is rebalancing loosely akin to market timing?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
miket29
Posts: 21
Joined: Tue Jun 20, 2017 9:07 pm

is rebalancing loosely akin to market timing?

Post by miket29 » Sat Feb 09, 2019 5:48 pm

Taking a riff off the term "closet indexing", I'm wondering if rebalancing is somewhat akin to market timing? In good years when you transfer money from stocks to bonds it seems like it is implicitly saying stocks may be pricy. And the inverse when stocks have fallen. It's following a rule rather than trying to predict the future of the market, but I've seen descriptions where it is called a form of timing.

For someone with a 60/40 stock/bond split then if stocks are up 20% and bonds up 3% then you'd sell 5% of your stock holdings to come back into balance. The reason I'm wondering is what do you do if you are a younger investor and are 100% in equity? If the 60/40 investor is cutting back on stock holdings when the market is rising, is there a place for the younger investor to do so too? I'm thinking that someone who had done so prior to 2000 or 2008 would be better off for it.

livesoft
Posts: 64980
Joined: Thu Mar 01, 2007 8:00 pm

Re: is rebalancing loosely akin to market timing?

Post by livesoft » Sat Feb 09, 2019 5:54 pm

Of course it is.

Some people might say that market timing is based on predicting the future, while rebalancing is looking at the past. In reality, market timers look at the past and rebalancers predict the future, too.

Also many people believe that market timing is going from 100% cash to 100% equities and back a few times a year. Nothing could be further from the truth.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
travelogue
Posts: 163
Joined: Sat Aug 12, 2017 4:29 pm

Re: is rebalancing loosely akin to market timing?

Post by travelogue » Sat Feb 09, 2019 6:03 pm

Perhaps rebalancing is somewhat akin to contrarian investing or anticipating reversion to the mean. As one asset class falls, you buy more of it. As another asset class climbs, you sell. Therefore you’re selling high and buying low.

Really, though, you’re maintaining your desired risk level by bringing your portfolio back to your designated asset mix. In this sense it’s not at all market timing.

jyoung
Posts: 7
Joined: Mon Jan 21, 2019 1:26 pm
Location: Houston, TX

Re: is rebalancing loosely akin to market timing?

Post by jyoung » Sat Feb 09, 2019 6:04 pm

Personally, I look at as more of an exercise to keep my exposure to risk/volatility at a level that I'm comfortable with than I do as an attempt to sell high/buy low.

User avatar
Taylor Larimore
Advisory Board
Posts: 27824
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: is rebalancing loosely akin to market timing?

Post by Taylor Larimore » Sat Feb 09, 2019 6:14 pm

miket29:
Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis.
Market timing - Wikipedia
According to the above definition, "Rebalancing" is NOT market-timing. It is simply returning your portfolio to its originally designed asset-allocation.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Mike Scott
Posts: 1148
Joined: Fri Jul 19, 2013 2:45 pm

Re: is rebalancing loosely akin to market timing?

Post by Mike Scott » Sat Feb 09, 2019 6:31 pm

Isn't the best reason for rebalancing to maintain a particular risk profile? Isn't market timing trying to "beat the market" for returns. In practice, they could look a lot the same but with very different reasons for making similar money moves.

sambb
Posts: 2350
Joined: Sun Mar 10, 2013 3:31 pm

Re: is rebalancing loosely akin to market timing?

Post by sambb » Sat Feb 09, 2019 7:53 pm

yes, it 100% is. One becomes uncomfrotable with valuatin, change risk tolerance, and rebalance, or vice versa

pward
Posts: 61
Joined: Fri Dec 21, 2018 8:18 pm

Re: is rebalancing loosely akin to market timing?

Post by pward » Sat Feb 09, 2019 8:40 pm

Yes and no, imo. No if the person has rules set in place that will be followed regardless of what's going on in the market (like yearly on a specific date, or 5% bands). These rules are in place to keep the risk profile static, not necessarily to try to maximize return (although it can help to that end as well). But yes if someone says "hey the market is down this week so I'm going to rebalance to try to take advantage of this" that would be trying to time the market. I've been guilty of doing that myself once or twice, but eh, it happens, haha.

If someone is 100% in equities then they have nothing to rebalance into. So that would be changing their asset allocation based on market conditions, not "rebalancing" to maintain an asset allocation. That is what is called active management, not passive management. Two totally different things. Would someone who was over-exposed to equities have benefitted from taking some off the table before either of those bear markets you mentioned? Of course in hind site it's easy to see that. But the problem is, no one knew what was coming in the moment, or that they would be as bad as they were. Generally, I think most people would be better off to not be 100% equities, even the young ones. It's easy to say you have the stomach for the drop when you've never went through it and your only experience in the markets are the crazy bull market of the past 10 years. It's a whole different ballgame when you actually have skin in the game and the market just keeps dropping, and dropping, and dropping....
Last edited by pward on Sat Feb 09, 2019 8:50 pm, edited 2 times in total.

