Boglehead contradiction, constant asset allocation is market timing

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fctu
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Boglehead contradiction, constant asset allocation is market timing

Post by fctu » Tue Feb 27, 2018 6:53 pm

I am trying to understand these apparently contradictory ideas which both seem to be widely accepted.

Idea 1: It is impossible to time the market
Idea 2: You should periodically rebalance to maintain your asset allocation. This is said to maintain a constant level of risk, but is also said to have the significant benefit of market timing in that if one asset crashes, you end up buying low when you rebalance.

If we ignore bonds and just look at equities - you could totally avoid market timing by having constant purchase allocation instead of asset allocation. I could say that every year I will buy $10,000 of US stocks, $10,000 of International stocks, $1000 of REIT, and $1000 of small cap. That would be buy and hold and completely avoid market timing. Maintaining a constant asset allocation among your equity funds appears to me to be a form of market timing - you are making buy and sell decisions based on past performance.

Going one step further, if it is accepted that maintaining a constant asset allocation is a form of market timing which works - it does better than just buying and holding without rebalancing - isn't that a slippery slope that could lead you to using those same market timing cues to time the market by periodically changing your asset allocation. For example, if US stocks were to be down 50% while international was up 20% - maybe you should do more than just rebalance but rather increase your percentage of US stocks?

I am imagining a system where you basically use constant asset allocation but slightly exaggerate each purchase and sell when you rebalance. Would that end up doing worse? Is constant asset allocation the best form of market timing and the only systematic form of market timing which is accepted to work?

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by livesoft » Tue Feb 27, 2018 7:02 pm

I cannot help you out with philosophy, but I'll stir the pot:

Not rebalancing when the market drops significantly is a form of market timing.
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David Jay
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by David Jay » Tue Feb 27, 2018 7:09 pm

The reason for rebalancing is to maintain your selected level of RISK, not to "buy low" or "sell high". Rebalancing out of stocks will be a long-term loser - holding more stocks is likely to increase your performance. But I rebalance out of stocks when my asset allocation is askew.
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by Catfish Plumber » Tue Feb 27, 2018 7:10 pm

I don’t have an answer for any of these questions, but I found it interesting seeing someone else post what I have (for reasons I don’t fully understand yet) been thinking about and planning to do: “over”-rebalancing right to the opposite limit of my bands.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by fctu » Tue Feb 27, 2018 7:13 pm

When looking at stock funds, you could vary your US to international allocation significantly without significantly changing your risk level. Anywhere between 20% to 50% international seems to be considered similarly ideal.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by Alexa9 » Tue Feb 27, 2018 7:17 pm

Here's what the experts say about rebalancing:

https://www.vanguard.com/pdf/icrpr.pdf

It is more to maintain risk level than for gainz. The rebalancing bonus works when the market is volatile but flat but does not help you in a long bull or bear market. If you put the same amount in each fund every year you would get more and more aggressive.
Last edited by Alexa9 on Tue Feb 27, 2018 7:18 pm, edited 1 time in total.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by bogglehead125 » Tue Feb 27, 2018 7:18 pm

livesoft wrote:
Tue Feb 27, 2018 7:02 pm
I cannot help you out with philosophy, but I'll stir the pot:

Not rebalancing when the market drops significantly is a form of market timing.
I feel that market timing is about chasing what one believes to be outsized future expected returns (alpha) and rationally-motivated rebalancing is about asserting a risk preference or an expected returns preference (with EMH and on the efficient frontier these are equivalent). It follows that not rebalancing when the market drops is failing to assert a risk preference, not market timing. Chanting “rebalancing bonus” and buying on a RBD would, however, be market timing.
Last edited by bogglehead125 on Tue Feb 27, 2018 7:44 pm, edited 1 time in total.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by Kenkat » Tue Feb 27, 2018 7:18 pm

I used to believe that there was a re-balancing bonus by selling over performing assets and buying underperforming assets. I no longer really believe that. Not that it is not in theory possible, but in practice you typically are selling assets with a higher expected future return (i.e., stocks) for assets with a lower expected future return (i.e., bonds). I would guess that my returns would actually be higher if I had never rebalanced. As others have said, my risk level would be much higher than when I started. So, if rebalancing is market timing, it doesn’t probably do much for you.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by longinvest » Tue Feb 27, 2018 7:30 pm

I like to use mathematics to think about such things.

Let's say that I've picked a 50/50 stocks/bonds allocation. I have $10,000 to invest. I choose to invest the stock allocation ($5,000) into Vanguard Total World Stock ETF (VT) and the bond allocation ($5,000) into the iShares TIPS Bond ETF (TIP), because I don't want to concentrate my stocks into a single country and I don't want to take inflation risk with my bonds.

For simplicity, I set up my brokerage account to automatically reinvest distributions.

One year later, I look at my portfolio. Stocks (VT) have dropped to $4,000 and bonds have grown to $5,150.

