Rebalancing into stocks when they fall is unrealistic

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Beliavsky
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Rebalancing into stocks when they fall is unrealistic

Post by Beliavsky » Thu Mar 12, 2020 10:45 pm

The common advice to decide on a stock/bond allocation and to rebalance to it periodically is unrealistic. In this market you would be selling bonds to buy stocks. VIX is 75, about 5 times its usual level. So after stocks have fallen drastically, and you have become substantially poorer, you should dial up risk? My wife is saying we need to exit stocks entirely, and I am trying to resist. If I insisted on rebalancing to get to our allocation of 2 months ago, she might divorce me.

Rebalancing out of stocks when they have outperformed bonds is feasible. There's no law saying you can't reduce risk after your investments have done well. it's the rebalancing into stocks with existing money that I oppose.

One reason stocks have fallen is that big parts of the travel and entertainment industries are being shut down. Many people will lose their jobs or have their hours cut back. If your income is stable and you are continuing to save, you can gradually rebalance into stocks by earmarking new savings for stocks.

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zhimbo
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Re: Rebalancing into stocks when they fall is unrealistic

Post by zhimbo » Thu Mar 12, 2020 10:48 pm

"So after stocks have fallen drastically, and you have become substantially poorer, you should dial up risk?"

"There's no law saying you can't reduce risk after your investments have done well."

Rebalancing is maintaining a predetermined level of long-term risk, not dialing up or dialing down.

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Beliavsky
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Re: Rebalancing into stocks when they fall is unrealistic

Post by Beliavsky » Thu Mar 12, 2020 10:55 pm

zhimbo wrote:
Thu Mar 12, 2020 10:48 pm
"So after stocks have fallen drastically, and you have become substantially poorer, you should dial up risk?"

"There's no law saying you can't reduce risk after your investments have done well."

Rebalancing is maintaining a predetermined level of long-term risk, not dialing up or dialing down.
If you sold bonds and bought stocks today at the close, you were undeniably increasing the risk of your portfolio when it had already risen because of dramatically higher market volatility.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by SimpleGift » Thu Mar 12, 2020 11:13 pm

Beliavsky wrote:
Thu Mar 12, 2020 10:45 pm
Rebalancing out of stocks when they have outperformed bonds is feasible. There's no law saying you can't reduce risk after your investments have done well. it's the rebalancing into stocks with existing money that I oppose.
There are many Bogleheads, mostly in retirement (including myself), who are one-way rebalancers such as you describe. When stocks do well, we rebalance into bonds. When stocks sell off, we sit tight with our large allocation to high-quality bonds and do nothing.

However, personally, we are in retirement with a portfolio value that we consider "enough" — so safety of our nest egg is more important to us than achieving the highest returns. For young accumulators, the rebalancing decision is likely to be different.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by FlyerJack » Thu Mar 12, 2020 11:18 pm

Buy low, sell high. This is the “buy low” part. Maybe easier in theory than in practice, sometimes.
Beliavsky wrote:
Thu Mar 12, 2020 10:45 pm
So after stocks have fallen drastically, and you have become substantially poorer...
I disagree with that, at least as far as it has any meaning regarding my investment plan. While my net worth has dropped in recent days, my income is unchanged. My cash flow is unchanged. My living expenses are unchanged. My emergency fund is unchanged. My autopilot retirement investments continue unchanged. The only thing that’s changed is that my automatic investments are buying equities low, and I believe they will be much higher when I need that money in 20 years.

I can understand how things may be different if you have a much shorter investment horizon (and have discovered that your asset allocation now gives you heartburn) or if you’re critically worried about sequence-of-returns risk in retirement, but otherwise it makes perfect sense to rebalance into stocks when they fall.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by AlohaJoe » Thu Mar 12, 2020 11:22 pm

Beliavsky wrote:
Thu Mar 12, 2020 10:45 pm
The common advice to decide on a stock/bond allocation and to rebalance to it periodically is unrealistic.
If you add "for many people", I'd agree that it is something that is underexplained in most typical Bogleheads strategies.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by sailaway » Thu Mar 12, 2020 11:23 pm

If you believe that the market goes up over time, rebalancing makes perfect sense.

I would think that constant monitoring and rebalancing would be exhausting. This is one reason that we only rebalance every six months.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by jjface » Thu Mar 12, 2020 11:35 pm

Basically you need to learn to take emotion out of investing. You may benefit from drawing up an IPS (investment policy statement) so you have an agreed plan if situations like these arise (and they will). Or turn to positive emotion and consider tax loss harvesting, buying cheap stocks with new money etc.