2015
Posts: 2658
Joined: Mon Feb 10, 2014 2:32 pm

Re: is rebalancing loosely akin to market timing?

Post by 2015 » Sat Feb 09, 2019 8:46 pm

Saying rebalancing is akin to market timing is an excellent example of financial voodoo semantics. I'm surprised some financial writer attempting to monetize their blog hasn't come up with something like this. It's a fantastic way to steal attention and hence time and hence life while getting all kind of clicks.

Trader Joe
Posts: 302
Joined: Fri Apr 25, 2014 6:38 pm

Re: is rebalancing loosely akin to market timing?

Post by Trader Joe » Sat Feb 09, 2019 8:48 pm

miket29 wrote:
Sat Feb 09, 2019 5:48 pm
Taking a riff off the term "closet indexing", I'm wondering if rebalancing is somewhat akin to market timing? In good years when you transfer money from stocks to bonds it seems like it is implicitly saying stocks may be pricy. And the inverse when stocks have fallen. It's following a rule rather than trying to predict the future of the market, but I've seen descriptions where it is called a form of timing.

For someone with a 60/40 stock/bond split then if stocks are up 20% and bonds up 3% then you'd sell 5% of your stock holdings to come back into balance. The reason I'm wondering is what do you do if you are a younger investor and are 100% in equity? If the 60/40 investor is cutting back on stock holdings when the market is rising, is there a place for the younger investor to do so too? I'm thinking that someone who had done so prior to 2000 or 2008 would be better off for it.
Yes it is market timing. Avoid market timing.

pdavi21
Posts: 531
Joined: Sat Jan 30, 2016 4:04 pm

Re: is rebalancing loosely akin to market timing?

Post by pdavi21 » Sat Feb 09, 2019 8:51 pm

Everything is market timing.

JJP88
Posts: 35
Joined: Sun Apr 22, 2018 4:41 pm

Re: is rebalancing loosely akin to market timing?

Post by JJP88 » Sat Feb 09, 2019 8:53 pm

I always thought that people that were 100% of equities were missing out on rebalancing, even with only 10% in bonds.

Currently I am in a target date index fund in my retirement plans, but have considered going to 3 fund portfolio and rebalancing at 10% shifts.

Jags4186
Posts: 2885
Joined: Wed Jun 18, 2014 7:12 pm

Re: is rebalancing loosely akin to market timing?

Post by Jags4186 » Sat Feb 09, 2019 8:55 pm

Rebalancing is keeping you at your preferred risk tolerance. When you rebalance from stock to bonds your portfolio has become to risky for your risk profile. When you rebalance from bonds to stocks your portfolio has become to conservative for your risk profile. Your asset allocation determines your risk profile.

User avatar
bengal22
Posts: 1557
Joined: Sat Dec 03, 2011 6:20 pm
Location: Ohio

Re: is rebalancing loosely akin to market timing?

Post by bengal22 » Sat Feb 09, 2019 9:02 pm

Market timing is guessing or predicting what direction the market or market segment is heading.

Rebalancing is resetting your portfolio to your prescribed allocation. No guessing or predicting involved.
"Earn All You Can; Give All You Can; Save All You Can." .... John Wesley

Fallible
Posts: 6665
Joined: Fri Nov 27, 2009 4:44 pm
Contact:

Re: is rebalancing loosely akin to market timing?

Post by Fallible » Sat Feb 09, 2019 9:06 pm

miket29 wrote:
Sat Feb 09, 2019 5:48 pm
Taking a riff off the term "closet indexing", I'm wondering if rebalancing is somewhat akin to market timing? In good years when you transfer money from stocks to bonds it seems like it is implicitly saying stocks may be pricy. And the inverse when stocks have fallen. It's following a rule rather than trying to predict the future of the market, but I've seen descriptions where it is called a form of timing. ...
Rebalancing, as explained by others here, is not market timing. But the larger question is why it's often confused with market timing, especially when rebalancing is simply about maintaining the asset allocation you originally set. For example, you say rebalancing by transferring money from stocks to bonds seems to refer to stock prices; but it is mainly referring to the allocation you originally set (by maintaining it).

With true market timing, you are predicting what the market may do. With rebalancing, there is no predicting since you've already set an allocation and intend to maintain it.

Now, if you think stocks will go up and you want a higher stock allocation...
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

thx1138
Posts: 802
Joined: Fri Jul 12, 2013 2:14 pm

Re: is rebalancing loosely akin to market timing?

Post by thx1138 » Sat Feb 09, 2019 9:13 pm

In pointless semantics sure you could call it market timing. And if you start to set up all sorts of conditions, thresholds and time intervals for doing rebalancing you might actually be able to create market timing in the guise of rebalancing. Or more directly one could decide to change their AA based on the market and then “rebalance” to that new AA. That of course would be market timing disguised as rebalancing.