Let's think a little. I was willing, one year ago, to buy my stocks for $5,000. Why wouldn't I be willing to buy more stocks, now, when they're on a 20% rebate relative to last year? If I had known ahead, I would have actually put all of my money, last year, into bonds, and I could sell half of the bonds this year to buy stocks. I would end up with the same amount of bonds ($5,150), but way more stocks ($5,150). But, for this to happen, I would have had to be a perfect market timer!

As a Boglehead, I don't try to time the market.

But, I can think rationally. It's pretty clear that stocks are cheaper this year than last year, and that bonds are more expensive this year than last year. So, it would be quite rational for me to trim part of my expensive bonds to buy some cheap stock.

How much? That's the dilemma that an asset allocation provides a logical solution for. If I've determined that I don't know what markets will return in the future, and I was willing to put half of my money into either investments last years, I should be willing to do the same this year!

So, here it is. As my portfolio is now ($4,000 + $5,150) = $9,150, I should be willing to have it invested 50/50 into stocks and bonds again. This is $4,575 into VT and $4,575 into TIP. To get there, I need to sell ($5,150 - $4,575) = $575 of TIP and buy VT with it.

It's all perfectly logical, and it isn't market timing.
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by livesoft » Tue Feb 27, 2018 7:36 pm

longinvest wrote:
Tue Feb 27, 2018 7:30 pm
I like to use mathematics to think about such things.
[...]
It's all perfectly logical, and it isn't market timing.
But suppose that on one day during the year, the VT allocation had dropped to $3,000 and the TIPS were at $5100. It was a day that you didn't look. The math holds for that day, but since you didn't look, you didn't do any math and you didn't rebalance.

OTOH, the fund managers of LifeStrategy or Target Retirement fund did look and they very likely used mathematics.
Last edited by livesoft on Tue Feb 27, 2018 7:37 pm, edited 1 time in total.
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by fctu » Tue Feb 27, 2018 7:37 pm

My question is more geared to those using a "slice and dice" approach rather than those buying Vanguard Total World Stock ETF.

From the boglehead wiki, https://www.bogleheads.org/wiki/Slice_and_dice
"In its simplest form, the idea is to garner excess returns by holding a portfolio that

a) splits the market portfolio among sub-asset classes that are deemed likely to deliver superior returns;
b) holds higher weightings of size and value sub-asset classes that have lower correlations with the market; and
c) periodically rebalances each sub-asset class to its original weight.
This is in contrast to total stock market investing, which approximates the entire market as a single asset class.

The theoretical justification for slice and dice rests on the benefits of what is often called "diversification." However, in this context the word is used with a specific technical meaning. It refers to asset classes with low correlation coefficients. The benefit comes from the fact that a mixture of assets with low correlation will have better risk-adjusted returns than either of them taken by itself. A well-known example is that even though international stocks are riskier than domestic stocks, adding a moderate amount of international stocks to domestic stocks actually reduces the risk of the domestic stocks--slightly.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by triceratop » Tue Feb 27, 2018 7:41 pm

longinvest wrote:
Tue Feb 27, 2018 7:30 pm
I like to use mathematics to think about such things.

Let's say that I've picked a 50/50 stocks/bonds allocation.

<snip>

It's all perfectly logical, and it isn't market timing.
Right, you and the OP are talking about different things because you are talking about an asset allocation and the OP is talking about something which, well, I'm not sure what it is, but it isn't an asset allocation.

The big hole in the OP's framing is that, I haven't seen them address what happens as one ages and has a lower risk tolerance. You know, because you need (probably, unless you don't need to, in which case this is all academic) to spend the money.
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by MrBeaver » Tue Feb 27, 2018 7:42 pm

I have many of the same thoughts as you state here. In fact, the Bogglehead wiki even links to this article (by the way, the link on the wiki in the footnote is dead, needs to be updated to this one):
http://www.wsfaonline.com/resources/Opp ... yanani.pdf

Which states the (market timing) assumption up-front: "The implicit assumption is that the underweight class is also undervalued and reversion to the mean should imply that future returns are expected to be higher than past returns."

I would also add that it also assumes that overweight classes are overvalued and reversion to the mean should imply that future returns are expected to be lower than past returns. The most notable exception to this assumption seems to be EM class equities in the mid-2000s which stayed at the top of the Callan periodic table from 2003 until 2007.

Wiki link: https://www.bogleheads.org/wiki/Rebalancing states:
"The frequency at which the portfolio is monitored for deviations from its target has some influence on the returns gains (or losses) that may be obtained by rebalancing."
With footnote:
"Research seems to indicate that monitoring on a weekly basis (while actually rebalancing very infrequently, e.g. by using large deviation thresholds) could provide the best rebalancing bonus. Conversely, rebalancing too frequently and using low thresholds would be detrimental. See: Opportunistic Rebalancing: A New Paradigm For Wealth Managers"

The article is a very good read, IMO. To your observations, I would add this:

The concept of rebalancing bands and tolerance bands within a rebalancing scheme seems like it attempts to accentuate the gains from this timing. By having a tolerance band and a wider rebalancing band, the strategy implicitly attempts to let 'winners' continue to win for a while (rebalancing band) before pulling assets out until it exceeds its tolerance band and it or another asset class exceeds its rebalance band, and not dump money into losers in a similar way.

