Rebalancing strategy during a market drawdown

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
theorist
Posts: 770
Joined: Sat Sep 28, 2019 11:39 am

Rebalancing strategy during a market drawdown

Post by theorist »

Hello:

Naive question. I have set my allocation and am happy with it (70/30 with finer gradations within categories). My rebalancing bands have been at 5% for the broad categories — meaning I’d re-up my equities when they fall below 65. I notice this requires a rather significant market drawdown before hitting the bottom of the rebalancing band if I start at precisely 70/30 — roughly a 20% decline in the value of equities (bringing the 70 to 56, if you will), assuming nothing happens to the fixed income.

Now in market drawdowns of the sort we occasionally experience (right now, for instance), it sometimes happens that we reach significant down milestones before getting all the way to the 20% threshold mentioned above. Does it make sense in this situation to rebalance back up when one hits e.g. 67/33 instead of 65/35? The advantage seems to be that one would be more sure of getting equities “on sale” (assuming they ever go back up!). The disadvantage is of course that one will be paying more than one had to, if the decline continues.

Someone must have thought about best practices here. Is it really to wait till hitting the bottom of a relatively broad rebalancing band?
lkar
Posts: 305
Joined: Sat May 04, 2019 4:02 pm

Re: Rebalancing strategy during a market drawdown

Post by lkar »

I would love for someone to post the formula for this for the math challenged.

In other words, if you take a particular asset allocation between stocks and fixed income, how do you convert from the percentage by which stocks drop to the effect on your asset allocation.

I mean, I can do this myself for any particular asset allocation and for a particular percentage of market drop. Like, if I'm 70/30 and stocks drops 10 percent, I can do the math and come up with the fact that my asset allocation has moved about 4.5 percent (now 67.75/32.25), but I would love to be able to understand the formula and I'm not smart enough to reverse engineer it from data points.

In particular, what I'd like to be able to solve for is this question: At asset allocation X, how much do equities need to fall in order for my asset allocation to become off by Y percent?

For example: At asset allocation 65/35, how much do equities need to drop before my asset allocation is off by 10 percent (that is 60/40)? [I recognize that some would call this 5 percent and some 10 percent so I guess that ambiguity needs to be resolved.]

Edit: And I guess also, less relevant this week, but the same formula for stock increases.
sailaway
Posts: 2576
Joined: Fri May 12, 2017 1:11 pm

Re: Rebalancing strategy during a market drawdown

Post by sailaway »

We total up our balances twice a year and rebalance at that time.
delamer
Posts: 10686
Joined: Tue Feb 08, 2011 6:13 pm

Re: Rebalancing strategy during a market drawdown

Post by delamer »

lkar wrote: Thu Feb 27, 2020 10:53 am I would love for someone to post the formula for this for the math challenged.

In other words, if you take a particular asset allocation between stocks and fixed income, how do you convert from the percentage by which stocks drop to the effect on your asset allocation.

I mean, I can do this myself for any particular asset allocation and for a particular percentage of market drop. Like, if I'm 70/30 and stocks drops 10 percent, I can do the math and come up with the fact that my asset allocation has moved about 4.5 percent (now 67.75/32.25), but I would love to be able to understand the formula and I'm not smart enough to reverse engineer it from data points.

In particular, what I'd like to be able to solve for is this question: At asset allocation X, how much do equities need to fall in order for my asset allocation to become off by Y percent?

For example: At asset allocation 65/35, how much do equities need to drop before my asset allocation is off by 10 percent (that is 60/40)? [I recognize that some would call this 5 percent and some 10 percent so I guess that ambiguity needs to be resolved.]

Edit: And I guess also, less relevant this week, but the same formula for stock increases.
Your stock allocation isn’t “off” by 10% if it drops from 65% to 60%.

Assume that your portfolio totals $100,000. For your stock allocation to fall to $60,000, you’d need to lose $5,000. $5,000/$65,000 is a 7.7% decline.

So 65% to 60% is a 5 percentage point decline or a 7.7% drop.
Topic Author
theorist
Posts: 770
Joined: Sat Sep 28, 2019 11:39 am

Re: Rebalancing strategy during a market drawdown

Post by theorist »

Hi Ikar:

Assume your equities fall by X percent. Let us define x to be X/100. And, let us say your desired allocation is A in equities and 100-A in fixed income, where A is some percentage. Similarly define a = A/100. Lastly, let y be the Y of your post divided by 100.

The fraction in equities after the X fall is

(1-x) A / [(1-x) A + (100 - A)]

The numerator is the remaining equities, the denominator the remaining equities plus fixed income, assuming the fixed income did not fall or rise.

Now you want this to be off by Y percent. This is a bit ambiguous, I’ll assume it means you want your equities to now be A-Y percent of your resulting allocation. So you want the quantity above to equal a-y. Then

a - y = (1-x) A / [(1-x) A + (100 - A)]

The equation you solve for x is then that equation, which is linear and easily solved. For instance plugging in A of 70 and Y of 5, you find basically X of 20 — a 20 percent decline is needed to get a 70/30 allocation off all the way to 65/35.
Last edited by theorist on Thu Feb 27, 2020 11:14 am, edited 1 time in total.
delamer
Posts: 10686
Joined: Tue Feb 08, 2011 6:13 pm

Re: Rebalancing strategy during a market drawdown

Post by delamer »

Tempting as it is to rebalance just due to a correction, I’d wait until you’ve reached the 5 percentage point decline.

The more “extracurricular” changes you make, the more chances to muck things up.
MnD
Posts: 4618
Joined: Mon Jan 14, 2008 12:41 pm

Re: Rebalancing strategy during a market drawdown

Post by MnD »

theorist wrote: Thu Feb 27, 2020 10:47 am Hello:

Naive question. I have set my allocation and am happy with it (70/30 with finer gradations within categories). My rebalancing bands have been at 5% for the broad categories — meaning I’d re-up my equities when they fall below 65. I notice this requires a rather significant market drawdown before hitting the bottom of the rebalancing band if I start at precisely 70/30 — roughly a 20% decline in the value of equities (bringing the 70 to 56, if you will), assuming nothing happens to the fixed income.

Now in market drawdowns of the sort we occasionally experience (right now, for instance), it sometimes happens that we reach significant down milestones before getting all the way to the 20% threshold mentioned above. Does it make sense in this situation to rebalance back up when one hits e.g. 67/33 instead of 65/35? The advantage seems to be that one would be more sure of getting equities “on sale” (assuming they ever go back up!). The disadvantage is of course that one will be paying more than one had to, if the decline continues.

Someone must have thought about best practices here. Is it really to wait till hitting the bottom of a relatively broad rebalancing band?
I am 70/30 and use a threshold of fixed income dropping below 25% or exceeding 35% to trigger a rebalance. Analyses of best practices fo rebalancing indicate that a rebalancing band of this magnitude or rebalancing no more frequently than once per year outperforms more frequent rebalancing from narrower bands or more frequent time based rules.

In practice during the 2008/09 debacle following these rules I rebalanced twice - once in the fall of 2008 and again in the spring of 2009, the latter being within a few days of the market bottom. In 2018 I rebalanced in late December, again within a day or two of market bottom. That's just a fortunate coincidence but I think it strikes a good balance between having narrow bands such that you are shoveling money into equities even in the early stages of a decline or having such wide bands that rebalancing rarely if ever happens.