But fundamentally no, rebalancing isn’t market timing. Rather it is absolutely necessary to maintain a targeted risk profile. Without rebalancing all portfolios will trend towards an AA of 100/0 at which point AA has become meaningless.

billfromct
Posts: 847
Joined: Tue Dec 03, 2013 9:05 am

Re: is rebalancing loosely akin to market timing?

Post by billfromct » Sat Feb 09, 2019 11:47 pm

Yes, you're selling high (assets that have appreciated beyond your comfort zone) & buying low (assets below your comfort zone).

bill

Starfish
Posts: 751
Joined: Wed Aug 15, 2018 6:33 pm

Re: is rebalancing loosely akin to market timing?

Post by Starfish » Sun Feb 10, 2019 5:13 am

Taylor Larimore wrote:
Sat Feb 09, 2019 6:14 pm
miket29:
Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis.
Market timing - Wikipedia
According to the above definition, "Rebalancing" is NOT market-timing. It is simply returning your portfolio to its originally designed asset-allocation.

Best wishes
Taylor
Would you rebalance if one asset was going to 0?
The assumption behind rebalancing si buy low sell high, buy an asset that is low because FOR SURE is going to be higher in the future.
Obviously market timing.
But we should redefine why is market timing evil.

Starfish
Posts: 751
Joined: Wed Aug 15, 2018 6:33 pm

Re: is rebalancing loosely akin to market timing?

Post by Starfish » Sun Feb 10, 2019 5:15 am

bengal22 wrote:
Sat Feb 09, 2019 9:02 pm
Market timing is guessing or predicting what direction the market or market segment is heading.
And this is exactly what you do when rebalancing. You assume the low market segment is going to be high later.

The Wizard
Posts: 12888
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: is rebalancing loosely akin to market timing?

Post by The Wizard » Sun Feb 10, 2019 5:20 am

Rebalancing tends to get one below-market returns.
Buying & holding gets market returns...
Attempted new signature...

livesoft
Posts: 64980
Joined: Thu Mar 01, 2007 8:00 pm

Re: is rebalancing loosely akin to market timing?

Post by livesoft » Sun Feb 10, 2019 5:38 am

Some investors do market timing by not rebalancing.

Here are a couple of ways that happens:

1. If there is a big stock market run-up, they will rebalance back down to their asset allocation. But if there is a big market drop, they will wait until the stock market recovers instead of rebalancing into stocks before the market recovers.

2. If there is a big market drop, they will sell equities that have a loss and remain in cash. After 31 days when the market is often higher, they will use the cash to buy equities to restore their allocation.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
goingup
Posts: 3440
Joined: Tue Jan 26, 2010 1:02 pm

Re: is rebalancing loosely akin to market timing?

Post by goingup » Sun Feb 10, 2019 10:40 am

miket29 wrote:
Sat Feb 09, 2019 5:48 pm
The reason I'm wondering is what do you do if you are a younger investor and are 100% in equity?
If you're 100% equity investor and a downturn hits you do not rebalance. You hang on and continue to purchase equity in your usual fashion. It helps if you have some cash/bonds in reserve in the form of an emergency fund. Of course, if you have cash/bonds in reserve, you really aren't 100% equity. :D

UpperNwGuy
Posts: 1601
Joined: Sun Oct 08, 2017 7:16 pm

Re: is rebalancing loosely akin to market timing?

Post by UpperNwGuy » Sun Feb 10, 2019 1:00 pm

livesoft wrote:
Sat Feb 09, 2019 5:54 pm
Of course it is.
Straight talk.

MotoTrojan
Posts: 3112
Joined: Wed Feb 01, 2017 8:39 pm

Re: is rebalancing loosely akin to market timing?

Post by MotoTrojan » Sun Feb 10, 2019 1:25 pm

miket29 wrote:
Sat Feb 09, 2019 5:48 pm
Taking a riff off the term "closet indexing", I'm wondering if rebalancing is somewhat akin to market timing? In good years when you transfer money from stocks to bonds it seems like it is implicitly saying stocks may be pricy. And the inverse when stocks have fallen. It's following a rule rather than trying to predict the future of the market, but I've seen descriptions where it is called a form of timing.

For someone with a 60/40 stock/bond split then if stocks are up 20% and bonds up 3% then you'd sell 5% of your stock holdings to come back into balance. The reason I'm wondering is what do you do if you are a younger investor and are 100% in equity? If the 60/40 investor is cutting back on stock holdings when the market is rising, is there a place for the younger investor to do so too? I'm thinking that someone who had done so prior to 2000 or 2008 would be better off for it.
The 60/40 investor isn’t “cutting back”, they are maintaining their 60% risk exposure.

I’m 100/0 and simply rebalance between my 3 equity classes.