The article furthermore states this though:
"This study assumes strategic rebalancing, which means that once the bands are set, they are not changed based on market projections."

And there lies a potential answer as to why rebalancing isn't viewed as timing:
  1. Set your asset allocation
  2. Rebalance periodically.
  3. Only change asset allocation as a result of changing risk profile (age, etc.)
Note also the wiki links to this forum thread, but there was no discussion or accusation that the approach might be 'market timing': viewtopic.php?t=186203

Concerning calendar rebalancing, the article states:
"Note that for a case of rebalance band of 0 percent, all asset classes must be rebalanced to the portfolio benchmark every time one looks at the portfolio [for the purpose of rebalancing]."

So, perhaps the distinction between the terms of "market timing" and "rebalancing bonus" is that the former uses emotional feelings or theories about predicting the future, while the latter assumes there is some reversion to the mean but uses a fixed system to ensure emotion and 'new ideas' don't take someone away from their investing plan?

Personally, the rebalancing band method appeals to me quite a lot, but I'm anxious to hear some responses of why this might be unwise (why the reversion to the mean assumption is not true in a global market).

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by bogglehead125 » Tue Feb 27, 2018 7:42 pm

longinvest wrote:
Tue Feb 27, 2018 7:30 pm
As a Boglehead, I don't try to time the market.

But, I can think rationally. It's pretty clear that stocks are cheaper this year than last year, and that bonds are more expensive this year than last year. So, it would be quite rational for me to trim part of my expensive bonds to buy some cheap stock.
Cheap relative to what? Their expected future returns, or their price yesterday? If you believe in EMH, it is irrational for you to buy something simply because it costs less than it did yesterday. The world may have changed.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by 22twain » Tue Feb 27, 2018 7:56 pm

Kenkat wrote:
Tue Feb 27, 2018 7:18 pm
I would guess that my returns would actually be higher if I had never rebalanced.
For my entire working career (> 30 years, 1984-2016) my contributions to my 403(b) retirement plan were 50% to a stock fund (TIAA's CREF Stock account) and 50% to "bonds" (TIAA Traditional account). I never rebalanced. My actual % of stock has varied between about 40% and 65% as the market rose and fell.

Recently I made a spreadsheet that separated the annual contributions from the returns and reconstructed what would have happened if I had rebalanced annually using various criteria, e.g. always rebalance to 50/50 each year, or only it's off by more than 5%. In both cases I ended up with a higher balance, with the latter case being better. It would have given me a current balance about 10% higher than I actually have now. by about 3% in the first case and 4.5% in the second.
Last edited by 22twain on Thu Mar 01, 2018 12:00 am, edited 1 time in total.
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by fctu » Tue Feb 27, 2018 7:58 pm

Catfish Plumber wrote:
Tue Feb 27, 2018 7:10 pm
I don’t have an answer for any of these questions, but I found it interesting seeing someone else post what I have (for reasons I don’t fully understand yet) been thinking about and planning to do: “over”-rebalancing right to the opposite limit of my bands.


Yes - this is basically what I am wondering about. Has anyone backtested this strategy? I was thinking of applying this only to equity sub-classes which would avoid altering your risk level significantly and avoid increasing your allocation to an asset with significantly lower expected long term returns.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by iceport » Tue Feb 27, 2018 8:03 pm

22twain wrote:
Tue Feb 27, 2018 7:56 pm
Kenkat wrote:
Tue Feb 27, 2018 7:18 pm
I would guess that my returns would actually be higher if I had never rebalanced.
For my entire working career (> 30 years, 1984-2016) my contributions to my 403(b) retirement plan were 50% to a stock fund (TIAA's CREF Stock account) and 50% to "bonds" (TIAA Traditional account). I never rebalanced. My actual % of stock has varied between about 40% and 65% as the market rose and fell.

Recently I made a spreadsheet that separated the annual contributions from the returns and reconstructed what would have happened if I had rebalanced annually using various criteria, e.g. always rebalance to 50/50 each year, or only it's off by more than 5%. In both cases I ended up with a higher balance, with the latter case being better. It would have given me a current balance about 10% higher than I actually have now.
That's amazing that you have such a consistent contribution history that allowed you to make those comparisons. And it's great that you thought to make those tests. Thanks for sharing that!
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by longinvest » Tue Feb 27, 2018 8:12 pm

bogglehead125 wrote:
Tue Feb 27, 2018 7:42 pm
longinvest wrote:
Tue Feb 27, 2018 7:30 pm
As a Boglehead, I don't try to time the market.