The most important thing is that you stick to your AA and rebalancing rules through thick and thin and don' let emotion get to you in times of market turmoil. Many people didn't have the nerve to rebalance in 2008/09 and also permenantly decreased their allocation to equity and in retrospect that really cost them.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
lkar
Posts: 305
Joined: Sat May 04, 2019 4:02 pm

Re: Rebalancing strategy during a market drawdown

Post by lkar »

theorist wrote: Thu Feb 27, 2020 11:11 am Hi Ikar:

Assume your equities fall by X percent. Let us define x to be X/100. And, let us say your desired allocation is A in equities and 100-A in fixed income, where A is some percentage. Similarly define a = A/100. Lastly, let y be the Y of your post divided by 100.

The fraction in equities after the X fall is

(1-x) A / [(1-x) A + (100 - A)]

The numerator is the remaining equities, the denominator the remaining equities plus fixed income, assuming the fixed income did not fall or rise.

Now you want this to be off by Y percent. This is a bit ambiguous, I’ll assume it means you want your equities to now be A-Y percent of your resulting allocation. So you want the quantity above to equal a-y. Then

a - y = (1-x) A / [(1-x) A + (100 - A)]

The equation you solve for x is then that equation, which is linear and easily solved. For instance plugging in A of 70 and Y of 5, you find basically X of 20 — a 20 percent decline is needed to get a 70/30 allocation off all the way to 65/35.
Fantastic. This is great and I appreciate you taking the time.
MnD
Posts: 4618
Joined: Mon Jan 14, 2008 12:41 pm

Re: Rebalancing strategy during a market drawdown

Post by MnD »

Also - one can't assume a XX% market drop would trigger rebalancing by some formula because it's very unlike one is going to be at their midpoint asset allocation at the beginning of the decline. It's more likely that one will be at the mid-high or high end of their equity allocation band when the decline begins.

So in this 70/30 target AA example, it's more likely something like a starting AA will be 72.5/27.5 when the decline starts. With this starting point, a 30% decline in equities is required to trigger a rebalancing at 65/35. That's exactly what happened to me in 2008/09. My first rebalancing occurred at a much bigger decline than 20%.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
lkar
Posts: 305
Joined: Sat May 04, 2019 4:02 pm

Re: Rebalancing strategy during a market drawdown

Post by lkar »

MnD wrote: Thu Feb 27, 2020 11:48 am Also - one can't assume a XX% market drop would trigger rebalancing by some formula because it's very unlike one is going to be at their midpoint asset allocation at the beginning of the decline. It's more likely that one will be at the mid-high or high end of their equity allocation band when the decline begins.

So in this 70/30 target AA example, it's more likely something like a starting AA will be 72.5/27.5 when the decline starts. With this starting point, a 30% decline in equities is required to trigger a rebalancing at 65/35. That's exactly what happened to me in 2008/09. My first rebalancing occurred at a much bigger decline than 20%.
I'm really curious to see how this all works in real time. I think it's a good exercise to go through to make decisions in the future after the dust settles about what is a comfortable asset allocation. For whatever reason it's more instructive to see how it all works with falling markets than rising markets, in part because of the seemingly accurate idiom that markets take the stairs up and the elevator down (which I read recently in this forum!)

I've recently been trying to get a handle on how I should monitor and track investments and as part of that exercise just a week or two ago I actually took an inventory of exactly what my AA was. So, I don't have to go back and reinvent the wheel to figure that out at a very definite point in time. At some point when things get a little settled, I'm going to do it again and compare. Part of the issue is that my online retirement account doesn't seem to update the price of funds until the next morning and by then the markets are already getting ready to move again!

But, the bottom line is that while a market drop is not a welcome event for sure, it is instructive to show how bonds tend to do their job and to show you the upside of the fixed income side of the equation, which to some for the last couple of years has felt like a drag instead of like a safe harbor.
Thesaints
Posts: 3501
Joined: Tue Jun 20, 2017 12:25 am

Re: Rebalancing strategy during a market drawdown

Post by Thesaints »

That’s why waiting for 70/30 to become 65/35 might be waiting a tad too long. I use 2.5% deviations as thresholds to start a rebalancing process (pro-rated over 9 months). If, during those 9 months, the deviations goes over 2.5% in the other direction I start another 9 months period. Otherwise, I keep correcting until on month 9 I hit full rebalancing.
CrankAddict
Posts: 29
Joined: Wed Feb 19, 2020 10:28 am
Location: Ozarks

Re: Rebalancing strategy during a market drawdown

Post by CrankAddict »

I'm struggling to understand the premise behind getting burned by rebalancing too often. Isn't a rebalance by definition a sell-high/buy-low exchange? (Which, to the OP's question, is also why it seems extra tempting to want to do it when the market has dropped notably). Assuming no transaction fees or taxable events, and of course one's time being valued at 0, why would rebalancing even every week be inherently bad?
mega317
Posts: 4582
Joined: Tue Apr 19, 2016 10:55 am

Re: Rebalancing strategy during a market drawdown

Post by mega317 »

theorist wrote: Thu Feb 27, 2020 10:47 am I notice this requires a rather significant market drawdown
Indeed you are right and 5% rebalancing bands are hit rather infrequently. So ANY time you stock percentage drops 5% would be a "drawdown of the sort we are experiencing right now". So if you want tighter bands just make it so, but we haven't learned anything this week about rebalacing bands.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
Luckywon
Posts: 1215
Joined: Tue Mar 28, 2017 10:33 am

Re: Rebalancing strategy during a market drawdown

Post by Luckywon »

theorist wrote: Thu Feb 27, 2020 11:11 am Hi Ikar:

Assume your equities fall by X percent. Let us define x to be X/100. And, let us say your desired allocation is A in equities and 100-A in fixed income, where A is some percentage. Similarly define a = A/100. Lastly, let y be the Y of your post divided by 100.

The fraction in equities after the X fall is

(1-x) A / [(1-x) A + (100 - A)]

The numerator is the remaining equities, the denominator the remaining equities plus fixed income, assuming the fixed income did not fall or rise.

Now you want this to be off by Y percent. This is a bit ambiguous, I’ll assume it means you want your equities to now be A-Y percent of your resulting allocation. So you want the quantity above to equal a-y. Then

a - y = (1-x) A / [(1-x) A + (100 - A)]

The equation you solve for x is then that equation, which is linear and easily solved. For instance plugging in A of 70 and Y of 5, you find basically X of 20 — a 20 percent decline is needed to get a 70/30 allocation off all the way to 65/35.
If I can push you a little further, does the above correct for any change in value of the fixed income portion? Of course, this would be more significant for portfolios heavier in fixed income.
Topic Author
theorist
Posts: 770
Joined: Sat Sep 28, 2019 11:39 am

Re: Rebalancing strategy during a market drawdown

Post by theorist »

Luckywon wrote: Thu Feb 27, 2020 3:04 pm
theorist wrote: Thu Feb 27, 2020 11:11 am Hi Ikar:

Assume your equities fall by X percent. Let us define x to be X/100. And, let us say your desired allocation is A in equities and 100-A in fixed income, where A is some percentage. Similarly define a = A/100. Lastly, let y be the Y of your post divided by 100.

