your estimate of the market's future return has changed. In contrast, my expectation for future returns is basically always the same. When I rebalance, it's to get back to the allocation I like. Not because I think the market has changed. See the difference?

If, instead, I said "I'm going to buy more bonds because I believe the recent drop means they'll give me a better return in the future!", then I'd be market timing. I don't say this.

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Re: Explain why Rebalancing isn't Market Timing?

Post by rbaldini » Thu Dec 08, 2016 6:05 pm

protagonist wrote: That said, I believe the attempted consequences (buying low, selling high) are very similar.
That is not my attempted consequence.
protagonist wrote: When stocks drop and your portfolio loses value, you are poorer, and thus more vulnerable, which is to say at a higher risk. When you then buy more stock to maintain your original AA, you are taking on more risk by selling a less risky product to buy a more risky one, in hopes of greater reward in the long run.
No - you do it to get the same risk-return balance that you had before the crash. I agree with you, of course, that your target AA may change if there is a big crash, as I wrote at least twice above. In that case, rebalance to the new AA.

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Re: Explain why Rebalancing isn't Market Timing?

Post by rbaldini » Thu Dec 08, 2016 6:07 pm

Dirghatamas wrote: Ding, ding. I think there is a fair bit of vague/subjective thinking on this subject in this forum. Our ability to take risk doesn't stay constant as markets move so why is a fixed % or rebalancing bands sensible?

...

My strategy is much simpler. Do nothing. Just buy every month and never sell..
Thereby giving you no control over the risk-return profile you get. The market dictates that to you.

I agree, as I've said many times, that your optimal AA might change as your financial situation changes. I think the best response to that *is to maintain AA at whatever you think is best for you right now* - not let the market decide for you. It doesn't have to be the one you decided before the market changed by -30% or +30%. Just pick something reasonable. It's not that hard.
Last edited by rbaldini on Thu Dec 08, 2016 6:13 pm, edited 1 time in total.

protagonist
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Re: Explain why Rebalancing isn't Market Timing?

Post by protagonist » Thu Dec 08, 2016 6:09 pm

Dirghatamas wrote: So, now you are supposed to deploy most of your bonds into stocks to get back to 80/20? Does that make sense? You are suddenly now half as wealthy as you were a year ago, you just lost your job and you are NOW supposed to be putting your little remaining money into the risky assets? I suspect a lot of people on this board who rebalance, DIDN'T actually do this during the depth of the crisis. Most people were frightened (justifiably so).

The reverse is also true. Lets say stocks go up 2X. You are now much wealthier. So now your ability to take risk is higher. So, now should you sell a bunch of your stocks? Why?
This is a very good point.

If you are a billionaire and there is no way, given your desired lifestyle, that you will need more than , say $10 million to maintain it for the rest of your life, virtually nothing is risky to you. You can lose 90% of your assets and it won't change a thing. Put it all in the stock market. Put it all in the bank. Whatever.

On the other hand, if you are living hand to mouth and feeding a family, a 2% loss can mean not being able to pay the rent. If you invest in stock, or go even farther and play the lottery, there is a chance your financial worries will be eliminated, or you might wind up broke. And if you don't, and just keep your money in the bank, you will always be vulnerable in case of emergency. You are caught between a rock and a hard place. Any course of action is risky to you.
Last edited by protagonist on Thu Dec 08, 2016 6:11 pm, edited 1 time in total.

rbaldini
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Re: Explain why Rebalancing isn't Market Timing?

Post by rbaldini » Thu Dec 08, 2016 6:11 pm

protagonist wrote:
This is a very good point.

If you are a billionaire and there is no way, given your desired lifestyle, that you will need more than , say $10 million to maintain it for the rest of your life, virtually nothing is risky to you. You can lose 90% of your assets and it won't change a thing.

On the other hand, if you are living hand to mouth and feeding a family, a 2% loss can mean not being able to pay the rent. If you invest in stock, or go even farther and play the lottery, there is a chance your financial worries will be eliminated, or you might wind up broke. And if you don't, and just keep your money in the bank, you will always be vulnerable in case of emergency. You are caught between a rock and a hard place. Any course of action is risky to you.
Yes. Hence the value of choosing an asset allocation that is consistent with your ability to take risk... and using rebalancing to return to that allocation when the market moves you away from it (or to a new one that is consistent with a new target allocation, based on what has happened in that time).