But, I can think rationally. It's pretty clear that stocks are cheaper this year than last year, and that bonds are more expensive this year than last year. So, it would be quite rational for me to trim part of my expensive bonds to buy some cheap stock.
Cheap relative to what? Their expected future returns, or their price yesterday? If you believe in EMH, it is irrational for you to buy something simply because it costs less than it did yesterday. The world may have changed.
It's much simpler than all this probabilistic vocabulary implies. (e.g. What's an expected return, really? Who knows how to precisely calculate it for the future? Isn't it just a guess, mostly useful for people willing to actually time the market and buy more of the most probabilistically rewarding asset ahead?)

I was just comparing the prices of this year with those of last year. I thought it was pretty explicit. Let me rephrase what I wrote, making it more tedious to read, though: "... So, it would be quite rational for me to trim part of my more-expensive-than-last-year bonds to buy some cheaper-than-last-year stocks".

Is that clearer?
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by cheese_breath » Tue Feb 27, 2018 8:17 pm

Market timing is doing something based on what you think is going to happen.

Rebalancing is responding to what has already happened.
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by fctu » Tue Feb 27, 2018 8:36 pm

MrBeaver wrote:
Tue Feb 27, 2018 7:42 pm
Wiki link: https://www.bogleheads.org/wiki/Rebalancing states:
Thanks for the useful links. I hadn't found that wiki page yet. It states that " rebalancing ensures that investors "Buy Low" and "Sell High"."

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by BHUser27 » Tue Feb 27, 2018 8:44 pm

fctu wrote:
Tue Feb 27, 2018 8:36 pm
Thanks for the useful links. I hadn't found that wiki page yet. It states that " rebalancing ensures that investors "Buy Low" and "Sell High"."
That statement is an over simplification at best, and not true at worst.

Rebalancing ensures that you are...
1) selling some of the portfolio products that are higher in value since last time you rebalanced, and...
2) buying some of the portfolio products that are lower in value since last time you rebalanced

It is a *relative* effect. No association should be made to the overall state of the market. <--- this is market timing.
Last edited by BHUser27 on Wed Feb 28, 2018 6:27 am, edited 1 time in total.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by Kenkat » Tue Feb 27, 2018 8:47 pm

22twain wrote:
Tue Feb 27, 2018 7:56 pm
Kenkat wrote:
Tue Feb 27, 2018 7:18 pm
I would guess that my returns would actually be higher if I had never rebalanced.
For my entire working career (> 30 years, 1984-2016) my contributions to my 403(b) retirement plan were 50% to a stock fund (TIAA's CREF Stock account) and 50% to "bonds" (TIAA Traditional account). I never rebalanced. My actual % of stock has varied between about 40% and 65% as the market rose and fell.

Recently I made a spreadsheet that separated the annual contributions from the returns and reconstructed what would have happened if I had rebalanced annually using various criteria, e.g. always rebalance to 50/50 each year, or only it's off by more than 5%. In both cases I ended up with a higher balance, with the latter case being better. It would have given me a current balance about 10% higher than I actually have now.
Interesting. I will note that the period starting in 1984 was one of the very best for bonds as interest rates fell from a very high point to a very low point over that time period. As they say, timing is everything.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by ThrustVectoring » Tue Feb 27, 2018 8:54 pm

It's risk management, not market timing. A risk management strategy that targets levering up to 120% on stocks would manage risk by buying stocks when they increase in value and selling when they decrease.
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by bogglehead125 » Tue Feb 27, 2018 9:23 pm

longinvest wrote:
Tue Feb 27, 2018 8:12 pm
bogglehead125 wrote:
Tue Feb 27, 2018 7:42 pm
longinvest wrote:
Tue Feb 27, 2018 7:30 pm
As a Boglehead, I don't try to time the market.

But, I can think rationally. It's pretty clear that stocks are cheaper this year than last year, and that bonds are more expensive this year than last year. So, it would be quite rational for me to trim part of my expensive bonds to buy some cheap stock.
Cheap relative to what? Their expected future returns, or their price yesterday? If you believe in EMH, it is irrational for you to buy something simply because it costs less than it did yesterday. The world may have changed.
It's much simpler than all this probabilistic vocabulary implies. (e.g. What's an expected return, really? Who knows how to precisely calculate it for the future? Isn't it just a guess, mostly useful for people willing to actually time the market and buy more of the most probabilistically rewarding asset ahead?)

I was just comparing the prices of this year with those of last year. I thought it was pretty explicit. Let me rephrase what I wrote, making it more tedious to read, though: "... So, it would be quite rational for me to trim part of my more-expensive-than-last-year bonds to buy some cheaper-than-last-year stocks".

Is that clearer?
Sometimes, simpler is better. I think you may have gone too far.

