If you are old, why bother with rebalancing!!?

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livesoft
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If you are old, why bother with rebalancing!!?

Post by livesoft » Tue Feb 05, 2019 11:38 am

After seeing all the many many threads on how to rebalance and how to set up a retired person's portfolio along with all the "I didn't hit my rebalancing trigger even though the market dropped 20%" posts, I have come to the conclusion that ...

If one has any portfolio of equities:bonds in an asset allocation of between 30:70 and 70:30 and one is over age 62 (especially if one is collecting SS benefits), then there is no point is worrying about rebalancing, no point in looking at one's asset allocation, and no actual point in rebalancing.

It seems to me that one's portfolio will take care of itself no matter what one does because one is going to die within 40 years anyways.

That means at that time and going forward that one doesn't need LifeStrategy funds. One doesn't need Target Date Funds. One can just forget about looking at their portfolio pretty much ever again.
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pdavi21
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Re: If you are old, why bother with rebalancing!!?

Post by pdavi21 » Tue Feb 05, 2019 11:40 am

Why hold bonds if your guaranteed income exceeds expenses? No bonds = no re-balancing (except for stocks)
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Re: If you are old, why bother with rebalancing!!?

Post by jebmke » Tue Feb 05, 2019 11:45 am

We are more or less in that position. Our target going into retirement 10 years ago was 40/60. In December, we did not hit a re-balance point. I am now drawing a pension and in 4 years will draw SS. In 2017 I used up all of our carryover losses from 2009 so I basically have decided to not re-balance on the upside and will only re-balance to equity on the downside if things REALLY tank.
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GoldStar
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Re: If you are old, why bother with rebalancing!!?

Post by GoldStar » Tue Feb 05, 2019 11:45 am

You stated a conclusion but not how you got there.

If I don't re-balance for 40 years won't my risk profile drift from where I want it? Or my growth expectations do so?

Perhaps if I don't need the money it doesn't matter - but if I am counting on this money to live - I'd like to know its going to exhibit the behavior based upon the AA chosen.

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Re: If you are old, why bother with rebalancing!!?

Post by J295 » Tue Feb 05, 2019 11:45 am

Interesting. Thanks for putting this out there for dialogue.

This may make even more sense if someone is in a position where:
1. The are quite reasonably assured of having assets available upon death to leave to children.
2. Children won't have immediate "need" upon death for the funds so they can continue a reasonable AA going forward.

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livesoft
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Re: If you are old, why bother with rebalancing!!?

Post by livesoft » Tue Feb 05, 2019 11:48 am

GoldStar wrote:
Tue Feb 05, 2019 11:45 am
If I don't re-balance for 40 years won't my risk profile drift from where I want it? Or my growth expectations do so?
No, one's portfolio won't drift that much in reality, so the risk profile drift is moot.
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Re: If you are old, why bother with rebalancing!!?

Post by bloom2708 » Tue Feb 05, 2019 11:48 am

When withdrawing with "no set allocation" do you always remove 50% bonds and 50% stocks?

If you are somewhere between 30/70 and 70/30 you just stay there.
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livesoft
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Re: If you are old, why bother with rebalancing!!?

Post by livesoft » Tue Feb 05, 2019 11:50 am

There is no need to pay someone for rebalancing advice or to rebalance one's portfolio because it simply won't be needed.
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TonyDAntonio
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Re: If you are old, why bother with rebalancing!!?

Post by TonyDAntonio » Tue Feb 05, 2019 11:55 am

I've come to a similar conclusion: the more I mess with my portfolio the worse I do. :oops:

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Re: If you are old, why bother with rebalancing!!?

Post by KlangFool » Tue Feb 05, 2019 11:55 am

Livesoft,

The answer is highly dependent on the portfolio size as a multiple of the retirement expense.

A) Let's assume that the portfolio size is 25X and the AA is 70/30. If the stock drops 50%, you are down to 65% of your portfolio = 16.25X. Can this portfolio last 20 years? 30 years?

B) Let's assume that the portfolio size is 25X and the AA is 30/70. If the stock drops 50%, you are down to 85% of your portfolio = 21.25X. Can this portfolio last 20 years? 30 years? What if there is another 50% drop?

C) Let's assume that the portfolio size is 50X and the AA is 70/30. If the stock drops 50%, you are down to 65% of your portfolio = 32.5X. Can this portfolio last 30 years? The answer is yes.