The fraction in equities after the X fall is

(1-x) A / [(1-x) A + (100 - A)]

The numerator is the remaining equities, the denominator the remaining equities plus fixed income, assuming the fixed income did not fall or rise.

Now you want this to be off by Y percent. This is a bit ambiguous, I’ll assume it means you want your equities to now be A-Y percent of your resulting allocation. So you want the quantity above to equal a-y. Then

a - y = (1-x) A / [(1-x) A + (100 - A)]

The equation you solve for x is then that equation, which is linear and easily solved. For instance plugging in A of 70 and Y of 5, you find basically X of 20 — a 20 percent decline is needed to get a 70/30 allocation off all the way to 65/35.
If I can push you a little further, does the above correct for any change in value of the fixed income portion? Of course, this would be more significant for portfolios heavier in fixed income.
Well, as stated it doesn’t, but that would be easy to incorporate. Suppose that at the same time that the equities went down by X percent, the fixed income went up by Z percent (so a bond worth $1 was now at a valuation of $1 + (Z/100)). Then you just modify the above calculation in a simple way — the (100-A) should be multiplied by (1 + (Z/100)). This is because that term is evaluating the worth of the remaining bond fraction, and that worth has gone up by Z percent at the same time that the equity value dropped by X percent.

I hope that is reasonably clear...
Luckywon
Posts: 1215
Joined: Tue Mar 28, 2017 10:33 am

Re: Rebalancing strategy during a market drawdown

Post by Luckywon »

theorist wrote: Thu Feb 27, 2020 3:18 pm
Luckywon wrote: Thu Feb 27, 2020 3:04 pm
theorist wrote: Thu Feb 27, 2020 11:11 am Hi Ikar:

Assume your equities fall by X percent. Let us define x to be X/100. And, let us say your desired allocation is A in equities and 100-A in fixed income, where A is some percentage. Similarly define a = A/100. Lastly, let y be the Y of your post divided by 100.

The fraction in equities after the X fall is

(1-x) A / [(1-x) A + (100 - A)]

The numerator is the remaining equities, the denominator the remaining equities plus fixed income, assuming the fixed income did not fall or rise.

Now you want this to be off by Y percent. This is a bit ambiguous, I’ll assume it means you want your equities to now be A-Y percent of your resulting allocation. So you want the quantity above to equal a-y. Then

a - y = (1-x) A / [(1-x) A + (100 - A)]

The equation you solve for x is then that equation, which is linear and easily solved. For instance plugging in A of 70 and Y of 5, you find basically X of 20 — a 20 percent decline is needed to get a 70/30 allocation off all the way to 65/35.
If I can push you a little further, does the above correct for any change in value of the fixed income portion? Of course, this would be more significant for portfolios heavier in fixed income.
Well, as stated it doesn’t, but that would be easy to incorporate. Suppose that at the same time that the equities went down by X percent, the fixed income went up by Z percent (so a bond worth $1 was now at a valuation of $1 + (Z/100)). Then you just modify the above calculation in a simple way — the (100-A) should be multiplied by (1 + (Z/100)). This is because that term is evaluating the worth of the remaining bond fraction, and that worth has gone up by Z percent at the same time that the equity value dropped by X percent.

I hope that is reasonably clear...
Yes, thank you, very nice. Not to detract from your effort here, but shouldn't there be an app for this? :sharebeer
Topic Author
theorist
Posts: 770
Joined: Sat Sep 28, 2019 11:39 am

Re: Rebalancing strategy during a market drawdown

Post by theorist »

Luckywon wrote: Thu Feb 27, 2020 3:25 pm
theorist wrote: Thu Feb 27, 2020 3:18 pm
Luckywon wrote: Thu Feb 27, 2020 3:04 pm
theorist wrote: Thu Feb 27, 2020 11:11 am Hi Ikar:

Assume your equities fall by X percent. Let us define x to be X/100. And, let us say your desired allocation is A in equities and 100-A in fixed income, where A is some percentage. Similarly define a = A/100. Lastly, let y be the Y of your post divided by 100.

The fraction in equities after the X fall is

(1-x) A / [(1-x) A + (100 - A)]

The numerator is the remaining equities, the denominator the remaining equities plus fixed income, assuming the fixed income did not fall or rise.

Now you want this to be off by Y percent. This is a bit ambiguous, I’ll assume it means you want your equities to now be A-Y percent of your resulting allocation. So you want the quantity above to equal a-y. Then

a - y = (1-x) A / [(1-x) A + (100 - A)]

The equation you solve for x is then that equation, which is linear and easily solved. For instance plugging in A of 70 and Y of 5, you find basically X of 20 — a 20 percent decline is needed to get a 70/30 allocation off all the way to 65/35.
If I can push you a little further, does the above correct for any change in value of the fixed income portion? Of course, this would be more significant for portfolios heavier in fixed income.
Well, as stated it doesn’t, but that would be easy to incorporate. Suppose that at the same time that the equities went down by X percent, the fixed income went up by Z percent (so a bond worth $1 was now at a valuation of $1 + (Z/100)). Then you just modify the above calculation in a simple way — the (100-A) should be multiplied by (1 + (Z/100)). This is because that term is evaluating the worth of the remaining bond fraction, and that worth has gone up by Z percent at the same time that the equity value dropped by X percent.

I hope that is reasonably clear...
Yes, thank you, very nice. Not to detract from your effort here, but shouldn't there be an app for this? :sharebeer
There probably is! I don’t trust anything I can’t basically understand with squiggles on the back of an envelope, though.
KlangFool
Posts: 19150
Joined: Sat Oct 11, 2008 12:35 pm

Re: Rebalancing strategy during a market drawdown

Post by KlangFool »

theorist wrote: Thu Feb 27, 2020 3:27 pm

There probably is! I don’t trust anything I can’t basically understand with squiggles on the back of an envelope, though.
theorist,

I use an excel spreadsheet. I use 5/25 band based rebalancing.

For the allocation of less than 20%, I use a 25% drop to trigger the rebalancing. For the allocation greater than 20%, I use a change of 5% or more.

I added up the values of my whole portfolio = portfolio value

A) Targeted value = targeted percentage X portfolio value.

B) I calculated the upper and lower limit of the rebalancing.

C) I change the color of the cell if the value exceeds the lower or upper limit.

KlangFool
Topic Author
theorist
Posts: 770
Joined: Sat Sep 28, 2019 11:39 am

Re: Rebalancing strategy during a market drawdown

Post by theorist »

KlangFool wrote: Thu Feb 27, 2020 3:54 pm
theorist wrote: Thu Feb 27, 2020 3:27 pm

There probably is! I don’t trust anything I can’t basically understand with squiggles on the back of an envelope, though.
theorist,

I use an excel spreadsheet. I use 5/25 band based rebalancing.

For the allocation of less than 20%, I use a 25% drop to trigger the rebalancing. For the allocation greater than 20%, I use a change of 5% or more.

I added up the values of my whole portfolio = portfolio value

A) Targeted value = targeted percentage X portfolio value.

B) I calculated the upper and lower limit of the rebalancing.

C) I change the color of the cell if the value exceeds the lower or upper limit.

