Is today a bad time to rebalance?

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PlayingLife
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Is today a bad time to rebalance?

Post by PlayingLife »

Hi BH's,

I recently posted questions about "how" to rebalance my portfolio where I currently have 6% in bonds, to an 80/20 allocation. Here are my questions:

1. If I rebalance today to 20% bonds, I'm essentially selling my stock index funds at a loss compared to a couple of month's ago, right? (They were valued higher then - yes...a very basic question)

2. My desired allocation is 80/20. Would you recommend rebalancing today or should I hold off since stocks are on a downward trend, assuming I'm okay with watching them drop? Another way of phrasing this questions is "Should I wait until the stock index funds return to the value they were at a couple of month's ago, before rebalancing?"

Here is my original post:

viewtopic.php?f=1&t=264247
AlohaJoe
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Re: Is today a bad time to rebalance?

Post by AlohaJoe »

PlayingLife wrote: Mon Nov 26, 2018 7:27 am Another way of phrasing this questions is "Should I wait until the stock index funds return to the value they were at a couple of month's ago, before rebalancing?"
If stocks go back to where they were before then...uh...how exactly would you be rebalancing? :confused

It sounds to me like you just want to change your asset allocation. That's not rebalancing.

Anyway: just do it today. If you have a desired asset allocation, then move to it as long as there aren't any tax consequences. (In this case having stock losses is good, anyway.)
ge1
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Re: Is today a bad time to rebalance?

Post by ge1 »

One of the biggest mistakes investors make is “anchoring”. Not sure when you bought your equity funds, but when you say that would sell them “at a loss”, that’s only true if you bought them this year. And even if you bought some of the equity funds this year, it doesn‘t matter if you sell them at loss or not (leaving aside tax consequences). If you know your current asset allocation is not correct there is really only one course of action: correct it immediately. Who is to say that stocks don’t drop 20% or 30% from current levels? I can’t tell you how much money I saved by selling stocks with losses which later turned into much bigger losses.

The only exception I would make to that rule is that if large sums of money are involved, people often recommend to make those adjustments in steps rather than all at once. In your case it doesn’t seem a huge adjustment, but you have do decide that yourself.

And lastly regarding your comment that stocks are in a “downward trend” - I hope you realize that a 10% correction is completely normal every few years and that - if anything - US stocks have been in a historic “upward trend” since 2009.

Good luck
PolarBearMarket
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Re: Is today a bad time to rebalance?

Post by PolarBearMarket »

The timing of your re-balancing should not be determined by your future expectations for the market.
student
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Re: Is today a bad time to rebalance?

Post by student »

I think most on this board will say something along the line "nobody knows and you should not market time." Personally, for psychological reasons, I will rebalance over the next few months in this situation.
exigent
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Re: Is today a bad time to rebalance?

Post by exigent »

Hey, if you wait, you might get “lucky” and ride stocks down to a point where you no longer need to rebalance... /s

As others have noted, nobody knows the future. You asked “should I hold off since stocks are on a downward trend.” Let’s imagine that you *do* know the future, and are correct that stocks will continue trending downward. Wouldn’t that be a good time to rebalance? Sure, it would’ve been better to do it two months ago, but that ship has sailed.

As of now, you have a few options. First, you could try to guess the future of the market and act accordingly. This, to me, is a fool’s errand. Alternatively, you could rip off the band-aid and rebalance right now. If you truly have a long-term desire to be at 80/20, and this isn’t just a reaction to recent turbulence, then this is probably the best course of action.

Another option would be to rebalance in a few steps. Maybe get 1/3 or 1/2 if the way back to your ur desire allocation today, the next increment next month, and get all the way there the month after. Or, if you’re in the accumulation phase and your portfolio isn’t too large relative to your contributions, you could just direct all ongoing investments to build nds until things equalize.