If the portfolio is big enough, for example, 50X, it does not matter. If not, it may matter.

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Re: If you are old, why bother with rebalancing!!?

Post by Dottie57 » Tue Feb 05, 2019 11:57 am

I guess I turn OLD in March. /sigh

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Re: If you are old, why bother with rebalancing!!?

Post by RickBoglehead » Tue Feb 05, 2019 11:58 am

I don't see how this is right.

If I look at my portfolio with a desired 65/35 at a point where the market has dropped significantly, then I will be selling bonds and buying stock. When the market goes back up I will gain. And I won't be rebalancing unless/until I hit another point where I take a look.

The more exacting my efforts, the more likely I will be to have more dollars in retirement which means I can live better, assuming I don't have so much wealth that I don't need another dollar.
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livesoft
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Re: If you are old, why bother with rebalancing!!?

Post by livesoft » Tue Feb 05, 2019 11:58 am

KlangFool wrote:
Tue Feb 05, 2019 11:55 am
If the portfolio is big enough, for example, 50X, it does not matter. If not, it may matter.
Rebalancing will not help one if all those drops happen. Those folks will need to do something besides wishful thinking.

I've seen enough posts where retirees didn't rebalance during 2008-2009 and they survived.
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Re: If you are old, why bother with rebalancing!!?

Post by Garco » Tue Feb 05, 2019 12:02 pm

It's not just portfolio size (relative to spending needs) that matters. Income sources matter, for example, from Social Security -- perhaps SS earned by two members of the household.

I'm retired and over 70. I do not worry about income. I "rebalance" but not following a rigorous routine.

I described my approach earlier this morning here: viewtopic.php?f=10&t=271797

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Re: If you are old, why bother with rebalancing!!?

Post by Day9 » Tue Feb 05, 2019 1:11 pm

First you have to answer the question "Why rebalance at all?" then you can answer the more specific question "Why rebalance if you are old". If we disagree about the answer of the first question then we are just spinning our wheels trying to discuss the second.
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Re: If you are old, why bother with rebalancing!!?

Post by sergeant » Tue Feb 05, 2019 1:18 pm

Dottie57 wrote:
Tue Feb 05, 2019 11:57 am
I guess I turn OLD in March. /sigh
I have 6 more years of being young and fretting about my AA and rebalancing. :D
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Re: If you are old, why bother with rebalancing!!?

Post by RadAudit » Tue Feb 05, 2019 1:22 pm

livesoft wrote:
Tue Feb 05, 2019 11:38 am
If one has any portfolio of equities:bonds in an asset allocation of between 30:70 and 70:30 and one is over age 62 (especially if one is collecting SS benefits), then there is no point is worrying about rebalancing, no point in looking at one's asset allocation, and no actual point in rebalancing.

It seems to me that one's portfolio will take care of itself no matter what one does because one is going to die within 40 years anyways.
Thank goodness! One less thing to be concerned about.
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HueyLD
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Re: If you are old, why bother with rebalancing!!?

Post by HueyLD » Tue Feb 05, 2019 1:24 pm

Since when is age 62 considered old?

My definition of old is for those older than I am.

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Re: If you are old, why bother with rebalancing!!?

Post by livesoft » Tue Feb 05, 2019 1:27 pm

HueyLD wrote:
Tue Feb 05, 2019 1:24 pm
Since when is age 62 considered old?

My definition of old is for those older than I am.
Mine, too. :)
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Re: If you are old, why bother with rebalancing!!?

Post by beyou » Tue Feb 05, 2019 1:27 pm

If nothing else, one needs some way to take your SWR/RMD from your portfolio to spend each year.
While that is not strictly rebalancing, it is a way to maintain an AA, as is rebalancing.
If you eliminate rebalancing you eliminate an AA target, and therefore any sensible logic for drawdown.

Contributions to maintain my AA have helped to minimize rebalancing during accumulation, and I hope will do same for me
during decumulation/retirement. Truth is, I could probably have avoided rebalancing during accumulation and had similar outcomes,
except one thing....the ability to sleep at night. Not sure I could do that with 70% equity in my old age.

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Re: If you are old, why bother with rebalancing!!?