Either you believe the price is correct, or you don't. If you think prices are wrong, lots of the boglehead philosophy gets awkward. If you think prices are right, then "cheaper-than-last-year stocks" doesn't mean anything. The price was right last year, and it is right now, and we assume it will be correct in the future as more information becomes available about future cash flows.

To be clear, I agree that it is rational to want to pay less for stocks. If I offered you AAPL at $100 and $80, you should pay $80. But if in 2017 the price is $100 and in 2018 the price is $80, obviously something has changed in the world to cause the price to go down. It is not a steal at $80. It is not a rip-off at $100. At the time we would be buying in either scenario, we expect the stock to have roughly the average historical return of its asset class going forward. Blindly comparing the two numbers is irrational.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by longinvest » Tue Feb 27, 2018 11:33 pm

bogglehead125 wrote:
Tue Feb 27, 2018 9:23 pm
longinvest wrote:
Tue Feb 27, 2018 8:12 pm
bogglehead125 wrote:
Tue Feb 27, 2018 7:42 pm
longinvest wrote:
Tue Feb 27, 2018 7:30 pm
As a Boglehead, I don't try to time the market.

But, I can think rationally. It's pretty clear that stocks are cheaper this year than last year, and that bonds are more expensive this year than last year. So, it would be quite rational for me to trim part of my expensive bonds to buy some cheap stock.
Cheap relative to what? Their expected future returns, or their price yesterday? If you believe in EMH, it is irrational for you to buy something simply because it costs less than it did yesterday. The world may have changed.
It's much simpler than all this probabilistic vocabulary implies. (e.g. What's an expected return, really? Who knows how to precisely calculate it for the future? Isn't it just a guess, mostly useful for people willing to actually time the market and buy more of the most probabilistically rewarding asset ahead?)

I was just comparing the prices of this year with those of last year. I thought it was pretty explicit. Let me rephrase what I wrote, making it more tedious to read, though: "... So, it would be quite rational for me to trim part of my more-expensive-than-last-year bonds to buy some cheaper-than-last-year stocks".

Is that clearer?
Sometimes, simpler is better. I think you may have gone too far.

Either you believe the price is correct, or you don't. If you think prices are wrong, lots of the boglehead philosophy gets awkward. If you think prices are right, then "cheaper-than-last-year stocks" doesn't mean anything. The price was right last year, and it is right now, and we assume it will be correct in the future as more information becomes available about future cash flows.
"Price is correct (or wrong)" means "valuation" means "expected return" means "guessing the future". That's complex probabilistic stuff.

I keep it simple: I don't believe that anybody can guess future returns.
bogglehead125 wrote:
Tue Feb 27, 2018 9:23 pm
To be clear, I agree that it is rational to want to pay less for stocks. If I offered you AAPL at $100 and $80, you should pay $80. But if in 2017 the price is $100 and in 2018 the price is $80, obviously something has changed in the world to cause the price to go down. It is not a steal at $80. It is not a rip-off at $100. At the time we would be buying in either scenario, we expect the stock to have roughly the average historical return of its asset class going forward. Blindly comparing the two numbers is irrational.
I read the word "expect" in: "... we expect the stock to have roughly..."

I don't expect* anything. I don't know who the "we" refers to, in that sentence, but it doesn't include me.

* In the sense of probabilistic expectation, of course. I'm not referring to the common usage of the word "expect".
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by Windylotus » Wed Feb 28, 2018 12:39 am

livesoft wrote:
Tue Feb 27, 2018 7:36 pm
OTOH, the fund managers of LifeStrategy or Target Retirement fund did look and they very likely used mathematics.
livesoft,

Do you know how often TR or LS funds rebalance? At their discretion, daily, weekly, monthly, ect?

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by Mursili » Wed Feb 28, 2018 12:49 am

bogglehead125 wrote:
Tue Feb 27, 2018 9:23 pm
Blindly comparing the two numbers is irrational.
Actually the ratio of two numbers is the definition of rational.

This discussion makes me wonder if dollar cost averaging is market timing to the OP since you "buy more when shares are down and less when shares are up?"
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by Northern Flicker » Wed Feb 28, 2018 1:08 am

It depends on how you define market timing. I define market timing as changing your asset allocation in response to market conditions or predictions. Rebalancing is resetting your established asset allocation after market movement has caused your investment position to drift from your established asset allocation, which does not satisfy this definition of market timing.
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by sambb » Wed Feb 28, 2018 1:30 am

rebalancing is a form of timing. because market went up or down, and now your allocation has drifted.
it is semantics.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by peterinjapan » Wed Feb 28, 2018 1:30 am

Truth be told, I love everyone here, but some people take the purity of Bogleheadism a little too far.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by MrBeaver » Wed Feb 28, 2018 1:45 am

I'll try to redirect here:
Can the "rebalancing bonus" be counted on to continue in the future? If so, I think that suggests that:
  • Total market returns (all asset classes) may not have a reversion to any mean growth rate such that low recent returns suggest high future returns and vice versa. This is why market timing based on valuations is generally foolhardy. But...
  • Relative returns between asset classes do have a reversion to a mean return of the entire market (because of globalization?).
Furthermore, does this suggest that cap-weighted total stock market indexes do essentially no rebalancing between asset classes, and therefore do not contain any 'rebalancing bonus' within themselves, giving up potential returns?

