More bonds now to rebalance?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Copernicus
Posts: 320
Joined: Thu May 16, 2013 4:38 pm

More bonds now to rebalance?

Post by Copernicus » Tue Dec 26, 2017 10:50 pm

With the stock market's rise, the asset allocations made couple of years ago now must be out-of-whack for many.
I wonder whether you are now buying more bond funds for rebalancing, in spite of the rising rates?

PFInterest
Posts: 1619
Joined: Sun Jan 08, 2017 12:25 pm

Re: More bonds now to rebalance?

Post by PFInterest » Tue Dec 26, 2017 10:59 pm

I buy whatever I need to with new money. I don't pay attention to rates. Or run ups. Or crashes.

User avatar
grabiner
Advisory Board
Posts: 22342
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: More bonds now to rebalance?

Post by grabiner » Tue Dec 26, 2017 11:00 pm

Remember that there is not just one "interest rate". The Fed targets a change in short-term rates. Bond rates are set by bond traders, who know about future rate forecasts, and will price their bonds accordingly. If bond traders expect short-term rates to rise by 1% next year, and they actually do, then bond yields won't change. If rates rise unexpectedly by 2%, bond yields will probably rise and prices will fall.

But the reason to buy bonds now is to control the risk of your portfolio. Both stocks and bonds have risk, but bonds have much less risk. An unexpected 2% rise in interest rates next year would cause an intermediate-term bond fund to lose 7% (10% price decline, but 3% average yield). An unexpected market crash can cause a stock fund to lose 50%.

I will buy more bonds when I reallocate my portfolio next week. (I do this in January when I make my IRA contribution, as I have to evaluate the whole portfolio to decide where the IRA contribution should go.) I have two reasons for buying more bonds: a minor rebalance because of the rising market, and an increase from 6% to 8% in my target net bond allocation because I am one year closer to retirement. (My "net bond allocation" counts my mortgage as a negative bond.)
Wiki David Grabiner

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: More bonds now to rebalance?

Post by dbr » Tue Dec 26, 2017 11:10 pm

If/when I reach my bands I will rebalance and not try to time interest rates.

Are you really saying people should change their asset allocation plan based on a presumption that interest rates, or certain interest rates, are rising/are going to rise now/soon/sometime? I would not make investment decisions that way.

TxInjun
Posts: 61
Joined: Fri May 29, 2015 12:05 pm

Re: More bonds now to rebalance?

Post by TxInjun » Tue Dec 26, 2017 11:28 pm

Most of us would find ourselves in either “accumulation” mode or “withdrawal” mode: so the easy thing to do is to buy (in the first instance), or sell (in the second instance) as needed to approach your desired asset allocation. It is not necessary, and very inefficient, to try and be too accurate about the investment allocations: most here have bands around their desired allocation (+/- 5 to 10%) that the allocations can drift within, with no action needed.

3funder
Posts: 640
Joined: Sun Oct 15, 2017 9:35 pm

Re: More bonds now to rebalance?

Post by 3funder » Wed Dec 27, 2017 8:29 am

My wife and I have increased our bond allocation by 5%. We plan on keeping our overall AA at 80/20 for the next decade or so.

livesoft
Posts: 61944
Joined: Thu Mar 01, 2007 8:00 pm

Re: More bonds now to rebalance?

Post by livesoft » Wed Dec 27, 2017 8:35 am

Yes, I have had to buy bond fund shares. No problem for me to do that. I didn't really have to sell equities since they should paid out their December distributions which knocked back down their allocation. Also I gave some equity shares to charity which also reduced my allocation to equities. But I am using the dividends to buy bond fund shares for the most part. (Or I am spending the dividends.)
Wiki This signature message sponsored by sscritic: Learn to fish.

Copernicus
Posts: 320
Joined: Thu May 16, 2013 4:38 pm

Re: More bonds now to rebalance?

Post by Copernicus » Wed Dec 27, 2017 12:55 pm

dbr wrote:
Tue Dec 26, 2017 11:10 pm
Are you really saying people should change their asset allocation plan based on a presumption that interest rates, or certain interest rates, are rising/are going to rise now/soon/sometime? I would not make investment decisions that way.
dbr,
Thanks. It is implicit in "asset allocations made couple of years ago now must be out-of-whack" that shifting AA must be out-of-whack for the individual's risk tolerance level; and if out-of-whack more than the rebalancing bands, this should trigger rebalance.
We both were thinking the same, but I was not explicit in my post.

chevca
Posts: 1765
Joined: Wed Jul 26, 2017 11:22 am

Re: More bonds now to rebalance?