Post by livesoft » Tue Feb 05, 2019 1:29 pm

beyou wrote:
Tue Feb 05, 2019 1:27 pm
Truth is, I could probably have avoided rebalancing during accumulation and had similar outcomes,except one thing....the ability to sleep at night. Not sure I could do that with 70% equity in my old age.
If you didn't look, then you wouldn't even know, would you?
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Re: If you are old, why bother with rebalancing!!?

Post by samsdad » Tue Feb 05, 2019 1:33 pm

So there’s a bright line at 30:70 or 70:30?

At 75:25 you’ll still need to rebalance?

Do you have something specific you’re looking at, or is this just a feeling based on anecdotes from the vox populi here?

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Re: If you are old, why bother with rebalancing!!?

Post by Watty » Tue Feb 05, 2019 1:36 pm

livesoft wrote:
Tue Feb 05, 2019 11:38 am
If one has any portfolio of equities:bonds in an asset allocation of between 30:70 and 70:30 and one is over age 62 (especially if one is collecting SS benefits), then there is no point is worrying about rebalancing, no point in looking at one's asset allocation, and no actual point in rebalancing.
There is a very reasonable chance that you could live past 90 and a very plausible chance that you could live to be over 100. A lot can happen in 30+ years including 10+ years in a nursing home during a big depression.

The big reason to rebalance to an appropriate asset allocation is that if you have more money than you will ever need it that you would be investing your money for your heirs and you would want to keep an appropriate asset allocation for them.

Or you could just give it to your heirs early.
...why bother ..
It does not have to be a "bother" if you get to the point where it doesn't really matter to you. Just put the money into some mutual fund that will rebalance it for you. I am using a target date fund but one of the Vanguard Lifestrategy funds could work too. There are also several tax efficient balanced mutual funds.

In fact using something like that is not a bad idea in case you are not able to rebalance when you are even older and you are in a situation where it is really important since you have more need for the money.

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Re: If you are old, why bother with rebalancing!!?

Post by Watty » Tue Feb 05, 2019 1:38 pm

livesoft wrote:
Tue Feb 05, 2019 1:27 pm
HueyLD wrote:
Tue Feb 05, 2019 1:24 pm
Since when is age 62 considered old?

My definition of old is for those older than I am.
Mine, too. :)
For me it is my age plus ten years.

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livesoft
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Re: If you are old, why bother with rebalancing!!?

Post by livesoft » Tue Feb 05, 2019 1:41 pm

samsdad wrote:
Tue Feb 05, 2019 1:33 pm
So there’s a bright line at 30:70 or 70:30?

At 75:25 you’ll still need to rebalance?

Do you have something specific you’re looking at, or is this just a feeling based on anecdotes from the vox populi here?
Something specific that I may be recalling incorrectly. Let me see if I can find a link.

This article: https://thefinancebuff.com/5-percent-re ... -band.html discussed back in 2015: viewtopic.php?f=10&t=172212 and perhaps in other threads.
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Re: If you are old, why bother with rebalancing!!?

Post by FRANK2009 » Tue Feb 05, 2019 1:45 pm

I've come to a similar conclusion.

I would NEVER sell in at taxable fund regardless of age.

In my IRA, I''d only rebalance with new money. If it took a few years to do so, no big deal.

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Re: If you are old, why bother with rebalancing!!?

Post by Watty » Tue Feb 05, 2019 1:47 pm

livesoft wrote:
Tue Feb 05, 2019 11:38 am
One can just forget about looking at their portfolio pretty much ever again.
You still need to review your statements to make sure that your account has not been hacked.

With normal bank you only have 30 to 90 days to report any errors.

I don't know about mutual funds but you would have a hard time getting reimbursed for and error or fraudulent transaction that you did not report in a reasonable amount of time.

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Re: If you are old, why bother with rebalancing!!?

Post by HomerJ » Tue Feb 05, 2019 1:51 pm

livesoft wrote:
Tue Feb 05, 2019 11:38 am
After seeing all the many many threads on how to rebalance and how to set up a retired person's portfolio along with all the "I didn't hit my rebalancing trigger even though the market dropped 20%" posts, I have come to the conclusion that ...

If one has any portfolio of equities:bonds in an asset allocation of between 30:70 and 70:30 and one is over age 62 (especially if one is collecting SS benefits), then there is no point is worrying about rebalancing, no point in looking at one's asset allocation, and no actual point in rebalancing.