In 20-30 years, this will be a tiny blip in your historical records. I would encourage you to do some soul searching about your ideal allocation right now, get to it however you want ASAP, and then set up rules for maintaining it going forward. Maybe use rebalancing bands that trigger you to act whenever your allocation drifts X% away from your target. Along the way, you can also direct new contributions to whatever is low to minimize the need to rebalance.
balbrec2
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Re: Is today a bad time to rebalance?

Post by balbrec2 »

If your desired AA is 80/20 then you should rebalance without hesitation. You are currently 94/6
and taking much more risk than should. Trying to find the optimal time to rebalance is akin to
market timing. Rebalancing is a risk management tool, if it gives any boost at all to returns that is
just gravy, but don't count on it. Develop sensible rebalancing bands or use the calendar method
or both. Come up with a system and stick with it.
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Rick Ferri
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Re: Is today a bad time to rebalance?

Post by Rick Ferri »

PlayingLife wrote: Mon Nov 26, 2018 7:27 am ,My desired allocation is 80/20. Would you recommend rebalancing today or should I hold off since stocks are on a downward trend, assuming I'm okay with watching them drop? Another way of phrasing this questions is "Should I wait until the stock index funds return to the value they were at a couple of month's ago, before rebalancing?"
Way too much market-timing talk. Rebalance when you planned to.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
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corn18
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Re: Is today a bad time to rebalance?

Post by corn18 »

And write an Investment Policy Statement (IPS) so you know what to do in the future. Don't think, meat, just rebalance!
Don't do something, just stand there!
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c.coyle
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Re: Is today a bad time to rebalance?

Post by c.coyle »

Given the recent slide, I'm thinking of rebalancing my retirement fund now, rather than waiting until 1-1-2019, by moving bonds into stocks and getting back to my 50-50 allocation.
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Fundhunter
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Re: Is today a bad time to rebalance?

Post by Fundhunter »

"since stocks are on a downward trend"

THAT shows the problem with this question. "ARE" stocks on a downward trend? Why- because there have been several days of sinking equity prices (up today however)?

The truth is that nobody EVER knows if stocks are or are not in a downward trend. We only know what they HAVE done. They might go up 1% tomorrow and every day for the next 3 months.

To think we can know that we ARE in a downward trend is to believe the market is predictable and that we can see what it is going to do tomorrow and into the future. Or that we can predict tomorrow's market based on what has happened today. Like driving your car by just looking in the rear view mirror.

There is not a "good" or a "bad" time to rebalance. Just have a plan (rebalance on a specific date per your plan or when percentages get too far out of whack if your plan has that as a trigger) and stick to the plan. To do otherwise is just market timing and speculation, and is inconsistent with the Boglehead investing philosophy.
retire2022
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Re: Is today a bad time to rebalance?

Post by retire2022 »

OP

I think new money should go into bonds (2019), you should think of rebalancing asset allocation as way to mitigate risk before it happens.

I would hold equities unless you think some other investment is safer but the potential investment may not necessary improve performance. You are essentially chasing performance.

If you are thinking of selling to re-balance it is already too late.

Bonds Mutual funds are not necessary attractive, they are a safe investment, they can loose money, as interest rates raise, the principle shrinks and vice versa.

Will you hold onto bond mutual funds if that happens? What will you do when the market recovers? and your bonds are flat?
delamer
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Re: Is today a bad time to rebalance?

Post by delamer »

Stocks may go down in the short term, but the long term trend for stocks always is up.

Pick an allocation and rebalance either once a year or when your allocation is off by a target percentage (like more than 5%).

You are overthinking the process.
Saganesque
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Re: Is today a bad time to rebalance?

Post by Saganesque »

I understand the sentiment of the OP. I started my re-allocation strat at the beginning of September, but didn't execute until last week. Needless to day, that 10% drop is felt when you are going from 100% equities to a 50/50 as I am. That said, the alternative is to time it. If stocks drop, you'll be happy you got it done. If they go up, if you still have some allocated to equities, you'll ride those up too. It's part of the Romance of Finance.
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PlayingLife
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Re: Is today a bad time to rebalance?