There is no rule that says you have to rebalance. Really a 5% deviation in asset allocation isn't that significant. If you sleep better leaving it alone then that is fine. You and your wife are probably good candidates for balanced all in one funds too to mask those larger stock drops and the rebalancing is done behind the scenes by the fund.

But selling now is a bad idea as you lock in losses unless you can time it right. Which many people fail to do and lose out. But there are always a few lucky people who market time well a few times and think they have a gift.

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bligh
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Re: Rebalancing into stocks when they fall is unrealistic

Post by bligh » Thu Mar 12, 2020 11:45 pm

jjface wrote:
Thu Mar 12, 2020 11:35 pm
Basically you need to learn to take emotion out of investing. You may benefit from drawing up an IPS (investment policy statement) so you have an agreed plan if situations like these arise (and they will). Or turn to positive emotion and consider tax loss harvesting, buying cheap stocks with new money etc.
+1. This is so important. Sometimes I pretend to manage my portfolio like it isn't mine. I manage it as if I were a financial advisor managing a client's portfolio. IA client whose success I am incredibly vested in. I ask myself if what I am doing would be defensible and appropriate even if the outcome turns out to be poor. ie. Am I implementing the correct strategy for my client

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Re: Rebalancing into stocks when they fall is unrealistic

Post by HomerJ » Fri Mar 13, 2020 12:41 am

SimpleGift wrote:
Thu Mar 12, 2020 11:13 pm
Beliavsky wrote:
Thu Mar 12, 2020 10:45 pm
Rebalancing out of stocks when they have outperformed bonds is feasible. There's no law saying you can't reduce risk after your investments have done well. it's the rebalancing into stocks with existing money that I oppose.
There are many Bogleheads, mostly in retirement (including myself), who are one-way rebalancers such as you describe. When stocks do well, we rebalance into bonds. When stocks sell off, we sit tight with our large allocation to high-quality bonds and do nothing.

However, personally, we are in retirement with a portfolio value that we consider "enough" — so safety of our nest egg is more important to us than achieving the highest returns. For young accumulators, the rebalancing decision is likely to be different.
I'm a one-way rebalancer as well at this point as well... I only sell stocks and buy bonds to get myself back to my target Asset Allocation.

Back in 2008, I rebalanced the other direction a few times, but stopped once my bonds were at certain level. I didn't want to sell any more bonds to buy stocks. I had a floor that I wanted to keep in cash/bonds just in case the Great Depression II did happen.

But, so far, anyone who has rebalanced the other direction all the way down has done well. Selling bonds and buying stocks back to your target AA in 2000 and 2008 (and 2011 and 2018) made you richer.

But who knows if the future will repeat the past? I have a much higher floor in bonds/cash now (since I'm close to retirement), and I'm not going below it.

I completely understand why you don't want to do it, but I think you're being a little harsh on other people who do rebalance in both directions. I can see both sides.
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Re: Rebalancing into stocks when they fall is unrealistic

Post by AlohaJoe » Fri Mar 13, 2020 12:44 am

jjface wrote:
Thu Mar 12, 2020 11:35 pm
Basically you need to learn to take emotion out of investing.
Sure, but then if you do that, you should have much higher equity allocations than Bogleheads typically suggest.

Telling complete newbies "hold 30-40% bonds because emotions matter...but also ignore emotions and rebalance during epochal crashes" seems borderline incoherent.

I agree that rebalancing isn't necessary, really. But I think(?) it is pretty standard advice in all the introductory Boglehead style books from Larimore, Ferri, Bernstein, Schulteis, etc, etc.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by visualguy » Fri Mar 13, 2020 12:54 am

How can you tell if you're rebalancing into a Japan scenario, or not? You can't, and this kills rebalancing (into stocks) for me.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by rascott » Fri Mar 13, 2020 12:58 am

These threads make me comfortable in knowing we are a lot closer to a bottom than not.

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JoMoney
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Re: Rebalancing into stocks when they fall is unrealistic

Post by JoMoney » Fri Mar 13, 2020 1:04 am

FWIW, "rebalancing" is often suggested as an annual thing, not something you constantly manage to try and rebalance while it's falling - you just wait for the portfolio birthday and if things are our out-of-balance at that point, then you make an adjustment.
If you're paying close attention to the daily movements you're doing it wrong.