It seems to me that one's portfolio will take care of itself no matter what one does because one is going to die within 40 years anyways.

That means at that time and going forward that one doesn't need LifeStrategy funds. One doesn't need Target Date Funds. One can just forget about looking at their portfolio pretty much ever again.
40 years is a long time. I disagree with your conclusion.

But I will admit that I do not rebalance any more in down markets. If stocks drop, I will pull from bonds, and wait for stocks to recover. I will not sell bonds and buy stocks.

But I will rebalance the other direction. If stocks are up a good amount, I will sell stocks and rebalance into bonds to maintain my Asset Allocation risk profile.
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Re: If you are old, why bother with rebalancing!!?

Post by HomerJ » Tue Feb 05, 2019 1:52 pm

livesoft wrote:
Tue Feb 05, 2019 11:48 am
GoldStar wrote:
Tue Feb 05, 2019 11:45 am
If I don't re-balance for 40 years won't my risk profile drift from where I want it? Or my growth expectations do so?
No, one's portfolio won't drift that much in reality, so the risk profile drift is moot.
This is incorrect.

You're not making much sense. 40 years a long time. If rebalancing is pointless for a 62 year-old, then wouldn't it be pointless for a 52-year old? Or even a 32-year old? What's the difference between 40 and 50 years?
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Re: If you are old, why bother with rebalancing!!?

Post by Watty » Tue Feb 05, 2019 1:52 pm

FRANK2009 wrote:
Tue Feb 05, 2019 1:45 pm
I've come to a similar conclusion.

I would NEVER sell in at taxable fund regardless of age.

In my IRA, I''d only rebalance with new money. If it took a few years to do so, no big deal.
You would not want to automatically reinvest any dividends in an asset class that is overweighted so you would still need to review the asset allocation.

Likewise when you need to make a withdrawal you would want to take it out of any asset class that is overweighted.

There is a big difference between actively deciding not to rebalance it right now and not reviewing your portfolio.

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Re: If you are old, why bother with rebalancing!!?

Post by straws46 » Tue Feb 05, 2019 1:56 pm

I rebalanced last December and reduced my exposure to equities. OK, maybe I didn't proactively do it, but it occurred. I'm over 70 and have enough in fixed income to, so I don't feel the need to rebalance if the market goes up or down. But each person's risk tolerance should be the deciding factor.

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Re: If you are old, why bother with rebalancing!!?

Post by FRANK2009 » Tue Feb 05, 2019 1:59 pm

Likewise when you need to make a withdrawal you would want to take it out of any asset class that is overweighted.
Yes, I am just old enough to make penalty free IRA withdrawals. but haven't done so yet. When the time comes, withdrawals will be made with an eye toward asset allocation.

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Re: If you are old, why bother with rebalancing!!?

Post by 2015 » Tue Feb 05, 2019 2:02 pm

HomerJ wrote:
Tue Feb 05, 2019 1:51 pm
livesoft wrote:
Tue Feb 05, 2019 11:38 am
...

...
But I will admit that I do not rebalance any more in down markets. If stocks drop, I will pull from bonds, and wait for stocks to recover. I will not sell bonds and buy stocks.

But I will rebalance the other direction. If stocks are up a good amount, I will sell stocks and rebalance into bonds to maintain my Asset Allocation risk profile.
HomerJ, would please be so kind as to explain your rationale for the underlined sentence. Why did you decide to stop rebalancing during down markets? Even though I have every intention of rebalancing during down markets, I'd be untruthful if I stated I can guarantee I will do so during the next 2008 style event. I'm interested in your reasoning.

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Re: If you are old, why bother with rebalancing!!?

Post by dodecahedron » Tue Feb 05, 2019 2:15 pm

When stock prices are up, I effectively and tax-efficiently rebalance by increasing my charitable donations (and doing so by donating appreciated shares.)

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Re: If you are old, why bother with rebalancing!!?

Post by HomerJ » Tue Feb 05, 2019 2:19 pm

2015 wrote:
Tue Feb 05, 2019 2:02 pm
HomerJ wrote:
Tue Feb 05, 2019 1:51 pm
livesoft wrote:
Tue Feb 05, 2019 11:38 am
...

...
But I will admit that I do not rebalance any more in down markets. If stocks drop, I will pull from bonds, and wait for stocks to recover. I will not sell bonds and buy stocks.