Fallible
Posts: 6665
Joined: Fri Nov 27, 2009 4:44 pm
Contact:

Re: is rebalancing loosely akin to market timing?

Post by Fallible » Sun Feb 10, 2019 1:39 pm

For those who still see market timing in rebalancing, maybe this example from Charles Ellis, author of the classic Winning the Loser's Game, will help separate the two. Starts with the video, then the transcript:

https://www.rebalance360.com/portfolio- ... eps-track/

Transcript
Best analogy to rebalancing is driving. If you close your eyes while you’re driving, I’ll bet you any amount of money that you can’t keep them closed for a full minute. That’s because you won’t know for sure you’re in the right lane. And rebalancing is a way of putting yourself back into the right lane by making easy-to-do adjustments. And it’s exactly like driving. You keep adjusting and putting ourselves back in the right lane. No big deal. Easy to do.
Driving, we have to do it all the time. And rebalancing in investing once a year is probably plenty. Once a quarter, maybe, for someone who’s got substantial assets. And those that are really substantial and have full-time professional investing going on all the time, sometimes rebalancing every single day. So they stay in the right zone, in the right lane, in the right direction for their long-term purpose.
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

02nz
Posts: 1308
Joined: Wed Feb 21, 2018 3:17 pm

Re: is rebalancing loosely akin to market timing?

Post by 02nz » Sun Feb 10, 2019 1:53 pm

I guess it depends a bit on how one executes that rebalancing. Doing so on a set schedule would not be market-timing.

I don't have a set schedule for when to rebalance. On December 26 I rebalanced my portfolio, as the correction had made me underweight in equities. Marketing timing? Probably. Wrong? Not for me. :mrgreen:

User avatar
bengal22
Posts: 1557
Joined: Sat Dec 03, 2011 6:20 pm
Location: Ohio

Re: is rebalancing loosely akin to market timing?

Post by bengal22 » Tue Feb 12, 2019 3:34 pm

Starfish wrote:
Sun Feb 10, 2019 5:15 am
bengal22 wrote:
Sat Feb 09, 2019 9:02 pm
Market timing is guessing or predicting what direction the market or market segment is heading.
And this is exactly what you do when rebalancing. You assume the low market segment is going to be high later.
We can agree to disagree. One could argue that choosing your AA is market timing. Rebalancing is not predicting a short term movement its sticking to your plan and hoping that in the long haul your AA is the best plan for you.
"Earn All You Can; Give All You Can; Save All You Can." .... John Wesley

User avatar
El Greco
Posts: 325
Joined: Tue Aug 23, 2016 2:21 pm

Re: is rebalancing loosely akin to market timing?

Post by El Greco » Tue Feb 12, 2019 3:46 pm

Rebalancing is a Boglehead's way of market timing without guilt, yet at the same time, being able to experience a delightful sensation of naughtiness. :D

StandingRock
Posts: 31
Joined: Sat Feb 02, 2019 6:54 pm

Re: is rebalancing loosely akin to market timing?

Post by StandingRock » Tue Feb 12, 2019 3:56 pm

bengal22 wrote:
Tue Feb 12, 2019 3:34 pm
Starfish wrote:
Sun Feb 10, 2019 5:15 am
bengal22 wrote:
Sat Feb 09, 2019 9:02 pm
Market timing is guessing or predicting what direction the market or market segment is heading.
And this is exactly what you do when rebalancing. You assume the low market segment is going to be high later.
We can agree to disagree. One could argue that choosing your AA is market timing. Rebalancing is not predicting a short term movement its sticking to your plan and hoping that in the long haul your AA is the best plan for you.
Not necessarily. One could rebalance according to their allocation plan while maintaining a completely neutral stance on current market prices. Especially if you're only rebalancing once or twice a year.

Fallible
Posts: 6665
Joined: Fri Nov 27, 2009 4:44 pm
Contact:

Re: is rebalancing loosely akin to market timing?

Post by Fallible » Tue Feb 12, 2019 7:18 pm

I wonder if the continued confusion about rebalancing being market timing is because we just want to believe it, because there is some need to believe it. It’s similar to other forum threads on whether reacting to market volatility is about market timing when it often is about risk tolerance and the need to lower risk. Almost any reaction to market movement will prompt charges of market timing even if it's only about rebalancing to maintain an original allocation or discovering a new tolerance for risk. It really seems there is some need for it to be market timing and we all are prone to believing what we need or want to believe. But what is the need to believe something is market timing even when it isn’t?
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

Fallible
Posts: 6665
Joined: Fri Nov 27, 2009 4:44 pm
Contact:

Re: is rebalancing loosely akin to market timing?

Post by Fallible » Tue Feb 12, 2019 8:14 pm

Delete repeat.
Last edited by Fallible on Wed Feb 13, 2019 12:05 am, edited 1 time in total.
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

User avatar
neurosphere
Posts: 3042
Joined: Sun Jan 17, 2010 1:55 pm

Re: is rebalancing loosely akin to market timing?