KlangFool
KlangFool:

And to come back to my original question, you would recommend just rebalancing equities back up to 70% when they get to 65, which is my band in my IPS, during the ongoing market event (or others like it)? And not doing it at 67 or some other value that allows more frequent buying in? The wait till 65 seems right to me — otherwise, why not have tighter bands always? — but that is the real question for those of us watching the market and wondering how to take advantage of any sale. (That sounds callous — the real issue here is the suffering and uncertainty engendered by the new disease — but I am just looking at the investing opportunity, which is what the site is for after all.)
dbr
Posts: 34289
Joined: Sun Mar 04, 2007 9:50 am

Re: Rebalancing strategy during a market drawdown

Post by dbr »

theorist wrote: Thu Feb 27, 2020 4:01 pm
And to come back to my original question, you would recommend just rebalancing equities back up to 70% when they get to 65, which is my band in my IPS, during the ongoing market event (or others like it)? And not doing it at 67 or some other value that allows more frequent buying in? The wait till 65 seems right to me — otherwise, why not have tighter bands always? — but that is the real question for those of us watching the market and wondering how to take advantage of any sale. (That sounds callous — the real issue here is the suffering and uncertainty engendered by the new disease — but I am just looking at the investing opportunity, which is what the site is for after all.)
Rebalancing is not intended as some kind of strategy to increase returns. The purpose is simply to keep risk roughly in a ballpark. As you suggest it doesn't even make sense to have bands and then decide you have some different kind of bands. Having relatively wide bands is intended to prevent doing much of anything until allocation is far off one's risk target. It wouldn't even be crazy to set stock/bond bands at 10% on the grounds that 40/60, 50/50, and 60/40, for example, are really not much different and 45/55, 50/50, and 55/45 are not different, for example.

Coming up with some sort of algorithm that translates market movements into allocation changes for the purpose of somehow increasing average return is a whole different enterprise, but it is not rebalancing. Whether such an enterprise actually exists would be for someone other than me to suggest.
KlangFool
Posts: 19150
Joined: Sat Oct 11, 2008 12:35 pm

Re: Rebalancing strategy during a market drawdown

Post by KlangFool »

theorist wrote: Thu Feb 27, 2020 4:01 pm
KlangFool wrote: Thu Feb 27, 2020 3:54 pm
theorist wrote: Thu Feb 27, 2020 3:27 pm

There probably is! I don’t trust anything I can’t basically understand with squiggles on the back of an envelope, though.
theorist,

I use an excel spreadsheet. I use 5/25 band based rebalancing.

For the allocation of less than 20%, I use a 25% drop to trigger the rebalancing. For the allocation greater than 20%, I use a change of 5% or more.

I added up the values of my whole portfolio = portfolio value

A) Targeted value = targeted percentage X portfolio value.

B) I calculated the upper and lower limit of the rebalancing.

C) I change the color of the cell if the value exceeds the lower or upper limit.

KlangFool
KlangFool:

And to come back to my original question, you would recommend just rebalancing equities back up to 70% when they get to 65, which is my band in my IPS, during the ongoing market event (or others like it)? And not doing it at 67 or some other value that allows more frequent buying in? The wait till 65 seems right to me — otherwise, why not have tighter bands always? — but that is the real question for those of us watching the market and wondering how to take advantage of any sale. (That sounds callous — the real issue here is the suffering and uncertainty engendered by the new disease — but I am just looking at the investing opportunity, which is what the site is for after all.)
theorist,

The whole point of having an IPS is to unemotionally follow a set of rules for rebalancing. If your IPS say 65 but you rebalance at 67, what is the point of having an IPS?

<<wondering how to take advantage of any sale. >>

You have no idea whether this is a sale. It could go down from here and never recover for a very long time. Do your IPS account for this possibility? I have a rebalancing limit of 5 years of expense in my fixed income to account for that.

My AA and rebalancing limit is designed for having a 50% market drop plus unemployment lasting 5 years. What is your limit in your IPS? How far and how long for the market to drop and you are unemployed before you will be wiped out?

KlangFool
Topic Author
theorist
Posts: 770
Joined: Sat Sep 28, 2019 11:39 am

Re: Rebalancing strategy during a market drawdown

Post by theorist »

KlangFool wrote: Thu Feb 27, 2020 4:12 pm
theorist wrote: Thu Feb 27, 2020 4:01 pm
KlangFool wrote: Thu Feb 27, 2020 3:54 pm
theorist wrote: Thu Feb 27, 2020 3:27 pm

There probably is! I don’t trust anything I can’t basically understand with squiggles on the back of an envelope, though.
theorist,

I use an excel spreadsheet. I use 5/25 band based rebalancing.

For the allocation of less than 20%, I use a 25% drop to trigger the rebalancing. For the allocation greater than 20%, I use a change of 5% or more.

I added up the values of my whole portfolio = portfolio value

A) Targeted value = targeted percentage X portfolio value.

B) I calculated the upper and lower limit of the rebalancing.

C) I change the color of the cell if the value exceeds the lower or upper limit.

KlangFool
KlangFool:

And to come back to my original question, you would recommend just rebalancing equities back up to 70% when they get to 65, which is my band in my IPS, during the ongoing market event (or others like it)? And not doing it at 67 or some other value that allows more frequent buying in? The wait till 65 seems right to me — otherwise, why not have tighter bands always? — but that is the real question for those of us watching the market and wondering how to take advantage of any sale. (That sounds callous — the real issue here is the suffering and uncertainty engendered by the new disease — but I am just looking at the investing opportunity, which is what the site is for after all.)
theorist,

The whole point of having an IPS is to unemotionally follow a set of rules for rebalancing. If your IPS say 65 but you rebalance at 67, what is the point of having an IPS?

<<wondering how to take advantage of any sale. >>

You have no idea whether this is a sale. It could go down from here and never recover for a very long time. Do your IPS account for this possibility? I have a rebalancing limit of 5 years of expense in my fixed income to account for that.

My AA and rebalancing limit is designed for having a 50% market drop plus unemployment lasting 5 years. What is your limit in your IPS? How far and how long for the market to drop and you are unemployed before you will be wiped out?

KlangFool
Thanks, dbr and KlangFool. I was basically looking for someone to reinforce this, which I know must be the right answer intellectually but am still inclined to poke at at the gut level.

KlangFool, I currently have over 10 years of expenses in fixed income. A 50% drawdown in equities, rebalanced to my AA, would reduce that to about 6.5 years. I haven’t considered what happens in an even worse case. If I were to amend my IPS to consider that, I’d probably draw a line at 5 years in fixed income. (I’m also not including the opportunity for a lifestyle change leading to expense reduction, for which we have significant room, and which we’d undoubtedly do in a worst case scenario.)

My job, and my spouses job, are both as secure as possible. Short of a major private institution going bankrupt (one which has survived for centuries), we will not be losing our jobs. If we both did, simultaneously, based on our investments we would have many years to figure out a new course before desperation set in. Our skills are highly portable, though at our ages the job market might be tough or very tough.
Thesaints
Posts: 3501
Joined: Tue Jun 20, 2017 12:25 am

Re: Rebalancing strategy during a market drawdown

Post by Thesaints »

KlangFool wrote: Thu Feb 27, 2020 4:12 pm I have a rebalancing limit of 5 years of expense in my fixed income to account for that.
Why ? Is the rest of your portfolio not immediately convertible in good old cash as well ?