But I will rebalance the other direction. If stocks are up a good amount, I will sell stocks and rebalance into bonds to maintain my Asset Allocation risk profile.
HomerJ, would please be so kind as to explain your rationale for the underlined sentence. Why did you decide to stop rebalancing during down markets? Even though I have every intention of rebalancing during down markets, I'd be untruthful if I stated I can guarantee I will do so during the next 2008 style event. I'm interested in your reasoning.
Because I'm more about preserving my money now, and less about growing it.

I'm 50/50 stocks/bonds. If stocks grow, and I find myself at 60/40, I sell stocks (lock in the gains), and drop back to 50/50. I don't want the next 50% crash to take away more than 25%-30% of my portfolio.

If I just let stocks keep growing, just in the past 8 years I'd probably be at 70/30 at this point, and the recent 20% drop would have been more painful and scary (Although I'd technically have more money from not rebalancing the past 8 years, but hindsight is 20/20).

Now, when the opposite happens, and stocks drop, I'm not interested in selling bonds to buy stocks anymore (I DID do this in 2008, to a limited extent, but I recognized it's not for me)

I don't need the extra return that might provide. I'm well on track to hit FI and retire early without any sizeable gains. Instead I'm more interested in keeping that 50% of my money safe. That's why I was 50% in bonds to begin with. It defeats my current goal of preservation to take some of money out of my "safe" pile and throw it into the stock market while it's going down in hopes of making big gains. I don't need big gains.

I understand it's the smart thing to do and 99% (99.9%?) likely to pay off with more money for me.

But it's not 100%. The 50% in bonds is enough for me to survive if a 20-year Great Depression II happens and I don't need to risk any of that 50% to meet my goals if the stock market bounces back like it normally does.

Rebalancing only on the upside meets my current goals.
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Re: If you are old, why bother with rebalancing!!?

Post by 2015 » Tue Feb 05, 2019 2:56 pm

HomerJ wrote:
Tue Feb 05, 2019 2:19 pm
2015 wrote:
Tue Feb 05, 2019 2:02 pm
HomerJ wrote:
Tue Feb 05, 2019 1:51 pm
livesoft wrote:
Tue Feb 05, 2019 11:38 am
...

...
But I will admit that I do not rebalance any more in down markets. If stocks drop, I will pull from bonds, and wait for stocks to recover. I will not sell bonds and buy stocks.

But I will rebalance the other direction. If stocks are up a good amount, I will sell stocks and rebalance into bonds to maintain my Asset Allocation risk profile.
HomerJ, would please be so kind as to explain your rationale for the underlined sentence. Why did you decide to stop rebalancing during down markets? Even though I have every intention of rebalancing during down markets, I'd be untruthful if I stated I can guarantee I will do so during the next 2008 style event. I'm interested in your reasoning.
Because I'm more about preserving my money now, and less about growing it.

I'm 50/50 stocks/bonds. If stocks grow, and I find myself at 60/40, I sell stocks (lock in the gains), and drop back to 50/50. I don't want the next 50% crash to take away more than 25%-30% of my portfolio.

If I just let stocks keep growing, just in the past 8 years I'd probably be at 70/30 at this point, and the recent 20% drop would have been more painful and scary (Although I'd technically have more money from not rebalancing the past 8 years, but hindsight is 20/20).

Now, when the opposite happens, and stocks drop, I'm not interested in selling bonds to buy stocks anymore (I DID do this in 2008, to a limited extent, but I recognized it's not for me)

I don't need the extra return that might provide. I'm well on track to hit FI and retire early without any sizeable gains. Instead I'm more interested in keeping that 50% of my money safe. That's why I was 50% in bonds to begin with. It defeats my current goal of preservation to take some of money out of my "safe" pile and throw it into the stock market while it's going down in hopes of making big gains. I don't need big gains.

I understand it's the smart thing to do and 99% (99.9%?) likely to pay off with more money for me.

But it's not 100%. The 50% in bonds is enough for me to survive if a 20-year Great Depression II happens and I don't need to risk any of that 50% to meet my goals if the stock market bounces back like it normally does.

Rebalancing only on the upside meets my current goals.
This is outstanding, thanks very much for this. One of the more valuable things I've read in a while. Your logic definitely fits my risk profile. It's a conundrum for me as my 100% liability matched funds in retirement mean I can take greater risk and rebalance to my 50/50 AA during down markets. OTOH, were another 2008 style market come along my risk profile would dictate not to sell bonds.