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Re: Explain why Rebalancing isn't Market Timing?

Post by cherijoh » Thu Dec 08, 2016 6:14 pm

Dirghatamas wrote:
protagonist wrote: Ding, ding. I think there is a fair bit of vague/subjective thinking on this subject in this forum. Our ability to take risk doesn't stay constant as markets move so why is a fixed % or rebalancing bands sensible? Consider the last financial crisis. Lets say your risk tolerance before that was 80% stocks/20% bonds. During that year, lets say stocks lost 50% of their value. You also lost your job in the crisis. Your ability to pay your mortgage was now in jeopardy. You couldn't sell your house because it had lost most of its perceived value.
You have introduced other extraneous factors into your straw man. The obvious answer is the you only thought you had an 80/20 risk tolerance. In addition, you didn't have enough assets in an emergency fund and you bought too much house. However, that really doesn't say much about whether setting up rebalancing bands is a reasonable risk reduction strategy.

I saved myself a great deal of grief by rebalancing out of a small cap growth fund in my 401k before the Y2K tech bubble burst. A number of my colleagues started piling in just when I was pulling back. Needless to say I was much better off than several of them - especially the ones who reacted to the crash by moving all their remaining money into the stable value fund. :oops:

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Re: Re:

Post by qwertyjazz » Thu Dec 08, 2016 6:15 pm

rbaldini wrote:
qwertyjazz wrote:
Not a personal signal but one of the market in total - you equally could consider it you look at the relationship of the bond market to stock market

The fact you look at your account balance versus the newspaper to get the same info is irrelevant
Let me put it another way: what signal do you think I'm getting? What inferences do you think I'm making from the "signal" that my bond allocation is lower than its prior target? What is it a signal of? Because I assure you it's not (for me) a signal of future returns, which is how pretty much everyone defines market timing.
qwertyjazz wrote: The fact you look at your account balance versus the newspaper to get the same info is irrelevant
It's not the same info: the newspaper can't tell me what my current allocation is. That's not public knowledge.
Let me try it like this

Professor Assanti Alberto has a new way of buying and selling stocks. He has you take a survey that gives you a number. For ease of thought - but not needed - he has you liquidate everything into cash then buy at that ratio if bonds to stocks. He has built a formula that every 6 months looks at the price of bonds and stocks including dividends and bond payments. He then tells you how much to buy and sell based on market signals.
That sounds like market timing to me and it can be mapped one to one to using a Vanguard risk survey and an individual looking at their accounts and buying or selling based on their AA.

Now let us add that Prof AA has a decades history of making a lot of people well off and his model does better than other market timing models (especially those based on gut instinct)
AA model may be good but it is the mathematical equivalent of looking at market signals and getting a single survey result.
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Re: Explain why Rebalancing isn't Market Timing?

Post by nisiprius » Thu Dec 08, 2016 6:15 pm

HomerJ wrote:I don't rebalance to increase returns. I rebalance because I don't want 90% of my money in stocks. Which is what would happen if I never rebalanced.
Yes, but it takes quite a while to that to happen.

Vanguard only provides four LifeStrategy funds, with allocations of 80/20, 60/40, 40/60, 80/20. This suggests that most people are comfortable with a stock allocation that's within ±10% of their chosen allocation.

So let's say your target is 60/40, and you would get uncomfortable if you stock allocation grew to over 70%. Not 90%, just 70%.

Let's say it's year-end 1994, the start of a fabulous bull market, and your allocation is 60/40 Total Stock (VTSMX) / Total Bond (VBMFX).

Your rebalancing plan is thatat the end of each year, you will check, and if your stock percentage is above your comfort level you will rebalance back to 60/40.

When will you first need to rebalance? Try to guess before you peek. The chart shows what happens to a 60/40 allocation without any rebalancing.

Click on this link to view answer.
Last edited by nisiprius on Thu Dec 08, 2016 6:28 pm, edited 2 times in total.
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Re: Re:

Post by boglephreak » Thu Dec 08, 2016 6:17 pm

snip.
Last edited by boglephreak on Thu Dec 08, 2016 6:25 pm, edited 1 time in total.