I bet that Warren Buffett doesn't have an emergency fund with 6 months of expenses...
Dottie57
Posts: 9564
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: Rebalancing strategy during a market drawdown

Post by Dottie57 »

Thesaints wrote: Thu Feb 27, 2020 4:35 pm
KlangFool wrote: Thu Feb 27, 2020 4:12 pm I have a rebalancing limit of 5 years of expense in my fixed income to account for that.
Why ? Is the rest of your portfolio not immediately convertible in good old cash as well ?

I bet that Warren Buffett doesn't have an emergency fund with 6 months of expenses...
Warren Buffet would have about 420m left if he lost 99% of his estimated net worth (check Google for NW est). He could survive on that. 8-) . Are you Warren Buffet? Is anyone on this forum?
KlangFool
Posts: 19150
Joined: Sat Oct 11, 2008 12:35 pm

Re: Rebalancing strategy during a market drawdown

Post by KlangFool »

Thesaints wrote: Thu Feb 27, 2020 4:35 pm
KlangFool wrote: Thu Feb 27, 2020 4:12 pm I have a rebalancing limit of 5 years of expense in my fixed income to account for that.
Why ? Is the rest of your portfolio not immediately convertible in good old cash as well ?

I bet that Warren Buffett doesn't have an emergency fund with 6 months of expenses...
Thesaints,

<<Why ? Is the rest of your portfolio not immediately convertible in good old cash as well ?>>

I don't have to for 5 years. That is the whole point.

<<I bet that Warren Buffett doesn't have an emergency fund with 6 months of expenses...>>

Why should I care? I am not Warren Buffett and he is not paying my bills.

KlangFool
User avatar
Quirkz
Posts: 466
Joined: Mon Jan 14, 2019 5:32 pm

Re: Rebalancing strategy during a market drawdown

Post by Quirkz »

theorist wrote: Thu Feb 27, 2020 4:01 pm
And to come back to my original question, you would recommend just rebalancing equities back up to 70% when they get to 65, which is my band in my IPS, during the ongoing market event (or others like it)? And not doing it at 67 or some other value that allows more frequent buying in? The wait till 65 seems right to me — otherwise, why not have tighter bands always?
Sorry if I'm misreading it, but you seem to be asking, "My IPS sets the trigger at 5%, should I take action at 3%?" If so, the obvious answer is no.

The next-level question might be "Should I adjust my IPS band from 5% to 3%?" That one is a fair question, but nobody besides you can really answer it.

What I can say, though, is that the IPS is created in a time of calm to guide you in a period of turbulence. Changing the IPS in the middle of the turbulence is asking for trouble, and goes against the point of the IPS. In your shoes I would let this one pass by, and then once things calmed down again ask myself: "Okay, so now that I've lived through one incident according to plan, do I want to adjust the plan for next time, based on what I've learned?"
Thesaints
Posts: 3501
Joined: Tue Jun 20, 2017 12:25 am

Re: Rebalancing strategy during a market drawdown

Post by Thesaints »

My second point is that if the proverbial "6 months of living expenses" amounts to very little compared to your portfolio size, you do not have to keep it separated and invested in an ultra-safe vehicle.

My first, and more directly related, point was that you don't have to stop rebalancing (towards stocks, evidently) because your bond component has gone below the "needed safe funds" mark. You also have stocks, which in an index fund form never go to zero, nor anywhere close to it.
KlangFool
Posts: 19150
Joined: Sat Oct 11, 2008 12:35 pm

Re: Rebalancing strategy during a market drawdown

Post by KlangFool »

Thesaints wrote: Thu Feb 27, 2020 5:37 pm My second point is that if the proverbial "6 months of living expenses" amounts to very little compared to your portfolio size, you do not have to keep it separated and invested in an ultra-safe vehicle.

My first, and more directly related, point was that you don't have to stop rebalancing (towards stocks, evidently) because your bond component has gone below the "needed safe funds" mark. You also have stocks, which in an index fund form never go to zero, nor anywhere close to it.
Thesaints,

<<you do not have to keep it separated and invested in an ultra-safe vehicle.>>

My emergency fund is 1 1/2 year of my annual expense. It is small compared to my portfolio. My answer to you is why won't I keep a separate emergency fund. It is a luxury that I can afford. It is the same as I buy some gold jewelry as my hyperinflation insurance.

Money is a nice tool. It is not the end goal. It is meant to be used.

<<You also have stocks, which in an index fund form never go to zero, nor anywhere close to it.>>

Ditto. I don't have to care whether it goes down to zero or close to zero.

If you plan for the worst, you do not have to care for any situation less than the worst case.

KlangFool
dbr
Posts: 34289
Joined: Sun Mar 04, 2007 9:50 am

Re: Rebalancing strategy during a market drawdown

Post by dbr »

theorist wrote: Thu Feb 27, 2020 4:22 pm
. . . . I currently have over 10 years of expenses in fixed income. A 50% drawdown in equities, rebalanced to my AA, would reduce that to about 6.5 years. I haven’t considered what happens in an even worse case. If I were to amend my IPS to consider that, I’d probably draw a line at 5 years in fixed income. (I’m also not including the opportunity for a lifestyle change leading to expense reduction, for which we have significant room, and which we’d undoubtedly do in a worst case scenario.)
Note that considering asset allocation as a question of how many years expenses one has in fixed income is a different concept from considering asset allocation as a proportion of stocks and bonds. The latter is done to hold a certain weighted expected return and a certain weighted variation in expected annual return. In the face of changes in market value maintaining a fixed proportion results in varying the years in bonds while keeping the years in bonds fixed results in varying the proportion. A person has to decide what concept they want to implement. Rebalancing is usually thought of in the context of asset proportion and doesn't mean the same thing if done to keep a fixed dollar amount in expenses.
Topic Author
theorist
Posts: 770
Joined: Sat Sep 28, 2019 11:39 am

Re: Rebalancing strategy during a market drawdown

Post by theorist »

dbr wrote: Thu Feb 27, 2020 6:24 pm
theorist wrote: Thu Feb 27, 2020 4:22 pm
. . . . I currently have over 10 years of expenses in fixed income. A 50% drawdown in equities, rebalanced to my AA, would reduce that to about 6.5 years. I haven’t considered what happens in an even worse case. If I were to amend my IPS to consider that, I’d probably draw a line at 5 years in fixed income. (I’m also not including the opportunity for a lifestyle change leading to expense reduction, for which we have significant room, and which we’d undoubtedly do in a worst case scenario.)
Note that considering asset allocation as a question of how many years expenses one has in fixed income is a different concept from considering asset allocation as a proportion of stocks and bonds. The latter is done to hold a certain weighted expected return and a certain weighted variation in expected annual return. In the face of changes in market value maintaining a fixed proportion results in varying the years in bonds while keeping the years in bonds fixed results in varying the proportion. A person has to decide what concept they want to implement. Rebalancing is usually thought of in the context of asset proportion and doesn't mean the same thing if done to keep a fixed dollar amount in expenses.
Agreed. I guess I was saying that in considering such an extreme scenario that our > 10 years of fixed income declined to 5 years, I would consider amending my IPS to be: maintain 70/30 with rebalancing bands of plus/minus 5, except in the event that fixed income declines to 5 years of (present) expenses. In latter case, hold fixed income amount fixed.