That said, I too will likely be a one-way rebalancer, but I don't even consider my portfolio a "constant mix" portfolio... closer to bucket'ing.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Rebalancing into stocks when they fall is unrealistic

Post by kaseg » Fri Mar 13, 2020 1:08 am

visualguy wrote:
Fri Mar 13, 2020 12:54 am
How can you tell if you're rebalancing into a Japan scenario, or not? You can't, and this kills rebalancing (into stocks) for me.
If that's a genuine concern, then why be in equities at all? In my opinion, if you cant create a plan and stick to it in all market conditions, its not the right plan. And if your plan is "never buy stocks in a bear market", then I suppose we've got different plans.


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Re: Rebalancing into stocks when they fall is unrealistic

Post by dru808 » Fri Mar 13, 2020 1:19 am

You must hate money. Your equities are 30% lower in price and you are contemplating being whatever % poorer/getting out?
60% US equity | 25% International equity | 15% US Treasury bonds

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Re: Rebalancing into stocks when they fall is unrealistic

Post by visualguy » Fri Mar 13, 2020 1:34 am

kaseg wrote:
Fri Mar 13, 2020 1:08 am
visualguy wrote:
Fri Mar 13, 2020 12:54 am
How can you tell if you're rebalancing into a Japan scenario, or not? You can't, and this kills rebalancing (into stocks) for me.
If that's a genuine concern, then why be in equities at all? In my opinion, if you cant create a plan and stick to it in all market conditions, its not the right plan. And if your plan is "never buy stocks in a bear market", then I suppose we've got different plans.
What does that have to do with rebalancing? It's absolutely not needed, and it's dangerous exactly in the cases where safe assets make the most difference - that is, something like a Japan scenario. If you think that's impossible, and stocks will always recover within your time horizon, why not be all in stocks?

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Re: Rebalancing into stocks when they fall is unrealistic

Post by jjface » Fri Mar 13, 2020 1:58 am

AlohaJoe wrote:
Fri Mar 13, 2020 12:44 am
jjface wrote:
Thu Mar 12, 2020 11:35 pm
Basically you need to learn to take emotion out of investing.
Sure, but then if you do that, you should have much higher equity allocations than Bogleheads typically suggest.

Telling complete newbies "hold 30-40% bonds because emotions matter...but also ignore emotions and rebalance during epochal crashes" seems borderline incoherent.

I agree that rebalancing isn't necessary, really. But I think(?) it is pretty standard advice in all the introductory Boglehead style books from Larimore, Ferri, Bernstein, Schulteis, etc, etc.
Rather I should have said learn to keep emotion under control. Obviously risk is always present and one cannot navigate with risk as if it didn't exist. But one needs to keep to a risk level they are comfortable enough with that they don't panic and do stupid things or listen to advice that isn't sound. So yes not saying ignore risk and go all equity by learning to be a robot. But rather if you are floundering over a 20% drop you need to control that by either re-evaluating how much risk you are willing to take, not looking at your portfolio as much, educating yourself more about long term investing, sticking to an ips, using balanced funds or whatever helps you navigate through these uncertain times.

Yes rebalancing is a pretty standard thing and has been shown to have benefits. But if you are freaking out and that makes it worse I say it is a small price to pay to forgo it to keep your sanity :D Textbook answer would be to argue for it. This is one of those ways to control emotion I am talking about. If it helps you stay calm not to rebalance then I think it is okay. Not worth tearing your hair out over.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by flaccidsteele » Fri Mar 13, 2020 3:06 am

Beliavsky wrote:
Thu Mar 12, 2020 10:45 pm
The common advice to decide on a stock/bond allocation and to rebalance to it periodically is unrealistic. In this market you would be selling bonds to buy stocks. VIX is 75, about 5 times its usual level. So after stocks have fallen drastically, and you have become substantially poorer, you should dial up risk? My wife is saying we need to exit stocks entirely, and I am trying to resist. If I insisted on rebalancing to get to our allocation of 2 months ago, she might divorce me.
This logic is common yet wrong

Risk goes down as prices collapse

Risk goes up as prices increase

The risk-adverse should be happy that the market is burning off risk

Your wife has the temperament to be poor

This is why I don’t hold bonds. I store cash because downturns are inevitable
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat

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Re: Rebalancing into stocks when they fall is unrealistic

Post by pascalwager » Fri Mar 13, 2020 4:08 am

visualguy wrote:
Fri Mar 13, 2020 12:54 am
How can you tell if you're rebalancing into a Japan scenario, or not? You can't, and this kills rebalancing (into stocks) for me.
Some of the forum proponents of a strong US home bias for stocks have claimed that a Japan scenario can't happen here.
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Re: Rebalancing into stocks when they fall is unrealistic

Post by Triple digit golfer » Fri Mar 13, 2020 4:39 am

It is not unrealistic. I did it yesterday.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by pharmermummles » Fri Mar 13, 2020 4:58 am

pascalwager wrote:
Fri Mar 13, 2020 4:08 am
visualguy wrote:
Fri Mar 13, 2020 12:54 am
How can you tell if you're rebalancing into a Japan scenario, or not? You can't, and this kills rebalancing (into stocks) for me.
Some of the forum proponents of a strong US home bias for stocks have claimed that a Japan scenario can't happen here.
I don't know if that's true. I guess it could be. I don't pay much attention to macroeconomics. Instead I hold as close to global market weight as I can with my 403(b) fund choices. That way I don't have to have a strong opinion either way. I guess the entire world could stagnate for the next few decades, but it isn't likely bonds would have done me much good in keeping up with inflation in that case anyway.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by pharmermummles » Fri Mar 13, 2020 4:59 am

This is one of the nice things about being 100% equities. No rebalancing necessary! :beer

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Ramjet
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Re: Rebalancing into stocks when they fall is unrealistic

Post by Ramjet » Fri Mar 13, 2020 5:52 am

Title of the thread should have been

"Rebalancing into stocks when they fall is unrealistic FOR ME"

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Re: Rebalancing into stocks when they fall is unrealistic

Post by Jack FFR1846 » Fri Mar 13, 2020 6:34 am

Ramjet wrote:
Fri Mar 13, 2020 5:52 am
Title of the thread should have been

"Rebalancing into stocks when they fall is unrealistic FOR ME"
Or simply:

"New strategy.....sell low, buy high, what could possibly go wrong?"
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Beliavsky
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Re: Rebalancing into stocks when they fall is unrealistic

Post by Beliavsky » Fri Mar 13, 2020 7:24 am

Jack FFR1846 wrote:
Fri Mar 13, 2020 6:34 am
Ramjet wrote:
Fri Mar 13, 2020 5:52 am
Title of the thread should have been

"Rebalancing into stocks when they fall is unrealistic FOR ME"
Or simply:

"New strategy.....sell low, buy high, what could possibly go wrong?"
Don't mischaracterize what I wrote. I'm saying that people don't need to buy stocks after they have fallen, not that that they need to sell what they already own. I also said that periodic investments in the stock market from income are fine.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by azanon » Fri Mar 13, 2020 7:29 am

Look at not being able to rebalance when the stock market drops as a good thing, because it's an almost perfect indicator that your asset allocation is too aggressive for your risk tolerance, and that's good thing because you're being given the opportunity to adjust it and get it right now instead of later.

One of the silver linings in this sudden drop is that it is allowing several people the opportunity to re-calibrate what their actual risk tolerance is.

"Our" federal TSP L funds rebalance daily. If you ask me, that's actually the ideal scenario, if it weren't for tax issues in a taxable account, or just the hassle of having to manually do it if you're not using a balanced fund. Ideally, your risk exposure on any given trading day, is always the same, if you truly believe in "buy/hold/rebalance" mindset/strategy.
Last edited by azanon on Fri Mar 13, 2020 7:31 am, edited 1 time in total.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by dwickenh » Fri Mar 13, 2020 7:30 am

I find re-balancing at 5% bands to maintain my 50/50 allocation somewhat soothing when the market is falling. It means I continue to follow my IPS and stick with my plan. If your IPS states not to re-balance or sell into a bear, it may be just as soothing for you to follow your plan. If you don't have a plan, you are just reacting with emotion. That is not good for investing and is proven to increase the risk of loss.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by yohac » Fri Mar 13, 2020 7:34 am

Beliavsky wrote:
Thu Mar 12, 2020 10:45 pm
My wife is saying we need to exit stocks entirely, and I am trying to resist. If I insisted on rebalancing to get to our allocation of 2 months ago, she might divorce me.
Our wives are natural allies! She trusts me to handle the investments but I haven't even brought up rebalancing yet. Certainly not after yesterday's grocery trip, where we invented a new game: Water, TP, or Both (as in what are the other people loading up on)

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Re: Rebalancing into stocks when they fall is unrealistic

Post by MnD » Fri Mar 13, 2020 9:16 am

I've been a 2-way rebalancer since 1986. It's one of the things that keeps me grounded by removing emotion from the process of maintaining ones portfolio and risk/reward exposure. It has also assisted in helping us meet all our financial-related goals and the rewards that come with that.