Post by neurosphere » Tue Feb 12, 2019 8:25 pm

I have not read any other responses. So forgive me if I'm restating things already said.

But, with respect to rebalancing. Consider a Target Date fund which rebalances daily. Is this market timing?

Now consider the personal investor who wished to maintain a fixed asset allocation and/or stick to a particular glide path. Daily rebalancing is not practical (nor necessary). Which of the following is market timing?

-- Every other day rebalacing
-- Weekly rebalancing
-- Monthly rebalancing
-- Quarterly?
-- Annually?
-- Every 2, 3, 4 years?

Alternately, what if rebalancing triggers were percentage based. That is suppose the rebalance trigger was:

-- if asset allocation was off by 0.1%?
-- 1%?
-- 5%?
-- 10%?

I would postulate that if annual rebalancing is "market timing", then daily rebalancing is also market timing.

For what it's worth, I try to rebalance about every 1-3 years. I don't stress about the timing. I do it when I get around to it. I'm not sure if that's good or bad. :)
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

User avatar
HomerJ
Posts: 12302
Joined: Fri Jun 06, 2008 12:50 pm

Re: is rebalancing loosely akin to market timing?

Post by HomerJ » Tue Feb 12, 2019 8:31 pm

livesoft wrote:
Sat Feb 09, 2019 5:54 pm
Of course it is.

Some people might say that market timing is based on predicting the future, while rebalancing is looking at the past. In reality, market timers look at the past and rebalancers predict the future, too.
This, of course, is incorrect. (If livesoft gets to make a declarative statement, then so do I)

Rebalancing is about maintaining your risk profile, not about predicting the future.

I'm 50/50 stocks/bonds... If stocks do well, and my AA slowly drifts up to 60/40, I am no longer at my desired risk level of 50/50.

I rebalance, not because I have ANY idea of when the next crash will happen, not because I think stocks are more risky at this time, but because my desired AA is 50/50, so when the next crash does happen, it only affects 50% of my portfolio, and not 60% or 70% of my portfolio.
Last edited by HomerJ on Tue Feb 12, 2019 8:56 pm, edited 2 times in total.
The J stands for Jay

User avatar
HomerJ
Posts: 12302
Joined: Fri Jun 06, 2008 12:50 pm

Re: is rebalancing loosely akin to market timing?

Post by HomerJ » Tue Feb 12, 2019 8:34 pm

Starfish wrote:
Sun Feb 10, 2019 5:15 am
bengal22 wrote:
Sat Feb 09, 2019 9:02 pm
Market timing is guessing or predicting what direction the market or market segment is heading.
And this is exactly what you do when rebalancing. You assume the low market segment is going to be high later.
This is incorrect. I do not rebalance from 60/40 stocks/bonds to 50/50 stocks/bonds because I think bonds are going to outperform stocks.

In fact, I rebalanced multiple times from 60/40 stocks/bonds to 50/50 in the years 2011-2017, and never did I think, and never did bonds out perform stocks.
Last edited by HomerJ on Tue Feb 12, 2019 8:39 pm, edited 2 times in total.
The J stands for Jay

z3r0c00l
Posts: 1312
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC
Contact:

Re: is rebalancing loosely akin to market timing?

Post by z3r0c00l » Tue Feb 12, 2019 8:34 pm

AA and re-balancing have nothing to do with timing. It is simply picking a risk/return point that one prefers, and maintaining it over time. We know it isn't timing because you could do it without really paying attention to the markets at all. In fact, my 401K rebalances automatically and I rarely take note of what is up and what is down every quarter.

Invest2027
Posts: 4
Joined: Thu May 17, 2018 8:23 pm

Re: is rebalancing loosely akin to market timing?

Post by Invest2027 » Tue Feb 12, 2019 8:48 pm

Rebalancing is often just the illusion of control. We all have a deep seeded desire to be in control of our life or in this case our financial lives.
The idea is that you return to your prior selected allocation and in order to stay true to this allocation you sell some of that years relative winners and purchase your relative losers. Will the relative loser outperform your prior year relative winner? Who knows...So I would call it rationalized market timing which may or may not result in higher returns.

User avatar
arcticpineapplecorp.
Posts: 3749
Joined: Tue Mar 06, 2012 9:22 pm

Re: is rebalancing loosely akin to market timing?

Post by arcticpineapplecorp. » Tue Feb 12, 2019 9:00 pm

miket29 wrote:
Sat Feb 09, 2019 5:48 pm
Taking a riff off the term "closet indexing", I'm wondering if rebalancing is somewhat akin to market timing? In good years when you transfer money from stocks to bonds it seems like it is implicitly saying stocks may be pricy. And the inverse when stocks have fallen. It's following a rule rather than trying to predict the future of the market, but I've seen descriptions where it is called a form of timing.
You've made an assumption that is not correct 100% of the time.