Post by PlayingLife »

retire2022 wrote: Mon Nov 26, 2018 9:39 pm OP

I think new money should go into bonds (2019), you should think of rebalancing asset allocation as way to mitigate risk before it happens.

I would hold equities unless you think some other investment is safer but the potential investment may not necessary improve performance. You are essentially chasing performance.

If you are thinking of selling to re-balance it is already too late.

Bonds Mutual funds are not necessary attractive, they are a safe investment, they can loose money, as interest rates raise, the principle shrinks and vice versa.

Will you hold onto bond mutual funds if that happens? What will you do when the market recovers? and your bonds are flat?
I really thought about this topic a lot the past couple of days and over-analyzed each individual fund I'm currently invested in (VFIAX, FUSVX, VTIAX, VBILX, VEXAX, VBTLX, across all accounts). The post above is mostly how I feel - I feel like it's already too late to re-balance as I don't think I can emotionally handle rebalancing my 94/6 portfolio when the overall value of my equity portfolio (and the market) has dropped so much since January. On the flip side, seeing the current decreases in my account does not emotionally bother me as I believe in swings in equities and entered the game right around 2009, so I've seen what has happened during the recession.

I've got 25 to 30 years left so I am going to believe time is on my side. For now 100% of future contributions will go 100% into bonds to get the allocation up a bit and I'll rebalance if/when things turn around a bit.
rkhusky
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Re: Is today a bad time to rebalance?

Post by rkhusky »

You should look to the future not the past. If you had a pot of cash equal to the value of your portfolio, what would you invest it in today? The answer should be based on what you expect the markets to do in the future, including future returns and future risk. And that is what your portfolio should be invested in today (of course you should take taxes into consideration when making portfolio changes).
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Portfolio7
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Re: Is today a bad time to rebalance?

Post by Portfolio7 »

PlayingLife wrote: Tue Nov 27, 2018 7:20 am I've got 25 to 30 years left so I am going to believe time is on my side. For now 100% of future contributions will go 100% into bonds to get the allocation up a bit and I'll rebalance if/when things turn around a bit.
I'm estimating from your other post that contributing 100% to bonds, or $18K per year (if I got that right), your allocation would shift about 4.5% per year (equity volatility will impact the number somewhat), so that in 3 years you'd be roughly at 80/20. (94/6 -> 90.5/10.5 -> 85/15 -> 80.5/19.5). You could just contribute 100% to bonds for each of the next 3 years. Or you could shift it all at once. The financial impact of one vs the other is less important than which approach makes you feel best about your overall risk level (both risk of decline, and risk of missing out.)

Either way, my yardstick is often a middle ground that attempts to leave me with the least regret... and that I can stick with regardless of the market, so I don't end up chasing performance (and unexpected setbacks!)
"An investment in knowledge pays the best interest" - Benjamin Franklin
retire2022
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Re: Is today a bad time to rebalance?

Post by retire2022 »

PlayingLife wrote: Tue Nov 27, 2018 7:20 am
retire2022 wrote: Mon Nov 26, 2018 9:39 pm OP

I think new money should go into bonds (2019), you should think of rebalancing asset allocation as way to mitigate risk before it happens.

I would hold equities unless you think some other investment is safer but the potential investment may not necessary improve performance. You are essentially chasing performance.

If you are thinking of selling to re-balance it is already too late.

Bonds Mutual funds are not necessary attractive, they are a safe investment, they can loose money, as interest rates raise, the principle shrinks and vice versa.

Will you hold onto bond mutual funds if that happens? What will you do when the market recovers? and your bonds are flat?
I really thought about this topic a lot the past couple of days and over-analyzed each individual fund I'm currently invested in (VFIAX, FUSVX, VTIAX, VBILX, VEXAX, VBTLX, across all accounts). The post above is mostly how I feel - I feel like it's already too late to re-balance as I don't think I can emotionally handle rebalancing my 94/6 portfolio when the overall value of my equity portfolio (and the market) has dropped so much since January. On the flip side, seeing the current decreases in my account does not emotionally bother me as I believe in swings in equities and entered the game right around 2009, so I've seen what has happened during the recession.