I will have to give this some more thought as I'm trying to get ahead of it before the next 2008 occurs. It doesn't matter to me than I can take more risk, my question is do I want to take more risk, even if I can? I've stated elsewhere I'm so risk averse I'm surprised I get out of bed in the morning.

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Re: If you are old, why bother with rebalancing!!?

Post by 1210sda » Tue Feb 05, 2019 3:32 pm

HomerJ wrote:
Tue Feb 05, 2019 1:51 pm

But I will admit that I do not rebalance any more in down markets. If stocks drop, I will pull from bonds, and wait for stocks to recover. I will not sell bonds and buy stocks.

But I will rebalance the other direction. If stocks are up a good amount, I will sell stocks and rebalance into bonds to maintain my Asset Allocation risk profile.
Homer, are you saying that you're OK with your portfolio becoming more conservative (stocks drop; bonds stay same) but not OK with it becoming more aggressive (Stocks rise; bonds stay same). Is that what you're saying?

Interesting. I like that. Especially for someone already retired.

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Re: If you are old, why bother with rebalancing!!?

Post by GoldStar » Tue Feb 05, 2019 3:39 pm

HomerJ wrote:
Tue Feb 05, 2019 1:52 pm
livesoft wrote:
Tue Feb 05, 2019 11:48 am
GoldStar wrote:
Tue Feb 05, 2019 11:45 am
If I don't re-balance for 40 years won't my risk profile drift from where I want it? Or my growth expectations do so?
No, one's portfolio won't drift that much in reality, so the risk profile drift is moot.
This is incorrect.

You're not making much sense. 40 years a long time. If rebalancing is pointless for a 62 year-old, then wouldn't it be pointless for a 52-year old? Or even a 32-year old? What's the difference between 40 and 50 years?
Agreed - I've seen a lot of studies that show very significant drift over this time period.

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One Ping
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Re: If you are old, why bother with rebalancing!!?

Post by One Ping » Tue Feb 05, 2019 3:50 pm

I just completed a study on this. Below is the max equity allocation over a 30 year time horizon for a starting 60/40 stock/bond portfolio. It uses 62 starting start dates from Jan 1928 through Jan 1989.
Image
Here are the trajectories over the 360 months for each of the 62 starting dates.
Image
Seems like there is always drift to higher and higher stock allocations over the time period. Whether that is significant or not I suppose depends to a certain extent on how much you really need the funds in the portfolio. Of course the portfolio likely grows significantly over that 30 years also.

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Every things free
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Re: If you are old, why bother with rebalancing!!?

Post by Every things free » Tue Feb 05, 2019 4:03 pm

Why bother rebalancing?
I recently read a book where the author boldly projected that 80% of what we presently know about finances will be obsolete in 20 years. There will new products, strategies etc. bought on by man and artificial intelligence. His encouragement was, never stop learning!

So today I'm reading the form where there is a possible new fund coming from Vanguard.....VEMAX.
Many raved about its possible potential for their portfolio. Someone mentioned the possible benefit it might have of simplicity.
Why bother rebalancing? Consider simplicity.

Kim
You know when you are rich. You can buy anything you want but want nothing.

Bir48die
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Re: If you are old, why bother with rebalancing!!?

Post by Bir48die » Tue Feb 05, 2019 4:15 pm

Since I'm one of the few on this forum that's over 62 and retired I guess I'll answer the question from my perspective.

I have changed my AA for my three different portfolios. About a year ago on my deferred comp I went from 100% equities to 60/40 to anticipate some correction in the market and I felt I was too exposed though I am a market believer. So, it was just common sense. I draw a check once a year so wanted to preserve the value.

My smaller portfolio was done by my friend who manages that piece and he is an active trader. Went into cash/fixed for maybe 75% of the value. By cash we're talking 2.5% - 4% return. He will jump in selectively.

My major piece was change from 60% equity and 40% MLP's to 50 equity/30 MLP/20 Fixed in October. Just wanted to ride this for a year or two. Allowed me to be able to access cash to weather the next 18 month and not sell equities.

So, things will change and I could be back to where I was in two years.

GoldenFinch
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Re: If you are old, why bother with rebalancing!!?