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Re: Re:

Post by rbaldini » Thu Dec 08, 2016 6:25 pm

qwertyjazz wrote: Professor Assanti Alberto has a new way of buying and selling stocks. He has you take a survey that gives you a number. For ease of thought - but not needed - he has you liquidate everything into cash then buy at that ratio if bonds to stocks. He has built a formula that every 6 months looks at the price of bonds and stocks including dividends and bond payments. He then tells you how much to buy and sell based on market signals.
That sounds like market timing to me and it can be mapped one to one to using a Vanguard risk survey and an individual looking at their accounts and buying or selling based on their AA.

Now let us add that Prof AA has a decades history of making a lot of people well off and his model does better than other market timing models (especially those based on gut instinct)
AA model may be good but it is the mathematical equivalent of looking at market signals and getting a single survey result.
I don't know what else to say...

If Prof AA is using information to make temporally-changing predictions about future market behavior (maybe by using these vague "market signals" you speak of), then he is market timing. By definition. If he's just dressing up a way of reverting you to your target allocation, without trying to guess the future, then he's not. By definition. I don't care what it "sounds like" to you. If you rebalance to achieve some target allocation, regardless of what you think the future holds, you are not market timing. This is getting silly.
Last edited by rbaldini on Thu Dec 08, 2016 6:30 pm, edited 2 times in total.

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Re: Explain why Rebalancing isn't Market Timing?

Post by Dottie57 » Thu Dec 08, 2016 6:28 pm

aboose wrote:It just doesn't make sense to me.

How can you reduce your risk, while simultaneously increasing your returns / beating the market?

There is no Free Lunch. I can accept that rebalancing helps us get back to our emotionally set asset allocations, if it also means we are reducing our returns. Because logically that makes sense.

That's my point, rebalancing based on % asset allocation might not achieve the goal we think it does.

I rebalance simply to have between 50-60%stock . When < 50% or >60% Inam unhappy. I want the dampening effect of big swings in stock that bonds will give. I've been putting money in 401k since 1988. Now I have a good sum and I want to preserve with some growth. I am not chasing returns.

If rebalancing helps returns so be it.

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Re: Explain why Rebalancing isn't Market Timing?

Post by protagonist » Thu Dec 08, 2016 6:32 pm

rbaldini wrote: Yes. Hence the value of choosing an asset allocation that is consistent with your ability to take risk... and using rebalancing to return to that allocation when the market moves you away from it (or to a new one that is consistent with a new target allocation, based on what has happened in that time).

I am not in the incredibly rich category, but I have enough to finance the rest of my retirement at a level of comfort that I am happy with (given my lifestyle), barring extreme unpredicted circumstances. That is why I do not rebalance, or maintain a fixed AA. Any rebalancing into stock would just increase my risk without substantially contributing to my happiness. I just keep enough money (with enough of a buffer) in investments that I feel will have the best chance of keeping up with inflation- anything beyond that is just lucky (mostly CDs these days for me). That is what I live off. The rest I keep in the stock market (index funds). If stocks go up, great. My heirs will be happy. If they go down, 50%...90%....I don't worry too much.

If I was a lot richer, the stock bucket might be as high as 95%. If I had less money, but enough to maintain my lifestyle, it might be 10% or less. It doesn't matter.

If I did not have more than enough to finance my retirement, the thought process would be more complicated, since I would be at higher risk no matter what I did. But I am not sure it would ultimately be that different. I would just be at greater risk, whether I chose to invest in more stocks in hopes of becoming financially independent (though I might risk losing my shirt in a crash that didn't recover quickly enough), or to invest more conservatively, knowing that I would never achieve the lifestyle I desired.

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Re: Explain why Rebalancing isn't Market Timing?

Post by rbaldini » Thu Dec 08, 2016 6:34 pm

protagonist wrote:
I am not in the incredibly rich category, but I have enough to finance the rest of my retirement at a level of comfort that I am happy with (given my lifestyle), barring extreme unpredicted circumstances. That is why I do not rebalance, or maintain a fixed AA. Any rebalancing into stock would just increase my risk without substantially contributing to my happiness. I just keep enough money (with enough of a buffer) in investments that I feel will have the best chance of keeping up with inflation- anything beyond that is just lucky (mostly CDs these days for me). That is what I live off. The rest I keep in the stock market (index funds). If stocks go up, great. My heirs will be happy. If they go down, 50%...90%....I don't worry too much.