Note: I understand that rebalancing has benefits for maintaining risk profiles completely independent of the question of whether there is a rebalancing bonus. I'm just wondering whether asset class reversion to the mean is a reasonable assumption that can or should be employed to maximize long-term returns.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by venkman » Wed Feb 28, 2018 2:42 am

fctu wrote:
Tue Feb 27, 2018 6:53 pm
If we ignore bonds and just look at equities - you could totally avoid market timing by having constant purchase allocation instead of asset allocation. I could say that every year I will buy $10,000 of US stocks, $10,000 of International stocks, $1000 of REIT, and $1000 of small cap. That would be buy and hold and completely avoid market timing. Maintaining a constant asset allocation among your equity funds appears to me to be a form of market timing - you are making buy and sell decisions based on past performance.
Isn't it technically "market timing" to invest money in ANY asset rather than in some other asset at ANY time?

And why are you investing that $22k into stocks every year, instead of, say, investing a lump sum of $110k every 5 years, or investing $87.30 every trading day? Isn't that choice a form of market timing?

You might consider rebalancing to be a form of market timing; but any BH prohibitions against it are superseded by the more fundamental BH principle that one should invest according to one's need, willingness, and ability to take risk.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by james22 » Wed Feb 28, 2018 3:09 am

livesoft wrote:
Tue Feb 27, 2018 7:02 pm
I cannot help you out with philosophy, but I'll stir the pot:

Not rebalancing when the market drops significantly is a form of market timing.
With respect to conventional investment strategies, understand that holding a fixed, static allocation to stocks and other investment classes, regardless of their valuations, is implicitly an *active* investment strategy.

At rich valuations, it is a strategy that lengthens the effective maturity of the portfolio and increases exposure to risk, even though prospective long-term returns have diminished. At depressed valuations, it is a strategy that shortens the effective maturity of the portfolio and reduces exposure to risk, even though prospective long-term returns have increased.

A static allocation does that automatically, as a consequence of how discounted cash flows operate. Failing to rebalance simply amplifies this outcome.


http://www.hussmanfunds.com/wmc/wmc170206.htm

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by livesoft » Wed Feb 28, 2018 6:18 am

Windylotus wrote:
Wed Feb 28, 2018 12:39 am
livesoft wrote:
Tue Feb 27, 2018 7:36 pm
OTOH, the fund managers of LifeStrategy or Target Retirement fund did look and they very likely used mathematics.
livesoft,

Do you know how often TR or LS funds rebalance? At their discretion, daily, weekly, monthly, ect?
No, but I do know they manage the funds every day. Somewhere on the forum is a link or quote from a Vanguard manager which basically says, "we are not going to reveal what we do, but you can assume we are doing something." Maybe you or someone else can find it if that interested.
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by dbr » Wed Feb 28, 2018 8:37 am

The simple answer is that you may be misunderstanding what market timing is. You may also be misunderstanding what rebalancing is for and what it accomplishes.

I think others are addressing these in detail.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by bottlecap » Wed Feb 28, 2018 8:55 am

This is been discussed thousands of times. Biggest problem you have is you mistate idea 2.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by RRAAYY3 » Wed Feb 28, 2018 8:57 am

We all market time

Some just have a really hard time admitting it

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by The Wizard » Wed Feb 28, 2018 9:03 am

fctu wrote:
Tue Feb 27, 2018 6:53 pm
...Maintaining a constant asset allocation among your equity funds appears to me to be a form of market timing - you are making buy and sell decisions based on past performance...
Right, but this is NOT a Past Performance Predicting Future Results situation.
A rebalancing algorithm looks at the current balance of your portfolio based on essentially the integral of recent performance of different asset classes.