I hadn’t thought about scenarios extreme enough that I’d want to do this, and so my current IPS concerns fractions in equities/bonds (with subcategories and a bit of further refined detail). KlangFool’s dire questions led me to consider more extreme scenarios, where a fixed dollar amount may become relevant.
BillyK
Posts: 75
Joined: Sat Sep 24, 2016 1:30 am

Re: Rebalancing strategy during a market drawdown

Post by BillyK »

My rebalancing strategy in a tumbling market has always been to sit back and do nothing. That is also spelled out in my IPS. If my bond to equity ratio becomes disproportionate, it isn’t going to cause me to lose sleep at night being overweighted in bonds for a period of time. I have seen it a lot in previous market crashes where investors are so anxious to do something when in fact doing nothing is often the prudent choice. If the market comes roaring back, and I missed out on picking up equities on the downside, it won’t be a big deal to me. However, I will allocate new monies into equities such as through my IRA and 401K plans as I make new monthly allocations.
rkhusky
Posts: 10909
Joined: Thu Aug 18, 2011 8:09 pm

Re: Rebalancing strategy during a market drawdown

Post by rkhusky »

5% isn’t written in stone. Choose what you like - 1%, 2%, 5%, 10%, but stick with it. The tighter the band, the more frequent rebalancing.

Personally I use 1% bands because I check my AA at least every other week, I like to tinker, and I don’t like to make large transactions.
Seananigans
Posts: 42
Joined: Tue Apr 16, 2019 11:57 pm

Re: Rebalancing strategy during a market drawdown

Post by Seananigans »

CrankAddict wrote: Thu Feb 27, 2020 2:38 pm I'm struggling to understand the premise behind getting burned by rebalancing too often. Isn't a rebalance by definition a sell-high/buy-low exchange? (Which, to the OP's question, is also why it seems extra tempting to want to do it when the market has dropped notably). Assuming no transaction fees or taxable events, and of course one's time being valued at 0, why would rebalancing even every week be inherently bad?
Thanks for asking this. It is a question I've often had myself. Can anyone offer any insight into the thinking here?

Thanks in advance!

Sean
Topic Author
theorist
Posts: 770
Joined: Sat Sep 28, 2019 11:39 am

Re: Rebalancing strategy during a market drawdown

Post by theorist »

Seananigans wrote: Thu Feb 27, 2020 11:04 pm
CrankAddict wrote: Thu Feb 27, 2020 2:38 pm I'm struggling to understand the premise behind getting burned by rebalancing too often. Isn't a rebalance by definition a sell-high/buy-low exchange? (Which, to the OP's question, is also why it seems extra tempting to want to do it when the market has dropped notably). Assuming no transaction fees or taxable events, and of course one's time being valued at 0, why would rebalancing even every week be inherently bad?
Thanks for asking this. It is a question I've often had myself. Can anyone offer any insight into the thinking here?

Thanks in advance!

Sean
I find the following a useful heuristic for the situation we are in now, of a falling market:

If the market is going to fall X percent and you choose between two options:
a) rebalance back to your AA after the first X/2 fall, and then again after the second X/2 fall;
b) rebalance back to your AA only after the full X fall,
then b) is more efficient. You got all of your equities at the full X discount, instead of half of them at only an X/2 discount.

The same argument could be generalized to cases more complicated than dividing X into two equal portions. This is the intuition for why rebalancing too often, at least in a falling market, could lose you more $ than just doing it less often.

However, in real life we don’t know whether we are going to get the full X fall or just an X/2 after which equities go back up. Hence the original question in this post — in a falling market, maybe we want to get the equities on sale in case the sale is about to end. This isn’t obvious as a question about prediction, but behavioral factors make it clear that you should just stick to your IPS (as older and wiser heads have emphasized in this thread).
Last edited by theorist on Thu Feb 27, 2020 11:19 pm, edited 1 time in total.
User avatar
whodidntante
Posts: 9624
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: Rebalancing strategy during a market drawdown

Post by whodidntante »

theorist wrote: Thu Feb 27, 2020 3:27 pm
There probably is! I don’t trust anything I can’t basically understand with squiggles on the back of an envelope, though.
If you trade this for bar napkins, you just explained a significant portion of my college education. My friends were smart drunks, however.
Seananigans
Posts: 42
Joined: Tue Apr 16, 2019 11:57 pm

Re: Rebalancing strategy during a market drawdown

Post by Seananigans »

theorist wrote: Thu Feb 27, 2020 11:16 pm
Seananigans wrote: Thu Feb 27, 2020 11:04 pm
CrankAddict wrote: Thu Feb 27, 2020 2:38 pm I'm struggling to understand the premise behind getting burned by rebalancing too often. Isn't a rebalance by definition a sell-high/buy-low exchange? (Which, to the OP's question, is also why it seems extra tempting to want to do it when the market has dropped notably). Assuming no transaction fees or taxable events, and of course one's time being valued at 0, why would rebalancing even every week be inherently bad?
Thanks for asking this. It is a question I've often had myself. Can anyone offer any insight into the thinking here?

Thanks in advance!

Sean
I find the following a useful heuristic for the situation we are in now, of a falling market:

If the market is going to fall X percent and you choose between two options:
a) rebalance back to your AA after the first X/2 fall, and then again after the second X/2 fall;
b) rebalance back to your AA only after the full X fall,
then b) is more efficient. You got all of your equities at the full X discount, instead of half of them at only an X/2 discount.

The same argument could be generalized to cases more complicated than dividing X into two equal portions. This is the intuition for why rebalancing too often, at least in a falling market, could lose you more $ than just doing it less often.

However, in real life we don’t know whether we are going to get the full X fall or just an X/2 after which equities go back up. Hence the original question in this post — in a falling market, maybe we want to get the equities on sale in case the sale is about to end. This isn’t obvious as a question about prediction, but behavioral factors make it clear that you should just stick to your IPS (as older and wiser heads have emphasized in this thread).
This makes perfect sense. Thanks for taking the time to break it down for me! Hope you have a good night.

Sean
H. E. Pennypacker
Posts: 29
Joined: Mon Feb 10, 2020 11:06 pm

Re: Rebalancing strategy during a market drawdown

Post by H. E. Pennypacker »

CrankAddict wrote: Thu Feb 27, 2020 2:38 pm I'm struggling to understand the premise behind getting burned by rebalancing too often. Isn't a rebalance by definition a sell-high/buy-low exchange? (Which, to the OP's question, is also why it seems extra tempting to want to do it when the market has dropped notably). Assuming no transaction fees or taxable events, and of course one's time being valued at 0, why would rebalancing even every week be inherently bad?
If you had sold off stock every week for the past ten years of the bull market, you’d probably be significantly poorer than you are now, right?
remomnyc
Posts: 855
Joined: Mon Jan 04, 2016 4:27 pm

Re: Rebalancing strategy during a market drawdown

Post by remomnyc »

I have 5% bands, and as we've established in this post, it takes a lot of movement to require rebalancing. Watching the market decline, I've been itching to do something, but my bands have not been triggered. I am thinking of changing my IPS to the lesser of 5% bands or a dollar amount. During a market drawdown, I also look for tax loss harvesting opportunities with a minimum loss set at $3k to sell, but even though my portfolio value declined 6 figures this week, I don't have a loss greater than a few hundred in any position because my basis is much lower than the current market price.
dbr
Posts: 34289
Joined: Sun Mar 04, 2007 9:50 am