Post by GoldenFinch » Tue Feb 05, 2019 4:26 pm

Why bother with rebalancing!!? Because we still want to grow the portfolio even though we are said to be old? And rebalancing is a good way to do that?

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HomerJ
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Re: If you are old, why bother with rebalancing!!?

Post by HomerJ » Tue Feb 05, 2019 4:26 pm

1210sda wrote:
Tue Feb 05, 2019 3:32 pm
HomerJ wrote:
Tue Feb 05, 2019 1:51 pm

But I will admit that I do not rebalance any more in down markets. If stocks drop, I will pull from bonds, and wait for stocks to recover. I will not sell bonds and buy stocks.

But I will rebalance the other direction. If stocks are up a good amount, I will sell stocks and rebalance into bonds to maintain my Asset Allocation risk profile.
Homer, are you saying that you're OK with your portfolio becoming more conservative (stocks drop; bonds stay same) but not OK with it becoming more aggressive (Stocks rise; bonds stay same). Is that what you're saying?

Interesting. I like that. Especially for someone already retired.

1210
Yes, that's how I look at it. 50% is the target I want in stocks, it can go lower (hopefully temporary), and I won't do anything, but if it drifts higher, I'll rebalance by selling stocks and buying bonds to get back to 50/50.
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livesoft
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Re: If you are old, why bother with rebalancing!!?

Post by livesoft » Tue Feb 05, 2019 4:29 pm

One Ping wrote:
Tue Feb 05, 2019 3:50 pm
....
Here are the trajectories over the 360 months for each of the 62 starting dates.
....
Of course the portfolio likely grows significantly over that 30 years also.
Suppose one took your plots and said that equities lost 50% of their value. What would be the portfolio value at that point? I didn't do it, but since the portfolio percentage to equities went higher, the loss would be greater in absolute terms, but the ending value might be very similar for all portfolios. For instance, at maintained 60/40 (rebalanced periodically), portfolio drops 30% to end up at value $X. But after growth and drift over several years AA ends up at 80/20, portfolio drops 40%, but still ends up at value $X or the same end point. Rebalancing got one nowhere in that case.
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HomerJ
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Re: If you are old, why bother with rebalancing!!?

Post by HomerJ » Tue Feb 05, 2019 4:33 pm

GoldenFinch wrote:
Tue Feb 05, 2019 4:26 pm
Why bother with rebalancing!!? Because we still want to grow the portfolio even though we are said to be old? And rebalancing is a good way to do that?
Rebalancing when stocks are down is a way to grow the portfolio.

Rebalancing when stocks are up probably reduces the growth of a portfolio. But it lowers risk.

Picking an AA is a "balancing act" between risk and growth. Rebalancing is used to maintain your chosen mix of risk and growth.

At this point in my life, risk is more important, so I only rebalance to reduce risk. But yes, growth is still important, even when old, so I have a sizable amount of money in stocks as well, but I don't feel the need to rebalance to get MORE growth any more.
The J stands for Jay

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HomerJ
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Re: If you are old, why bother with rebalancing!!?

Post by HomerJ » Tue Feb 05, 2019 4:43 pm

livesoft wrote:
Tue Feb 05, 2019 4:29 pm
One Ping wrote:
Tue Feb 05, 2019 3:50 pm
....
Here are the trajectories over the 360 months for each of the 62 starting dates.
....
Of course the portfolio likely grows significantly over that 30 years also.
Suppose one took your plots and said that equities lost 50% of their value. What would be the portfolio value at that point? I didn't do it, but since the portfolio percentage to equities went higher, the loss would be greater in absolute terms, but the ending value might be very similar for all portfolios. For instance, at maintained 60/40 (rebalanced periodically), portfolio drops 30% to end up at value $X. But after growth and drift over several years AA ends up at 80/20, portfolio drops 40%, but still ends up at value $X or the same end point. Rebalancing got one nowhere in that case.
Psychologically, one lost less money with rebalancing.

People anchor to the higher number, plan around it even.

Person A: $1 million grows to $1.4 million with no rebalancing, then drops to $900,000
Person B: $1 million grows to $1.2 million with rebalancing during the upswing, then drops to $900,000.

Person A who lost $500,000 may feel more regret than Person B who lost $300,000.

Person A with $1.4 million thought they were closer to their retirement goal, and now feel like they are farther away than Person B does. Even though they are technically in the same spot.