If I was a lot richer, the stock bucket might be as high as 95%. If I had less money, but enough to maintain my lifestyle, it might be 10% or less. It doesn't matter.

If I did not have more than enough to finance my retirement, the thought process would be more complicated, since I would be at higher risk no matter what I did. But I am not sure it would ultimately be that different. I would just be at greater risk, whether I chose to invest in more stocks in hopes of becoming financially independent (though I might risk losing my shirt), or to invest more conservatively, knowing that I probably would never achieve the lifestyle I desired.
It's your money; you should do what you want with it. I'm just saying that you are letting the market decide your risk level, rather than choosing it yourself and maintaining it there. If you're happy with that, no problem. In practice, it likely won't make much difference unless the markets go crazy.

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Re: Explain why Rebalancing isn't Market Timing?

Post by ruralavalon » Thu Dec 08, 2016 6:51 pm

aboose wrote:Can you please explain to me why rebalancing isn't market timing? I have been shamed and made fun of for having this hypothesis but I am not technically experienced or literate enough in order to prove my point.

If we define market timing to be reacted to the current market's state of returns, I propose that rebalancing is market timing (emphasis added).
I think that your definition is incorrect.

Market timing always involves an opinion that predicts a future market development.

Rebalancing involves a present fact (specifically -- the current allocation my portfolio) as compared to my past decision on my target allocation.

"Market timing is the act of moving in and out of the market or switching between asset classes based on using predictive methods such as technical indicators or economic data. Because it is extremely difficult to predict the future direction of the stock market, investors who try to time the market, especially mutual fund investors, tend to underperform investors who remain invested" (emphasis added).
Investopdia, "What is market timing?".

"Market timing is the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis. This is an investment strategy based on the outlook for an aggregate market, rather than for a particular financial asset" (emphasis added).
Wikipedia, "Market timing".

1) Rebalancing at a particular time of year is not market timing. No opinion predicting future market events is involved.

2) Rebalancing by bands when the portfolio is off the target allocation is not market timing. No opinion predicting future market events is involved.

aboose wrote:Rbaldini, I don't mean to get into an argument of terms.


What I was hoping for was a technical/backtested analysis of data that shows that rebalancing doesn't hurt returns. I should have put this in my original post, but this is my point. In my view, rebalancing based on % allocation band reactions will hurt long term return because it is reactive to short term market volatility as opposed to the scenario 1 of rebalancing I put. I believe that controlling for time will average out returns, while controlling for asset allocation % will cause fluctuations and hurt returns.

I am not sure if an analysis on this has been done, so maybe I will have to do it myself (emphasis added).
That is a much different question than "Explain why Rebalancing isn't Market Timing?"

To respond to this new question -- there can be a bonus return from rebalancing. William Bernstein, "The Rebalancing Bonus". And even a modest bond allocation may substantially reduce volatility (risk), with only a relatively slight decrease in return. Graph, "An Efficient Frontier: the power of diversification".

aboose wrote:There is no Free Lunch. I can accept that rebalancing helps us get back to our emotionally set asset allocations, if it also means we are reducing our returns. Because logically that makes sense.

That's my point, rebalancing based on % asset allocation might not achieve the goal we think it does (emphasis added).
I think that in rebalancing (like asset allocation) the goal is risk reduction rather than to increase portfolio returns.
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Re: Explain why Rebalancing isn't Market Timing?

Post by Dandy » Thu Dec 08, 2016 7:45 pm

It is only in the slightest extent. You can call it maintaining risk but it is an pre planned way of selling when the market is high and buying when it is low. On the high side you are trying to mitigate the risk of a major correction and on the low side you are buying with the idea that you are buying near a low.