You assumed that because your stocks have risen more than the bonds (and therefore necessitate a rebalance) that means that stocks are "pricy [sic]". This may or may not be true. Stocks can go up but still be considered undervalued. And stocks can go down and still be considered pricey. As an example, the stock market declined in 2018 and yet many people said stocks were still expensive. People also had said for years since 2012 that stocks wouldn't keep going up and we were headed for a recession any day. If that was the case, weren't they saying stocks were expensive and due (or overdue) for a pullback? And what happened? Stocks continued to go up for many years. So were stocks expensive after 2012 or cheap relative to their prices in 2017?

Think about it another way...if stocks go up 10% in a given year but bonds go up 3% does that make one more expensive than the other? Not in and of itself. People have been calling what we're in a "bond bubble" for a few years when interest rates were low (which means the prices of bonds were high and due to fall when interest rates rise). So if bonds are "pricy" then you'd be rebalancing out of bonds and into stocks, unless you consider them both pricey (and some have considered just that and have said there aren't many good investment choices, except perhaps emerging markets which were beaten down).

You don't have enough information just based on need to rebalance to determine whether something is undervalued, overvalued or perfectly valued (I happen to believe in EMH and therefore I believe that generally speaking assets reflect the fundamental value determined by the market and therefore talk of assets being over or undervalued, that is, pricey or cheap, are generally not helpful). Sure there are times when you get more for your money like in 2008-2009. As a result of buying when stocks were half price you doubled your investment over the next 3 years (March 2009-March 2012). But these events that make stock prices cheap don't come around all that often. So you're left to rebalance back to your chosen asset allocation annually and if a rebalancing band is breached, which also doesn't happen all that often. See why: source: https://thefinancebuff.com/5-percent-re ... -band.html
"Invest we must" | "By God, If John Q. Public doesn't get the word after two Swedroe books, two (Bill) Bernstein books, and four Bogle books, he (she) has only himself to blame!"

Dottie57
Posts: 5234
Joined: Thu May 19, 2016 5:43 pm

Re: is rebalancing loosely akin to market timing?

Post by Dottie57 » Tue Feb 12, 2019 9:06 pm

HomerJ wrote:
Tue Feb 12, 2019 8:31 pm
livesoft wrote:
Sat Feb 09, 2019 5:54 pm
Of course it is.

Some people might say that market timing is based on predicting the future, while rebalancing is looking at the past. In reality, market timers look at the past and rebalancers predict the future, too.
This, of course, is incorrect. (If livesoft gets to make a declarative statement, then so do I)

Rebalancing is about maintaining your risk profile, not about predicting the future.

I'm 50/50 stocks/bonds... If stocks do well, and my AA slowly drifts up to 60/40, I am no longer at my desired risk level of 50/50.

I rebalance, not because I have ANY idea of when the next crash will happen, not because I think stocks are more risky at this time, but because my desired AA is 50/50, so when the next crash does happen, it only affects 50% of my portfolio, and not 60% or 70% of my portfolio.
Agree.

Starfish
Posts: 751
Joined: Wed Aug 15, 2018 6:33 pm

Re: is rebalancing loosely akin to market timing?

Post by Starfish » Tue Feb 12, 2019 9:34 pm

HomerJ wrote:
Tue Feb 12, 2019 8:34 pm
Starfish wrote:
Sun Feb 10, 2019 5:15 am
bengal22 wrote:
Sat Feb 09, 2019 9:02 pm
Market timing is guessing or predicting what direction the market or market segment is heading.
And this is exactly what you do when rebalancing. You assume the low market segment is going to be high later.
This is incorrect. I do not rebalance from 60/40 stocks/bonds to 50/50 stocks/bonds because I think bonds are going to outperform stocks.

In fact, I rebalanced multiple times from 60/40 stocks/bonds to 50/50 in the years 2011-2017, and never did I think, and never did bonds out perform stocks.
That is not what I meant.
Rebalancing is by definition buying low and selling high. Which exactly what active management try to do.
You call it something else, you say that you do it to return to your original allocation or something, but the actions are identical with market timing. It walks like a duck.
When you rebalanced from 60/40 to 50/50 you sold sticks you "thought" are high. How did you determine high? By comparing them with a reference amount of bonds. You tried to lock the gains.

I am not why are you trying so hard to avoid the dirty word. Who cares what is the rationale behind if the action is what it is? And if it works?

pdavi21
Posts: 531
Joined: Sat Jan 30, 2016 4:04 pm

Re: is rebalancing loosely akin to market timing?

Post by pdavi21 » Tue Feb 12, 2019 9:46 pm

Everything is market timing. Rebalancing is market timing. Not rebalancing is market timing. Rebalancing sometimes but not others is market timing.