And the opposite argument can be made: When Person B rebalances at this low point, he'll gain more on the next upswing than Person A who never rebalances at all, since they are both starting at an equal point again.
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GoldenFinch
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Re: If you are old, why bother with rebalancing!!?

Post by GoldenFinch » Tue Feb 05, 2019 4:46 pm

HomerJ wrote:
Tue Feb 05, 2019 4:33 pm
GoldenFinch wrote:
Tue Feb 05, 2019 4:26 pm
Why bother with rebalancing!!? Because we still want to grow the portfolio even though we are said to be old? And rebalancing is a good way to do that?
Rebalancing when stocks are down is a way to grow the portfolio.

Rebalancing when stocks are up probably reduces the growth of a portfolio. But it lowers risk.

Picking an AA is a "balancing act" between risk and growth. Rebalancing is used to maintain your chosen mix of risk and growth.

At this point in my life, risk is more important, so I only rebalance to reduce risk. But yes, growth is still important, even when old, so I have a sizable amount of money in stocks as well, but I don't feel the need to rebalance to get MORE growth any more.
I like your answer! :beer

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livesoft
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Re: If you are old, why bother with rebalancing!!?

Post by livesoft » Tue Feb 05, 2019 4:52 pm

HomerJ wrote:
Tue Feb 05, 2019 4:43 pm
Person A with $1.4 million thought they were closer to their retirement goal, and now feel like they are farther away than Person B does. Even though they are technically in the same spot.

And the opposite argument can be made: When Person B rebalances at this low point, he'll gain more on the next upswing than Person A who never rebalances at all, since they are both starting at an equal point again.
Note that this thread is about old people. They are already retired, so there is no retirement goal anymore.

Talking out of both sides of the mouth. :)
HomerJ wrote:
Tue Feb 05, 2019 2:19 pm
But I will admit that I do not rebalance any more in down markets. If stocks drop, I will pull from bonds, and wait for stocks to recover. I will not sell bonds and buy stocks.

But I will rebalance the other direction. If stocks are up a good amount, I will sell stocks and rebalance into bonds to maintain my Asset Allocation risk profile..
This thread is a nice study in behavioral finance, too, which I didn't expect.
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One Ping
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Re: If you are old, why bother with rebalancing!!?

Post by One Ping » Tue Feb 05, 2019 5:59 pm

livesoft wrote:
Tue Feb 05, 2019 4:29 pm
One Ping wrote:
Tue Feb 05, 2019 3:50 pm
....
Here are the trajectories over the 360 months for each of the 62 starting dates.
....
Of course the portfolio likely grows significantly over that 30 years also.
Suppose one took your plots and said that equities lost 50% of their value. What would be the portfolio value at that point? I didn't do it, but since the portfolio percentage to equities went higher, the loss would be greater in absolute terms, but the ending value might be very similar for all portfolios. For instance, at maintained 60/40 (rebalanced periodically), portfolio drops 30% to end up at value $X. But after growth and drift over several years AA ends up at 80/20, portfolio drops 40%, but still ends up at value $X or the same end point. Rebalancing got one nowhere in that case.
My spreadsheet is set up to use actual returns, so I artificially introduce a 50% drop in equities in Oct 29 and ran out the rest of the scenario using the actual returns for the next 30 years. Here is the portfolio value and equity allocation for that run. Initial portfolio value was $10,000.
Image
Here's the same 30 year time span (Sep 29-Aug-58) using the actual numbers.
Image
Portfolio value is 50% higher using the real returns from that time period, so the artificial 50% equity drop did do some damage, but if you didn't need it to begin with, meh ...
Last edited by One Ping on Tue Feb 05, 2019 6:00 pm, edited 2 times in total.
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The Wizard
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Re: If you are old, why bother with rebalancing!!?

Post by The Wizard » Tue Feb 05, 2019 6:00 pm

I'm old, retired almost six years now.
I started retirement with a 50/50 AA due to SoR risk over the seven years before SS at age 70.
Over past six years, I've done Roth conversions and to a lesser degree increased my taxable account holdings.
I hold only stock funds in my Roth IRA and my taxable account.
So my composite AA now is close to 60/40.

Due to decent income from lifetime immediate annuities and (soon) SS, I won't need income from portfolio on a monthly basis anymore.
So I may well continue rebalancing toward a higher stock percentage as RMDs start next year...
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