I do note that in times of market duress that many people who have a AA plan that includes rebalancing to maintain it, proceed to throw that plan out the window. The same person that was happy to maintain their AA when markets were at record highs are emotionally unable to stick to their plan when stocks are at once in a decade or longer sale prices. Fine with me. I compete for goods and services with everyone else and the more that others engage in sub-optimal investment practices the better things are for our household.

If your plan calls for one-way rebalancing that's fine but if you can't stick to your plan to maintain a fixed AA then you are mismanaging your households financial future and you should hire someone to manage your investments like Vanguard PAS and/or put everything in target date or balanced funds that handle the rebalancing for you.
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Re: Rebalancing into stocks when they fall is unrealistic

Post by Caduceus » Fri Mar 13, 2020 9:19 am

So, to summarize, what you and your wife believe is that it's great to sell stocks when stocks are going up ("rebalancing out of stocks"), and also great to sell stocks when stocks are going down ("managing your risk"). You can call it what you want, but it just sounds silly to me.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by jeffyscott » Fri Mar 13, 2020 9:28 am

HomerJ wrote:
Fri Mar 13, 2020 12:41 am
SimpleGift wrote:
Thu Mar 12, 2020 11:13 pm
Beliavsky wrote:
Thu Mar 12, 2020 10:45 pm
Rebalancing out of stocks when they have outperformed bonds is feasible. There's no law saying you can't reduce risk after your investments have done well. it's the rebalancing into stocks with existing money that I oppose.
There are many Bogleheads, mostly in retirement (including myself), who are one-way rebalancers such as you describe. When stocks do well, we rebalance into bonds. When stocks sell off, we sit tight with our large allocation to high-quality bonds and do nothing.

However, personally, we are in retirement with a portfolio value that we consider "enough" — so safety of our nest egg is more important to us than achieving the highest returns. For young accumulators, the rebalancing decision is likely to be different.
I'm a one-way rebalancer as well at this point as well... I only sell stocks and buy bonds to get myself back to my target Asset Allocation.

Back in 2008, I rebalanced the other direction a few times, but stopped once my bonds were at certain level. I didn't want to sell any more bonds to buy stocks. I had a floor that I wanted to keep in cash/bonds just in case the Great Depression II did happen.

But, so far, anyone who has rebalanced the other direction all the way down has done well. Selling bonds and buying stocks back to your target AA in 2000 and 2008 (and 2011 and 2018) made you richer.

But who knows if the future will repeat the past? I have a much higher floor in bonds/cash now (since I'm close to retirement), and I'm not going below it.

I completely understand why you don't want to do it, but I think you're being a little harsh on other people who do rebalance in both directions. I can see both sides.
Similar here, 2-way with a limit. And when I do sell bonds to buy stocks (or visa-versa) it is done slowly in tiny increments, I maybe moved about 0.5% of portfolio this week.

We also have some money in funds that do some rebalancing for us.
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Rebalancing into stocks when they fall is unrealistic

Post by 9-5 Suited » Fri Mar 13, 2020 9:30 am

kaseg wrote:
Fri Mar 13, 2020 1:08 am
visualguy wrote:
Fri Mar 13, 2020 12:54 am
How can you tell if you're rebalancing into a Japan scenario, or not? You can't, and this kills rebalancing (into stocks) for me.
If that's a genuine concern, then why be in equities at all? In my opinion, if you cant create a plan and stick to it in all market conditions, its not the right plan. And if your plan is "never buy stocks in a bear market", then I suppose we've got different plans.
Agree about the issue here being more about not having the right plan, specifically that I wonder if the original AA was actually higher than OP’s wife is truly comfortable with. The market decline and subsequent question about rebalancing only drew that to the forefront. There’s nothing wrong with not rebalancing into stocks, but it does suggest the original plan likely was too high risk.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by Kenkat » Fri Mar 13, 2020 9:44 am

It is times like these that make investing challenging. It’s easy to write up an IPS that says “when A happens, do this”. The hard part is when the market is falling, you’re instincts say “get out”, not “put more in”.