Think of it this way if your portfolio is 63% stocks, you are betting that 63% stocks is better than any other AA. You are betting 63% stocks will give you the highest risk adjusted return and make your life wonderful. If you weren't, you'd change it.

Unfortunately it is impossible to be alive without participating in some kind of market timing.

User avatar
neurosphere
Posts: 3042
Joined: Sun Jan 17, 2010 1:55 pm

Re: is rebalancing loosely akin to market timing?

Post by neurosphere » Tue Feb 12, 2019 9:49 pm

Starfish wrote:
Tue Feb 12, 2019 9:34 pm
Rebalancing is by definition buying low and selling high. Which exactly what active management try to do.
You call it something else, you say that you do it to return to your original allocation or something, but the actions are identical with market timing. It walks like a duck.
I'm curious, if you have time, to hear my opinions on my post: viewtopic.php?p=4378872#p4378753

Target date funds rebalance daily. Is that market timing? According to you, it is? Why?

monkeydluffy
Posts: 2
Joined: Sat Feb 09, 2019 12:08 am

Re: is rebalancing loosely akin to market timing?

Post by monkeydluffy » Tue Feb 12, 2019 10:12 pm

Starfish wrote:
Tue Feb 12, 2019 9:34 pm
That is not what I meant.
Rebalancing is by definition buying low and selling high. Which exactly what active management try to do.
You call it something else, you say that you do it to return to your original allocation or something, but the actions are identical with market timing. It walks like a duck.
When you rebalanced from 60/40 to 50/50 you sold sticks you "thought" are high. How did you determine high? By comparing them with a reference amount of bonds. You tried to lock the gains.

I am not why are you trying so hard to avoid the dirty word. Who cares what is the rationale behind if the action is what it is? And if it works?
My definition of rebalancing must be different from yours: buy low. Notice the absence of "selling high." That's because I subscribe to the additional rule that a buy-and-hold strategy means not selling a single share of any asset class. I mean, the word "hold" is in the name of the strategy! The number of shares in each asset class, whether it's in my Roth 457, my Roth IRA, or my taxable brokerage account, must be monotonically increasing. Thus, rebalancing according to my definition has to occur on every contribution. I follow the basic algorithm laid out here where I contribute to the most underweighted asset class and go from there. I try to adhere to a 60/30/10 US/Intl/Bonds AA by treating all of my accounts as one giant account that needs rebalancing.

What do you guys think?

User avatar
HomerJ
Posts: 12302
Joined: Fri Jun 06, 2008 12:50 pm

Re: is rebalancing loosely akin to market timing?

Post by HomerJ » Tue Feb 12, 2019 10:38 pm

Starfish wrote:
Tue Feb 12, 2019 9:34 pm
HomerJ wrote:
Tue Feb 12, 2019 8:34 pm
Starfish wrote:
Sun Feb 10, 2019 5:15 am
bengal22 wrote:
Sat Feb 09, 2019 9:02 pm
Market timing is guessing or predicting what direction the market or market segment is heading.
And this is exactly what you do when rebalancing. You assume the low market segment is going to be high later.
This is incorrect. I do not rebalance from 60/40 stocks/bonds to 50/50 stocks/bonds because I think bonds are going to outperform stocks.

In fact, I rebalanced multiple times from 60/40 stocks/bonds to 50/50 in the years 2011-2017, and never did I think, and never did bonds out perform stocks.
That is not what I meant.
Rebalancing is by definition buying low and selling high. Which exactly what active management try to do.
You call it something else, you say that you do it to return to your original allocation or something, but the actions are identical with market timing. It walks like a duck.
When you rebalanced from 60/40 to 50/50 you sold sticks you "thought" are high. How did you determine high? By comparing them with a reference amount of bonds. You tried to lock the gains.

I am not why are you trying so hard to avoid the dirty word. Who cares what is the rationale behind if the action is what it is? And if it works?
Market timing is about predicting the future. Rebalancing is not.

It's really as simple as that. A market timer picks stocks or funds that they think will do well in the future.

"What stock/fund/asset is a good buy AT THIS TIME?"

4 months later....

"Which one is a good buy NOW?"

or

"Which is one is overvalued and likely to crash SOON?"

Market TIMING.

They may look at the past to determine which asset they think will do well (or poorly) going forward, but they are still picking an asset based on a future prediction.

When I rebalance, I am not picking bonds or stocks because I think they will do better in the future. I make no judgement about the future when I rebalance. Again, I sold stocks all through the last bull market, and never did I sell thinking "Stocks are due to do poorly" or "bonds will do well" when I sold stocks. I didn't make any prediction at all.

They are two different things. Rebalancing is not the same as market timing.
The J stands for Jay

Starfish
Posts: 751
Joined: Wed Aug 15, 2018 6:33 pm

Re: is rebalancing loosely akin to market timing?