Post by chevca » Wed Dec 27, 2017 1:01 pm

Copernicus wrote:
Tue Dec 26, 2017 10:50 pm
With the stock market's rise, the asset allocations made couple of years ago now must be out-of-whack for many.
I wonder whether you are now buying more bond funds for rebalancing, in spite of the rising rates?
If they had been rebalancing along the way, they wouldn't be out-of-whack, right? :happy

I don't have the $$ amount in my portfolio as many here, but I'm a simple 60/40 type and my AA has barely moved away from that. Maybe portfolio size and dividends and all make a difference that way, but it doesn't seem automatic that things are out-of-whack for all.

Copernicus
Posts: 320
Joined: Thu May 16, 2013 4:38 pm

Re: More bonds now to rebalance?

Post by Copernicus » Wed Dec 27, 2017 1:17 pm

chevca wrote:
Wed Dec 27, 2017 1:01 pm
Copernicus wrote:
Tue Dec 26, 2017 10:50 pm
With the stock market's rise, the asset allocations made couple of years ago now must be out-of-whack for many.
I wonder whether you are now buying more bond funds for rebalancing, in spite of the rising rates?
If they had been rebalancing along the way, they wouldn't be out-of-whack, right? :happy

I don't have the $$ amount in my portfolio as many here, but I'm a simple 60/40 type and my AA has barely moved away from that. Maybe portfolio size and dividends and all make a difference that way, but it doesn't seem automatic that things are out-of-whack for all.
Depends on the width of rebalancing trigger bands, and frequency of rebalancing. Too much rebalancing is detrimental (costs, sometimes selling a rising asset too soon, sometimes buying a falling asset too soon). -- I read Mr. Bogle advising some time ago: "Rebalance 'rarely' and 'slightly'."

chevca
Posts: 1765
Joined: Wed Jul 26, 2017 11:22 am

Re: More bonds now to rebalance?

Post by chevca » Wed Dec 27, 2017 1:38 pm

Copernicus wrote:
Wed Dec 27, 2017 1:17 pm
chevca wrote:
Wed Dec 27, 2017 1:01 pm
Copernicus wrote:
Tue Dec 26, 2017 10:50 pm
With the stock market's rise, the asset allocations made couple of years ago now must be out-of-whack for many.
I wonder whether you are now buying more bond funds for rebalancing, in spite of the rising rates?
If they had been rebalancing along the way, they wouldn't be out-of-whack, right? :happy

I don't have the $$ amount in my portfolio as many here, but I'm a simple 60/40 type and my AA has barely moved away from that. Maybe portfolio size and dividends and all make a difference that way, but it doesn't seem automatic that things are out-of-whack for all.
Depends on the width of rebalancing trigger bands, and frequency of rebalancing. Too much rebalancing is detrimental (costs, sometimes selling a rising asset too soon, sometimes buying a falling asset too soon). -- I read Mr. Bogle advising some time ago: "Rebalance 'rarely' and 'slightly'."
Agreed. But, that doesn't really matter for your out-of-whack topic. If they have narrow bands and rebalance often, they're not out-of-whack. If they have wide bands and haven't had to rebalance, they're not out-of-whack either. The run up shouldn't make for anyone to "must be out-of-whack". Unless maybe they don't pay attention to their portfolio at all. And even then, is that person out-of-whack if they don't even know it? :happy

UpperNwGuy
Posts: 694
Joined: Sun Oct 08, 2017 7:16 pm
Location: Washington DC

Re: More bonds now to rebalance?

Post by UpperNwGuy » Wed Dec 27, 2017 2:45 pm

Perhaps it would be better to say: This is the time of year when many investors routinely check to see if they need to rebalance, and much of that rebalancing may involve buying bonds due to the continuing rise of stock prices.

Not sure I understand why an investor would be "out-of-whack" unless they had not been monitoring on schedule and rebalancing as needed.

visualguy
Posts: 647
Joined: Thu Jan 30, 2014 1:32 am

Re: More bonds now to rebalance?

Post by visualguy » Wed Dec 27, 2017 2:53 pm

Copernicus wrote:
Tue Dec 26, 2017 10:50 pm
With the stock market's rise, the asset allocations made couple of years ago now must be out-of-whack for many.
I wonder whether you are now buying more bond funds for rebalancing, in spite of the rising rates?
You can get CDs instead of bond funds. Many here do that.

Post Reply