Re: Rebalancing strategy during a market drawdown

Post by dbr »

H. E. Pennypacker wrote: Thu Feb 27, 2020 11:26 pm
CrankAddict wrote: Thu Feb 27, 2020 2:38 pm I'm struggling to understand the premise behind getting burned by rebalancing too often. Isn't a rebalance by definition a sell-high/buy-low exchange? (Which, to the OP's question, is also why it seems extra tempting to want to do it when the market has dropped notably). Assuming no transaction fees or taxable events, and of course one's time being valued at 0, why would rebalancing even every week be inherently bad?
If you had sold off stock every week for the past ten years of the bull market, you’d probably be significantly poorer than you are now, right?
Yes, rebalancing by definition reduces return during bull markets because otherwise you would own more and more stock and get more and more return. If you would like to end up richer on average and with almost everything in stock at the end, you would not rebalance. But, then if that is what one wanted, one would have just invested everything 100% in stocks in the first place. Having an asset allocation and not rebalancing makes the idea of an asset allocation altogether nonsense. Otherwise you have to advocate changing the asset allocation before the market does something, and that usually does not work out.
KlangFool
Posts: 19150
Joined: Sat Oct 11, 2008 12:35 pm

Re: Rebalancing strategy during a market drawdown

Post by KlangFool »

remomnyc wrote: Thu Feb 27, 2020 11:56 pm I have 5% bands, and as we've established in this post, it takes a lot of movement to require rebalancing. Watching the market decline, I've been itching to do something, but my bands have not been triggered. I am thinking of changing my IPS to the lesser of 5% bands or a dollar amount. During a market drawdown, I also look for tax loss harvesting opportunities with a minimum loss set at $3k to sell, but even though my portfolio value declined 6 figures this week, I don't have a loss greater than a few hundred in any position because my basis is much lower than the current market price.
remomnyc,

Changing IPS in response to the recent market movement = market timing.

KlangFool
Admiral
Posts: 3212
Joined: Mon Oct 27, 2014 12:35 pm

Re: Rebalancing strategy during a market drawdown

Post by Admiral »

Just as a data point:

My portfolio was 70/29/1 (stocks/bonds/cash) at the top of the market last week.

As of yesterday (not including today's drop) it was:

67.5 stocks
31.6% bonds
1% cash (rounded)

I am doing... nothing. Except buying since today is pay-day. :sharebeer
CrankAddict
Posts: 29
Joined: Wed Feb 19, 2020 10:28 am
Location: Ozarks

Re: Rebalancing strategy during a market drawdown

Post by CrankAddict »

theorist wrote: Thu Feb 27, 2020 11:16 pm I find the following a useful heuristic for the situation we are in now, of a falling market:

If the market is going to fall X percent and you choose between two options:
a) rebalance back to your AA after the first X/2 fall, and then again after the second X/2 fall;
b) rebalance back to your AA only after the full X fall,
then b) is more efficient. You got all of your equities at the full X discount, instead of half of them at only an X/2 discount.

The same argument could be generalized to cases more complicated than dividing X into two equal portions. This is the intuition for why rebalancing too often, at least in a falling market, could lose you more $ than just doing it less often.

However, in real life we don’t know whether we are going to get the full X fall or just an X/2 after which equities go back up. Hence the original question in this post — in a falling market, maybe we want to get the equities on sale in case the sale is about to end. This isn’t obvious as a question about prediction, but behavioral factors make it clear that you should just stick to your IPS (as older and wiser heads have emphasized in this thread).
This is a great summary. The other posts about why you shouldn't rebalance often site examples of the market continuing to move in one direction. And as you pointed out, sure, in that case, you want to ride it out longer. So this makes me think that as market volatility increases so should your rebalance frequency. We've had a couple years here where we cross the same thresholds multiple times (25k on the Dow, for example). Would those time periods not have done better with a monthly rebalance than a yearly?
Topic Author
theorist
Posts: 770
Joined: Sat Sep 28, 2019 11:39 am

Re: Rebalancing strategy during a market drawdown

Post by theorist »

CrankAddict wrote: Fri Feb 28, 2020 10:13 am
theorist wrote: Thu Feb 27, 2020 11:16 pm I find the following a useful heuristic for the situation we are in now, of a falling market:

If the market is going to fall X percent and you choose between two options:
a) rebalance back to your AA after the first X/2 fall, and then again after the second X/2 fall;
b) rebalance back to your AA only after the full X fall,
then b) is more efficient. You got all of your equities at the full X discount, instead of half of them at only an X/2 discount.

The same argument could be generalized to cases more complicated than dividing X into two equal portions. This is the intuition for why rebalancing too often, at least in a falling market, could lose you more $ than just doing it less often.

However, in real life we don’t know whether we are going to get the full X fall or just an X/2 after which equities go back up. Hence the original question in this post — in a falling market, maybe we want to get the equities on sale in case the sale is about to end. This isn’t obvious as a question about prediction, but behavioral factors make it clear that you should just stick to your IPS (as older and wiser heads have emphasized in this thread).
This is a great summary. The other posts about why you shouldn't rebalance often site examples of the market continuing to move in one direction. And as you pointed out, sure, in that case, you want to ride it out longer. So this makes me think that as market volatility increases so should your rebalance frequency. We've had a couple years here where we cross the same thresholds multiple times (25k on the Dow, for example). Would those time periods not have done better with a monthly rebalance than a yearly?
I think you’re right — there is clearly an interesting subject for study here. Of course the difficulty of knowing whether the markets will fluctuate (and with what frequency and distribution of size of fluctuations), or just move smoothly for a period, is part of why famous people say that “nobody knows nothing.” Pragmatically, Vanguard did look at backtesting different rebalancing practices. Their study is here:

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

They concluded that pretty infrequent rebalancing is best; but it could be as you say, that this was because of characteristics of the period tested that aren’t always true, and variable frequency rebalancing (or variable bands) could be more better. But you’d have to know when to switch between practices (mild market timing). For the behavioral reasons cited in this thread, I’ll stick with my 5% bands :-).

Good luck!
teamDE
Posts: 323
Joined: Tue Jun 28, 2016 9:16 pm

Re: Rebalancing strategy during a market drawdown

Post by teamDE »

Assumption: the equities market will recover at some point to previous highs.
Assumption: rebalancing is in tax-advantaged account with no fees or tax implications

If that is true, then you can basically do no harm by selling bonds high and buying equities low, right? The point/s at which you decide to do this rebalancingmay not be optimal since it is essentially market timing (you don't know when the optimal rebalance point, the bottom) would be, but you're at least better off than if the markets simply held flat.
HappyJack
Posts: 246
Joined: Thu Jan 10, 2019 7:45 am

Re: Rebalancing strategy during a market drawdown

Post by HappyJack »

garlandwhizzer
Posts: 3104
Joined: Fri Aug 06, 2010 3:42 pm

Re: Rebalancing strategy during a market drawdown

Post by garlandwhizzer »

It's a complex decision--if, when, and how much to rebalance during a market downturn. A lot depends on personal factors rather than computer driven backtesting models--whether your job/income stream is secure if a recession impacts the economy, how large your safe asset fixed income base is, your risk tolerance, your long term goals, your level of household debt, the presence and size of your emergency fund, how well you're sleeping at night, etc. In short models on what is optimal to do may not give a definitive answer because they are based on broad averages run by computers, and not you in your particular circumstances with emotions and financial problems to deal with. In addition there is your assessment of how quickly reversible the current market problem is although it's important to keep in mind that at best this is only a guess and most who make the guess will turn out to be wrong. I personally wouldn't put a lot of certainty in what I or anyone else predicts for when and how much the market will turn, only that at some indefinite point in the future it will. Those who periodically rebalanced from 1929 to 1932, sold the only storehouse of retained value, bonds, and bought stocks that just kept going down and down more. Rebalancing was a disaster for them but for those who did in the 2007-9 GR it worked out well. There is always a strong element of uncertainty about how long the decline will last and how severe the drop will be. I don't think it wise to act on when you think the turnaround will be and how strong it will be. It's hard to sell the only asset that is maintaining its value, or even increasing in value, as everything else keeps tanking. The most important mistake to avoid IMO is selling equity into severe weakness. Keeping your bond holdings intact may make it easier to avoid the big behavioral mistake.