Post by Starfish » Wed Feb 13, 2019 12:34 am

neurosphere wrote:
Tue Feb 12, 2019 9:49 pm
Starfish wrote:
Tue Feb 12, 2019 9:34 pm
Rebalancing is by definition buying low and selling high. Which exactly what active management try to do.
You call it something else, you say that you do it to return to your original allocation or something, but the actions are identical with market timing. It walks like a duck.
I'm curious, if you have time, to hear my opinions on my post: viewtopic.php?p=4378872#p4378753

Target date funds rebalance daily. Is that market timing? According to you, it is? Why?
I read your post. I don't how percentages and frequency has anything to do here.
You are trying to separate yourselves from the dirty word so much that it becomes a cult, a religion. 666.
Market timing is awesome if it works. If it doesn't is bad.
Two simple forms of working market timing are dollar cost averaging and rebalancing. Both of them transform standard variation (volatility) in returns. But they both have limitations: cannot defeat a declining market. Actually for reballancing a declining market is disaster.
Last edited by Starfish on Wed Feb 13, 2019 12:41 am, edited 3 times in total.

DrGoogle2017
Posts: 1930
Joined: Mon Aug 14, 2017 12:31 pm

Re: is rebalancing loosely akin to market timing?

Post by DrGoogle2017 » Wed Feb 13, 2019 12:38 am

It is but without emotions, a bit more systematically.
Last edited by DrGoogle2017 on Wed Feb 13, 2019 12:46 am, edited 1 time in total.

Starfish
Posts: 751
Joined: Wed Aug 15, 2018 6:33 pm

Re: is rebalancing loosely akin to market timing?

Post by Starfish » Wed Feb 13, 2019 12:38 am

HomerJ wrote:
Tue Feb 12, 2019 10:38 pm
Market timing is about predicting the future. Rebalancing is not.
Investing in anything else outside inflation protected safe assets (i-bonds?) is about predicting the future. And even then.
When you rebalance you hope stocks won't go down for long term. Otherwise you end with 0 by rebalancing (instead of 50% if you didn't). You do actually take serious potential risks by re-balancing.

User avatar
HomerJ
Posts: 12302
Joined: Fri Jun 06, 2008 12:50 pm

Re: is rebalancing loosely akin to market timing?

Post by HomerJ » Wed Feb 13, 2019 12:40 am

If you use such a broad brush for the word "market-timing", the term loses its meaning.

You use adjectives like "rebalancing" market-timing and "dollar-cost-averaging" market-timing.

What's the adjective for the "bad" kind of market-timing? "market-timing" market-timing?
The J stands for Jay

The Wizard
Posts: 12888
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: is rebalancing loosely akin to market timing?

Post by The Wizard » Wed Feb 13, 2019 4:41 am

Starfish wrote:
Wed Feb 13, 2019 12:38 am
HomerJ wrote:
Tue Feb 12, 2019 10:38 pm
Market timing is about predicting the future. Rebalancing is not.
Investing in anything else outside inflation protected safe assets (i-bonds?) is about predicting the future. And even then.
When you rebalance you hope stocks won't go down for long term. Otherwise you end with 0 by rebalancing (instead of 50% if you didn't). You do actually take serious potential risks by re-balancing.
So balanced funds should henceforth be called market timing funds?
Attempted new signature...

skeptic42
Posts: 4
Joined: Mon Feb 11, 2019 5:27 pm

Re: is rebalancing loosely akin to market timing?

Post by skeptic42 » Wed Feb 13, 2019 6:01 am

No it's not market timing for me. I rebalance to keep my allocation to stocks at a constant % level, because I think I can't tolerate more and I don't want to miss out at the same time. There is no prediction involved, just the expectation of more risk and more return from stocks compared to bonds.

User avatar
neurosphere
Posts: 3042
Joined: Sun Jan 17, 2010 1:55 pm

Re: is rebalancing loosely akin to market timing?

Post by neurosphere » Wed Feb 13, 2019 6:16 am

Starfish wrote:
Wed Feb 13, 2019 12:34 am
neurosphere wrote:
Tue Feb 12, 2019 9:49 pm
Starfish wrote:
Tue Feb 12, 2019 9:34 pm
Rebalancing is by definition buying low and selling high. Which exactly what active management try to do.
You call it something else, you say that you do it to return to your original allocation or something, but the actions are identical with market timing. It walks like a duck.
I'm curious, if you have time, to hear my opinions on my post: viewtopic.php?p=4378872#p4378753

Target date funds rebalance daily. Is that market timing? According to you, it is? Why?
I read your post. I don't how percentages and frequency has anything to do here.
Percentages and frequency are methods one employs to rebalance. And typically, one of these methods is chosen in advance, and is irrespective of market movement direction.

Many target date and balanced funds rebalance daily, for example, to preserve a fixed asset allocation.

If daily rebalancing = market timing, and daily rebalancing is for the purposes of maintaining an asset allocation, then by your implication: asset allocation = market timing.

Post Reply