I've got 25 to 30 years left so I am going to believe time is on my side. For now 100% of future contributions will go 100% into bonds to get the allocation up a bit and I'll rebalance if/when things turn around a bit.
If you have 30 years to invest, essentially you will recover, I started with $2000 at Fidelity 1987 stock market crash, met a Broker Dean Witter Reynolds (now part of Morgan Stanley) in 1993, my portfolio was worth 50K. I decided that the broker was making more than me and invested all my savings in 457 plan and IRA.

In 13 years March 2000, my portfolio was approx 400K and my Janus IRA investments were worth 139K, the bubble popped and lost half of my portfolio value. I had invested in PBHG technology and communications fund (taxable) in 1997 approx 10 and March 2000 it was worth 70K, of course I sold it a week before the bubble bursted. I used the 70K as down payment for my first home, coop apt 2002 brought 225K, now worth 650K.

My Janus investments were worth approx 70K in March 2000 and I was about to get rid of them in 2007/2008 when the bubble bursted again.
In 2013 I sold most of my position in Janus and moved it all to Vanguard.

In 2008 my portfolio value was worth approx 400k, my cost basis was the same, the majority of my holdings were in 457 and Roth IRA which was converted from Janus.

In 2010 the market started to recover by 2015. My investments in 457 was TRowe Price Equity Income Fund (from 1993-2013) and I sold 500K 2015, with the remaining 200K in that fund. Since TRowe was Large Cap Value most of my profits were from dividends and the approx annual average was 4.5% the 20 years I held it.

The portfolio has been rebalanced slowly over the years:

457b (28 years) Plan VPMAX 30%, BRMIX 23.22%, VWENX 18.53%, Roth IRA (31years) VSEQX 13.97%, VGHAX 7.59%, VFWAX 4.81%, VFSVX 0.7%, JNGTX 0.24%

My asset allocation is 93% equities and 6% bonds, I am considered an aggressive investor

Today I am holding 1.4million portfolio and lost about 154K since August, I am not panicking.

I'm in my 31year of investing and ready to retire, since I am state civil servant (salary history 16K-96K), no one is forcing me to stop working.

I'm 58, no kids, single and homeowner of two properties, my net worth is 2.1million.

I hope this puts you at ease.
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grabiner
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Re: Is today a bad time to rebalance?

Post by grabiner »

PlayingLife wrote: Mon Nov 26, 2018 7:27 am Hi BH's,

I recently posted questions about "how" to rebalance my portfolio where I currently have 6% in bonds, to an 80/20 allocation. Here are my questions:

1. If I rebalance today to 20% bonds, I'm essentially selling my stock index funds at a loss compared to a couple of month's ago, right? (They were valued higher then - yes...a very basic question)

2. My desired allocation is 80/20. Would you recommend rebalancing today or should I hold off since stocks are on a downward trend, assuming I'm okay with watching them drop? Another way of phrasing this questions is "Should I wait until the stock index funds return to the value they were at a couple of month's ago, before rebalancing?"
What you are doing is not rebalancing, because you were never balanced in the first place. Rebalancing would be returning a portfolio that was originally 80/20 back to 80/20, after market movements made it 85/15 or 75/25.

However, it's still right to do. The reason you want an 80/20 portfolio is that this is the correct level for your risk tolerance. There is no point in holding a portfolio which is too risky for you. You want to get the best benefit, comparing risk and return, for the X dollars you currently have; what those X dollars were invested in a few months ago doesn't matter.

I will do something similar in January, because my Investment Policy Statement says that I will increase my bond allocation by 2% every year. (As retirement gets closer, my risk tolerance decreases.) Thus, if the market hasn't dropped enough to move me from 8% to 10% bonds, I will have to sell a bit of stock when I review my allocation in January.
Wiki David Grabiner
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