What is absent is the current day fear, reaction to media hype or actual projections -- you are just implementing a plan set in calmer, saner times. Of course if you buy when the market PE is at 15 and sell when it is at 22 you will be labeled a market timer. The label is tossed around and covers day traders and those who rebalance. I think the key is not making moves based on emotion or feeling you know what the market is going to do e.g. it is too high and will drop. Moves made by pre planned rebalancing or objective measures are fine with me.

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Re: Explain why Rebalancing isn't Market Timing?

Post by tadamsmar » Thu Dec 08, 2016 8:20 pm

It a long thread, and I don't know if anyone has mentioned this, but if you never re-balance then your allocation to riskier investments will tend increase over time since they tend to grow faster. You will likely end up holding more stocks. Your risk will increase. Your risk will increase while your investments horizon is becoming shorter term since you are approaching retirement. But you typically want lower risk for shorter term investments.

So the goal of rebalancing is to avoid the build up of this risk creep.

Your scenario 2 guy seemed to have the intent of market timing, but he is avoiding risk creep regardless of his beliefs.

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Re: Explain why Rebalancing isn't Market Timing?

Post by Oicuryy » Thu Dec 08, 2016 8:27 pm

Modern Portfolio Theory assumes that the securities in a portfolio are rebalanced to their initial weights at the start of each return measurement period. (E.g. rebalance annually if you chose weights based on your predictions of the means, variances and covariances of the future annual returns of the securities in your portfolio.)

Rebalancing at the start of each return measurement period is not market timing (OP's scenario 1)
Rebalancing more frequently or less frequently is market timing.
Rebalancing when the portfolio is out of balance is market timing. (OP's scenario 2)
Changing your predictions of means, variances and covariances is market timing.
Moving to a different point on the efficient frontier when your personal circumstances change is not market timing.

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Re: Explain why Rebalancing isn't Market Timing?

Post by tadamsmar » Thu Dec 08, 2016 8:30 pm

aboose wrote:It just doesn't make sense to me.

How can you reduce your risk, while simultaneously increasing your returns / beating the market?

There is no Free Lunch. I can accept that rebalancing helps us get back to our emotionally set asset allocations, if it also means we are reducing our returns. Because logically that makes sense.

That's my point, rebalancing based on % asset allocation might not achieve the goal we think it does.
Do you realize you are arguing with a straw man?

For many of us, the goal is risk control. I agree that it does not make sense to believe that you beat the market.

Do you not care what your asset allocation is? Not sure why you are accusing those who care of being emotional. Seems rational to care.

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Re: Explain why Rebalancing isn't Market Timing?

Post by rgs92 » Thu Dec 08, 2016 8:44 pm

Actually, I think Mr. Bogle himself kind of agrees with you deep down. His core belief that he often states is that he has faith in the overall strength and long-term success of the American companies in the S&P 500 taken as a whole, and he has said a million times that the correct holding time of the S&P 500 index is forever.
In other words, it's never a good time to sell your stock index fund shares unless you need the money.
That's my impression of how he feels if you read between the lines.

Of course, he also states all the time that holding bonds provides ballast against the ups and downs of the market, it sounds as if does this with clenched teeth, since his main article of faith and love is the S&P500. (He's not even a fan of small caps or international, but accepts them grudgingly.)

I think he's probably right. It would take a strong stomach though not to rebalance.

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Re: Explain why Rebalancing isn't Market Timing?

Post by sambb » Thu Dec 08, 2016 9:02 pm

of course rebalancing is market timing. Something goes up, and you sell because you have a "signal" for your risk tolerance to change. The difference is that bogleheads accept it, so it is looked at differently under the guise of "risk change in allocation". Some people however, time the market becuase of a big runup, that results in them feeling a change in risk tolerance.

What i find that some people dont understand that at a market high, one's risk tolerance may change, so they sell. That is called "timing", but instead it is just a dynamic risk tolerance change. Timing can also be people trying to predict the market.

It is all the same thing - selling winners to reallocate into something else, but it is far more acceptable here to rebalance, and it makes sense.

Who cares, pick an allocation and go for it.

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Re: Explain why Rebalancing isn't Market Timing?

Post by snowshoes » Thu Dec 08, 2016 9:22 pm

Rebalancing's odds of financially positive outcomes are better than market timings odds.

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Re: Explain why Rebalancing isn't Market Timing?