So yes, I suppose you could say that rebalancing algorithms are DESIGNED to buy more stocks when their prices are significantly down compared to recent history, and to sell some stocks when they are hitting sustained new highs...
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by oldcomputerguy » Wed Feb 28, 2018 9:12 am

fctu wrote:
Tue Feb 27, 2018 6:53 pm
If we ignore bonds and just look at equities - you could totally avoid market timing by having constant purchase allocation instead of asset allocation. I could say that every year I will buy $10,000 of US stocks, $10,000 of International stocks, $1000 of REIT, and $1000 of small cap. That would be buy and hold and completely avoid market timing. Maintaining a constant asset allocation among your equity funds appears to me to be a form of market timing - you are making buy and sell decisions based on past performance.
On the contrary. I maintain a constant allocation in my portfolio based on my desired level or risk, regardless of what the market is doing, has done, or will do. My decisions on whether to buy or sell are based 100% on the relative proportion of assets in my portfolio. That is a hard-and-fast metric that requires no prediction on my part. That decision is never influenced by whether I think the market will go up or go down. By definition, this is not market timing.
"I’ve come around to this: If you’re dumb, surround yourself with smart people; and if you’re smart, surround yourself with smart people who disagree with you." (Aaron Sorkin)

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by dbr » Wed Feb 28, 2018 9:14 am

The Wizard wrote:
Wed Feb 28, 2018 9:03 am
fctu wrote:
Tue Feb 27, 2018 6:53 pm
...Maintaining a constant asset allocation among your equity funds appears to me to be a form of market timing - you are making buy and sell decisions based on past performance...
Right, but this is NOT a Past Performance Predicting Future Results situation.
A rebalancing algorithm looks at the current balance of your portfolio based on essentially the integral of recent performance of different asset classes.

So yes, I suppose you could say that rebalancing algorithms are DESIGNED to buy more stocks when their prices are significantly down compared to recent history, and to sell some stocks when they are hitting sustained new highs...
It may be nitpicky, but I myself would be happier with saying not that the algorithms are DESIGNED to buy . . . but rather that rebalancing algorithms can often have the effect of . . . What the algorithms are designed to do, of course, is return the asset allocation to a target based on some condition. I do get your point, however.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by BBQ Nut » Wed Feb 28, 2018 9:46 am

Nice topic to bandy about.

One thing I haven't seen discussed is the frequency one rebalances.

Do people constantly monitor or have trigger warnings when their asset allocation bands get out of whack?

Because, to me, that would be a form of market timing. Not a big deal for 2017 as there wasn't really much market volatility.

For 2018 is seems volatility is back, so does that mean folks here will be constantly doing reallocations based on short trend swings in the market?

I check my account balances maybe once a month and let the allocations ride per my IPS.

So, my question is, what time frame do people use to base a need to readjust their AA? Day, month, year, other?

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by vested1 » Wed Feb 28, 2018 9:56 am

Said simply, but not to be confused with recency bias.
cheese_breath wrote:
Tue Feb 27, 2018 8:17 pm
Market timing is doing something based on what you think is going to happen.

Rebalancing is responding to what has already happened.
Selling high and buying low is not the goal, but rather the collateral effect. It's tempting to stick with a winner. Until it's not.
Alexa9 wrote:
Tue Feb 27, 2018 7:17 pm
Here's what the experts say about rebalancing:

https://www.vanguard.com/pdf/icrpr.pdf

It is more to maintain risk level than for gainz. The rebalancing bonus works when the market is volatile but flat but does not help you in a long bull or bear market. If you put the same amount in each fund every year you would get more and more aggressive.
The fallacy of the OP's argument in two sentences.
livesoft wrote:
Tue Feb 27, 2018 7:02 pm
I cannot help you out with philosophy, but I'll stir the pot:

Not rebalancing when the market drops significantly is a form of market timing.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by dbr » Wed Feb 28, 2018 10:12 am

BBQ Nut wrote:
Wed Feb 28, 2018 9:46 am
Nice topic to bandy about.

One thing I haven't seen discussed is the frequency one rebalances.

Do people constantly monitor or have trigger warnings when their asset allocation bands get out of whack?

Because, to me, that would be a form of market timing. Not a big deal for 2017 as there wasn't really much market volatility.

For 2018 is seems volatility is back, so does that mean folks here will be constantly doing reallocations based on short trend swings in the market?

I check my account balances maybe once a month and let the allocations ride per my IPS.

So, my question is, what time frame do people use to base a need to readjust their AA? Day, month, year, other?
You haven't seen any discussion of that question because you haven't looked (sorry).

There is an article in the Wiki that discusses your questions. https://www.bogleheads.org/wiki/Rebalancing

There are also lots and lots of articles on the subject: https://www.google.com/search?source=hp ... 5mhpEGY9Ls

As far as individual preferences, there are probably as many individual preferences as there are individuals which cover every conceivable way this might be done including not doing it at all.

Note it is definitely possible to read things about rebalancing that are wrong, or misleading, or just confused. That is just as possible right here on this forum as anywhere else. There is even an alleged quote that Mr. Bogle says people should not rebalance. I don't believe he really meant that as an absolute generalization.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by jacoavlu » Wed Feb 28, 2018 10:28 am

Maybe everything is market timing. In that case, passive market timing, following a plan laid out ahead of time in a well-reasoned investment policy statement, is better than active market timing.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by Shallowpockets » Wed Feb 28, 2018 10:49 am

As above post. The only way to take the market timing out is to rebalance when certain percentages of AA are met, or to rebalance per a set date.
How may that work?
Well, you could have reallocated percentage wise during the January run up. Then within the next two weeks, you would have seen your AA all askew again.
What to do about something like that?