Garland Whizzer
cpan00b
Posts: 132
Joined: Wed May 10, 2017 9:39 pm

Re: Rebalancing strategy during a market drawdown

Post by cpan00b »

What if you took into account volatility when coming up with an IPS? So something like the below:


Deviation from high Asset allocation
All time high through -5% 80-20
Between -5% and -10% 83-17
Between -10% and -15% 85-15
Between -15% and -20% 88-12
Between -20% and -25% 90-10
Between -25% and -30% 95-05
Below -30% 100-0


So right now since we're about to break into the -15% row, you would feel comfortable with 85-15. If we get down to -20% and bear territory next week, you sell off more of your bonds until you get close to 90-10? What do you think about this kind of strategy that moves along with market. I.e. when the market is doing really badly, you feel like taking more risk, but when the market is amazing, you're ok foregoing some profits and holding onto "dry powder"
remomnyc
Posts: 855
Joined: Mon Jan 04, 2016 4:27 pm

Re: Rebalancing strategy during a market drawdown

Post by remomnyc »

KlangFool wrote: Fri Feb 28, 2020 9:40 am
remomnyc wrote: Thu Feb 27, 2020 11:56 pm I have 5% bands, and as we've established in this post, it takes a lot of movement to require rebalancing. Watching the market decline, I've been itching to do something, but my bands have not been triggered. I am thinking of changing my IPS to the lesser of 5% bands or a dollar amount. During a market drawdown, I also look for tax loss harvesting opportunities with a minimum loss set at $3k to sell, but even though my portfolio value declined 6 figures this week, I don't have a loss greater than a few hundred in any position because my basis is much lower than the current market price.
remomnyc,

Changing IPS in response to the recent market movement = market timing.

KlangFool
I realize that for my 5% bands to be triggered, I need a huge swing, so I am considering changing the trigger to the lesser of 5% or +/-$100k. My fixed income is set at the lesser of 40% or a dollar amount that represents 10-12x expenses. I made that change when I realized I didn't want to accumulate more than 12x expenses in fixed income, which was happening at 40% as my portfolio grew. I don't consider either of these changes market timing. These are changes to my IPS to recalibrate my risk and manage my asset allocation.
KlangFool
Posts: 19150
Joined: Sat Oct 11, 2008 12:35 pm

Re: Rebalancing strategy during a market drawdown

Post by KlangFool »

remomnyc wrote: Fri Feb 28, 2020 10:38 pm
KlangFool wrote: Fri Feb 28, 2020 9:40 am
remomnyc wrote: Thu Feb 27, 2020 11:56 pm I have 5% bands, and as we've established in this post, it takes a lot of movement to require rebalancing. Watching the market decline, I've been itching to do something, but my bands have not been triggered. I am thinking of changing my IPS to the lesser of 5% bands or a dollar amount. During a market drawdown, I also look for tax loss harvesting opportunities with a minimum loss set at $3k to sell, but even though my portfolio value declined 6 figures this week, I don't have a loss greater than a few hundred in any position because my basis is much lower than the current market price.
remomnyc,

Changing IPS in response to the recent market movement = market timing.

KlangFool
I realize that for my 5% bands to be triggered, I need a huge swing, so I am considering changing the trigger to the lesser of 5% or +/-$100k. My fixed income is set at the lesser of 40% or a dollar amount that represents 10-12x expenses. I made that change when I realized I didn't want to accumulate more than 12x expenses in fixed income, which was happening at 40% as my portfolio grew. I don't consider either of these changes market timing. These are changes to my IPS to recalibrate my risk and manage my asset allocation.
remomnyc,

Which will not be a problem when the stock market drops some more and fix that for you. But, somehow you believe that you can predict the future and the huge swing is not possible. So, you change your IPS instead.

This is market timing.

How do you know that the huge swing is not possible?

In order for my 5% band to be triggered, the stock market has to drop at least 30%. I know that is not impossible. It had happened historically. So, what is your huge swing that you know is impossible?

KlangFool
remomnyc
Posts: 855
Joined: Mon Jan 04, 2016 4:27 pm

Re: Rebalancing strategy during a market drawdown

Post by remomnyc »

KlangFool wrote: Fri Feb 28, 2020 10:50 pm
remomnyc wrote: Fri Feb 28, 2020 10:38 pm
KlangFool wrote: Fri Feb 28, 2020 9:40 am
remomnyc wrote: Thu Feb 27, 2020 11:56 pm I have 5% bands, and as we've established in this post, it takes a lot of movement to require rebalancing. Watching the market decline, I've been itching to do something, but my bands have not been triggered. I am thinking of changing my IPS to the lesser of 5% bands or a dollar amount. During a market drawdown, I also look for tax loss harvesting opportunities with a minimum loss set at $3k to sell, but even though my portfolio value declined 6 figures this week, I don't have a loss greater than a few hundred in any position because my basis is much lower than the current market price.
remomnyc,

Changing IPS in response to the recent market movement = market timing.

KlangFool
I realize that for my 5% bands to be triggered, I need a huge swing, so I am considering changing the trigger to the lesser of 5% or +/-$100k. My fixed income is set at the lesser of 40% or a dollar amount that represents 10-12x expenses. I made that change when I realized I didn't want to accumulate more than 12x expenses in fixed income, which was happening at 40% as my portfolio grew. I don't consider either of these changes market timing. These are changes to my IPS to recalibrate my risk and manage my asset allocation.
remomnyc,

Which will not be a problem when the stock market drops some more and fix that for you. But, somehow you believe that you can predict the future and the huge swing is not possible. So, you change your IPS instead.

This is market timing.

How do you know that the huge swing is not possible?

In order for my 5% band to be triggered, the stock market has to drop at least 30%. I know that is not impossible. It had happened historically. So, what is your huge swing that you know is impossible?

KlangFool
I'm not saying it's not possible. I'm saying that I don't want to wait so long. I could just as easily decide that I am more comfortable with 2% bands, but I think adjusting when it's 5% or +/- $100k from my target is not an unreasonable position. Just as I don't think wanting more than 12 years of expenses in fixed income is market timing even if it was not my original IPS.

Edit: In any event, I said I was thinking about it. I'm not going to implement any change to my IPS during this volatile period. I want to see how I feel after everything shakes out. It's times like this where you learn about your comfort levels.
Post Reply