Post by rbaldini » Thu Dec 08, 2016 9:31 pm

sambb wrote:of course rebalancing is market timing. Something goes up, and you sell because you have a "signal" for your risk tolerance to change.
You're wrong. You rebalance to get the same risk-reward balance that you had before. To not rebalance is to assume a different risk tolerance than you had before.

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Re: Explain why Rebalancing isn't Market Timing?

Post by protagonist » Thu Dec 08, 2016 10:13 pm

rbaldini wrote:
protagonist wrote:
I am not in the incredibly rich category, but I have enough to finance the rest of my retirement at a level of comfort that I am happy with (given my lifestyle), barring extreme unpredicted circumstances. That is why I do not rebalance, or maintain a fixed AA. Any rebalancing into stock would just increase my risk without substantially contributing to my happiness. I just keep enough money (with enough of a buffer) in investments that I feel will have the best chance of keeping up with inflation- anything beyond that is just lucky (mostly CDs these days for me). That is what I live off. The rest I keep in the stock market (index funds). If stocks go up, great. My heirs will be happy. If they go down, 50%...90%....I don't worry too much.

If I was a lot richer, the stock bucket might be as high as 95%. If I had less money, but enough to maintain my lifestyle, it might be 10% or less. It doesn't matter.

If I did not have more than enough to finance my retirement, the thought process would be more complicated, since I would be at higher risk no matter what I did. But I am not sure it would ultimately be that different. I would just be at greater risk, whether I chose to invest in more stocks in hopes of becoming financially independent (though I might risk losing my shirt), or to invest more conservatively, knowing that I probably would never achieve the lifestyle I desired.
It's your money; you should do what you want with it. I'm just saying that you are letting the market decide your risk level, rather than choosing it yourself and maintaining it there.
Not at all. My financial risk level- everybody's financial risk level- is mostly decided by how much money they have vs. how much they will need. That ratio can be altered in either direction by consequences arising from one's investment strategy. combined with pure luck. If you are 100% in stocks and the market goes up tenfold, you are that much richer and thus your risk level is that much lower, providing your needs stay the same. On the other hand, if the market crashes and you lose half your money, your risk level is then a lot higher than when you started. My risk level is extremely low because I have enough saved in what I believe to be very safe investments from which I can survive and be happy. Not because I am 50/50 in stocks/fixed income. That (my AA- I think it might be more like 45/55 now) ) is irrelevant to me, because a stock crash will not significantly increase my risk. Even if the stock market does "go crazy". (Nor will a bull market significantly change my lifestyle).

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Re: Explain why Rebalancing isn't Market Timing?

Post by HomerJ » Thu Dec 08, 2016 10:46 pm

Dirghatamas wrote:
protagonist wrote: To say that rebalancing "controls risk" without hoping for higher returns....I am not sure I understand that. I get that stocks are riskier than bonds, and you are trying to maintain a set stock/bond ratio. Sure, it reduces risk if you are rebalancing OUT OF a riskier product (stocks) and INTO a less risky product (bonds). But if you have already lost a lot of money in stock , you are already in a more vulnerable (eg less wealthy and thus more risky) position than you were when you started, and then by putting more money into stock you are investing in the riskier product in hopes of receiving a better return . Risk and reward are almost always (if not always) positively correlated.
Ding, ding. I think there is a fair bit of vague/subjective thinking on this subject in this forum. Our ability to take risk doesn't stay constant as markets move so why is a fixed % or rebalancing bands sensible? Consider the last financial crisis. Lets say your risk tolerance before that was 80% stocks/20% bonds. During that year, lets say stocks lost 50% of their value. You also lost your job in the crisis. Your ability to pay your mortgage was now in jeopardy. You couldn't sell your house because it had lost most of its perceived value.
Oh, I agree with both of you... I didn't rebalance INTO stocks during the 2008-2009 crash... (I did change my new contributions to 100% stock, but I didn't risk my EXISTING bond money).

I usually only rebalance the other way, selling stocks when they go way up, to put my risk back to 50/50.

But that doesn't have anything to do with the DEFINITION of rebalancing.

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Re: Explain why Rebalancing isn't Market Timing?