The BH belief in the upward trend of the market over time would seem to suggest that rebalancing is not indicated.
AA might become an issue during your last 10 years of possible life. Sure you don't know that, but I am sure people are already projecting their age for finances.
The old adage of age in stocks and the rest bonds would put you 60/40 at 60 years old. That is outdated in light of longer life expectancy. BHs are most likely in that demographic more so than the general populace.
I bet most BHs are looking out to at least 90 years old. So at 60, you have 30 years of the market ahead of you. Surely that is enough time per BH market belief, to recover if there were a drop of significance.
And really, although people casually use a 50% drop in the market, the likelihood of a fall that far is not borne out historically. So, no rebalancing until 80 years old. More or less.

Rebalance should only be done in light of tragedy in your life. Nursing home costs, big medical bills with ongoing life span changes. These are things whereby you might have to hold your money a little closer to secure. Your ongoing expenses rise dramatically and you need that security to weather through.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by vested1 » Wed Feb 28, 2018 11:09 am

Shallowpockets wrote:
Wed Feb 28, 2018 10:49 am
As above post. The only way to take the market timing out is to rebalance when certain percentages of AA are met, or to rebalance per a set date.
How may that work?
Well, you could have reallocated percentage wise during the January run up. Then within the next two weeks, you would have seen your AA all askew again.
What to do about something like that?

Display patience with a resistance to reacting in the short term. I rebalanced for the 1st time in two years while in retirement right before the top of the market in January because I had drifted from 60/40 to 66/34, stocks to bonds with a 5% rebalancing band. I didn't react to the temporary correction, if it can even be called that, and my AA is now within .5% of 60/40. Bonds lost more YTD than stocks BTW. Perhaps a combination of a time restriction and a band restriction would be prudent.

The BH belief in the upward trend of the market over time would seem to suggest that rebalancing is not indicated.
AA might become an issue during your last 10 years of possible life. Sure you don't know that, but I am sure people are already projecting their age for finances.
The old adage of age in stocks and the rest bonds would put you 60/40 at 60 years old. That is outdated in light of longer life expectancy. The "old adage" is age in bonds, not stocks. The newer adage seems to be a gradually rising equity allocation in retirement. Pick your adage to justify your philosophy. BHs are most likely in that demographic more so than the general populace.
I bet most BHs are looking out to at least 90 years old. So at 60, you have 30 years of the market ahead of you. Surely that is enough time per BH market belief, to recover if there were a drop of significance.
And really, although people casually use a 50% drop in the market, the likelihood of a fall that far is not borne out historically. So, no rebalancing until 80 years old. More or less.

Rebalance should only be done in light of tragedy in your life. Nursing home costs, big medical bills with ongoing life span changes. These are things whereby you might have to hold your money a little closer to secure. Your ongoing expenses rise dramatically and you need that security to weather through.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by Shallowpockets » Wed Feb 28, 2018 11:15 am

Damn! Got my adage wrong. Must be my old adage.

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by Sandtrap » Wed Feb 28, 2018 11:16 am

This may or may not apply here.
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Re: Boglehead contradiction, constant asset allocation is market timing

Post by Da5id » Wed Feb 28, 2018 11:27 am

I think in order to discuss this at all intelligently, OP should offer a highly precise definition of what OP means by market timing.

Here is the investopedia definition (https://www.investopedia.com/terms/m/markettiming.asp), bolding added by me
DEFINITION of 'Market Timing'
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.
OP, is your definition the one above? Or something else? If it is the one above, unclear to me how rebalancing is market timing, as it lacks the bolded part above. Mechanically restoring a preset asset allocation by pre-determined criteria (e.g. annual rebalancing) doesn't use predictive methods of any sort. It doesn't have as a goal increasing return. If your definition is that "selling one asset class and buying a different asset class to get back to a preselected asset allocation" is market timing, OK. Then so be it. But it isn't my sense of what market timing means. Under your definition, if it differs from above, can you clarify some examples of investment strategies that are or are not "market timing"?

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Re: Boglehead contradiction, constant asset allocation is market timing

Post by Fallible » Wed Feb 28, 2018 11:43 am

fctu wrote:
Tue Feb 27, 2018 6:53 pm
I am trying to understand these apparently contradictory ideas which both seem to be widely accepted.

Idea 1: It is impossible to time the market
Idea 2: You should periodically rebalance to maintain your asset allocation. This is said to maintain a constant level of risk, but is also said to have the significant benefit of market timing in that if one asset crashes, you end up buying low when you rebalance. ...
I don't see these two as contradictory, just different:

-Market timing is essentially predicting what the market will do (and then investing based on the prediction);
-Rebalancing is reacting to what the market has done (and then maintaining the preset allocation).
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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