Post by Fallible » Thu Dec 08, 2016 11:38 pm

aboose wrote:...If we define market timing to be reacted to the current market's state of returns, I propose that rebalancing is market timing....
Simply stated:

Market timing is about predicting what the market will do. Rebalancing is about maintaining a predetermined asset allocation.

Key words:

Market timing - predicting
rebalancing - maintaining

If you still don't think market timing is predicting, then the real question is why.
John Bogle on his often bumpy road to low-cost indexing: "When a door closes, if you look long enough and hard enough, if you're strong enough, you'll find a window that opens."

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Re: Explain why Rebalancing isn't Market Timing?

Post by slowmoney » Thu Dec 08, 2016 11:52 pm

Aboose wrote:
It just doesn't make sense to me.

How can you reduce your risk, while simultaneously increasing your returns / beating the market?

There is no Free Lunch. I can accept that rebalancing helps us get back to our emotionally set asset allocations, if it also means we are reducing our returns. Because logically that makes sense.
That’s funny….I been munching on the diversification “free lunch” for years now. Rebalancing has nothing to do with market timing. Rebalancing is:

1. Maintaining a risk tolerance that allows you to “stay the course”.
2. Forcing you to maintain a diversified portfolio of stocks, bonds, international and cash.
3. Allows for a smoother ride of portfolio returns.

Market timing is a LOSING strategy. I personally, do not know of any evidence that shows that market timing works. Is rebalancing a losing strategy? Where is the evidence that rebalancing a diversified portfolio is a loser?
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Re: Explain why Rebalancing isn't Market Timing?

Post by sambb » Fri Dec 09, 2016 12:17 am

obviously a lot of justification herein for reblanacing not being timing.

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Re: Explain why Rebalancing isn't Market Timing?

Post by qwertyjazz » Fri Dec 09, 2016 8:07 am

sambb wrote:obviously a lot of justification herein for reblanacing not being timing.
All market timing is bad
Rebalancing is not bad

Therefore rebalancing is not market timing

QED

Formal logical proof so there can be no problem with that :oops:
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Re: Explain why Rebalancing isn't Market Timing?

Post by rbaldini » Fri Dec 09, 2016 9:41 am

qwertyjazz wrote:
sambb wrote:obviously a lot of justification herein for reblanacing not being timing.
All market timing is bad
Rebalancing is not bad

Therefore rebalancing is not market timing

QED

Formal logical proof so there can be no problem with that :oops:
I hope this is not your only take-away from this discussion...

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Re: Explain why Rebalancing isn't Market Timing?

Post by rbaldini » Fri Dec 09, 2016 9:45 am

protagonist wrote: Not at all. My financial risk level- everybody's financial risk level- is mostly decided by how much money they have vs. how much they will need. That ratio can be altered in either direction by consequences arising from one's investment strategy. combined with pure luck. If you are 100% in stocks and the market goes up tenfold, you are that much richer and thus your risk level is that much lower, providing your needs stay the same. On the other hand, if the market crashes and you lose half your money, your risk level is then a lot higher than when you started. My risk level is extremely low because I have enough saved in what I believe to be very safe investments from which I can survive and be happy. Not because I am 50/50 in stocks/fixed income. That (my AA- I think it might be more like 45/55 now) ) is irrelevant to me, because a stock crash will not significantly increase my risk. Even if the stock market does "go crazy". (Nor will a bull market significantly change my lifestyle).
I get all that. What I'm saying is that, by not rebalancing, you are letting the vagaries of the market decide what your asset allocation is, rather than take control of it yourself. This means the market is deciding how "risky" your portfolio is, since (for most of us) the riskiness of our portfolio is determined by the stock:bond ratio. Again, usually the market isn't going to change your allocation rapidly, so if you're comfortable with where it is now, you'll likely be fine.

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Re: Explain why Rebalancing isn't Market Timing?

Post by avalpert » Fri Dec 09, 2016 9:49 am

sambb wrote:obviously a lot of justification herein for reblanacing not being timing.
That's funny, what I think is obvious is a lot of people here trying to conflate two distinct concepts (what are labeled here rebalancing and market timing) in an effort to dismiss one (rebalancing) without addressing it directly because everyone is ok dismissing the other (market timing).

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