Look, if you can’t stomach rebalancing in a big way right now, then don’t. Target new monies 100% equities until you get back into balance and you’ll be ok. Is this mental accounting? Yes, but emotion is part of it so find something that works.

In 2008, I couldn’t do a big rebalance all at once. I just couldn’t bring myself to do it. So I set up periodic automatic investments to slowly move me back into equities instead. It’s what I could do.

I haven’t rebalanced yet. I have been somewhat slothful as the market ran up and was on the high side of my equity allocation before all this hit. But I did switch over all future 401k contributions to 100% equities.

Take it slow if you need to. Your wife has to be somewhat comfortable with things as well. The only thing I wouldn’t do is sell out completely. That I believe would be a giant mistake.

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Re: Rebalancing into stocks when they fall is unrealistic

Post by alluringreality » Fri Mar 13, 2020 9:55 am

Beliavsky wrote:
Thu Mar 12, 2020 10:45 pm
it's the rebalancing into stocks with existing money that I oppose.
The money that I don't put into the stock market has been reserved for other reasons. Personally I have no interest in choosing a policy that forces me to trade my reserved money to buy stocks. If the stock market was to fall for years, trading my reserved assets for stocks wouldn't make much sense according to my ideas around risk mitigation, since I would end up with both fewer total assets and fewer safe assets. I'll just buy stocks with new money, like you're talking about. Essentially my considerations around risk mitigation simply do not agree with the idea of using an asset allocation percentage as a way to handle risk. When I started a similar thread, I agreed with the idea that a percentage simply involves a numerator and denominator and does not necessarily represent how I look at risk and reward.
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Re: Rebalancing into stocks when they fall is unrealistic

Post by firebirdparts » Fri Mar 13, 2020 9:57 am

visualguy wrote:
Fri Mar 13, 2020 12:54 am
How can you tell if you're rebalancing into a Japan scenario?
Earnings. Fundamentals win.
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Re: Rebalancing into stocks when they fall is unrealistic

Post by greg24 » Fri Mar 13, 2020 10:05 am

Everyone enjoys the risk of equities when the market is going up.

Sagefemme
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Re: Rebalancing into stocks when they fall is unrealistic

Post by Sagefemme » Fri Mar 13, 2020 10:12 am

My investment plan (which I have only had for about a year) says rebalance Jan 1 and July 1 each year, and whenever the portfolio is 6% away from the designated AA of 50-50. July 1 of 2019 and Jan 1 of 2020 there was nothing to do, as I was still at 50-50 or very close. Yesterday I was at 44-56, and went ahead and sold bonds and bought stocks. It was surprisingly easy to do; I trust the FA that made the plan with us and just followed that plan. My husband said, "Seriously, you're really buying stocks today?" And I said, yep, and did it. Luckily he is mostly uninterested in our retirement accounts and decided resistance was futile.

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Sandtrap
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Re: Rebalancing into stocks when they fall is unrealistic

Post by Sandtrap » Fri Mar 13, 2020 10:16 am

HomerJ wrote:
Fri Mar 13, 2020 12:41 am
SimpleGift wrote:
Thu Mar 12, 2020 11:13 pm
Beliavsky wrote:
Thu Mar 12, 2020 10:45 pm
Rebalancing out of stocks when they have outperformed bonds is feasible. There's no law saying you can't reduce risk after your investments have done well. it's the rebalancing into stocks with existing money that I oppose.
There are many Bogleheads, mostly in retirement (including myself), who are one-way rebalancers such as you describe. When stocks do well, we rebalance into bonds. When stocks sell off, we sit tight with our large allocation to high-quality bonds and do nothing.

However, personally, we are in retirement with a portfolio value that we consider "enough" — so safety of our nest egg is more important to us than achieving the highest returns. For young accumulators, the rebalancing decision is likely to be different.
I'm a one-way rebalancer as well at this point as well... I only sell stocks and buy bonds to get myself back to my target Asset Allocation.

Back in 2008, I rebalanced the other direction a few times, but stopped once my bonds were at certain level. I didn't want to sell any more bonds to buy stocks. I had a floor that I wanted to keep in cash/bonds just in case the Great Depression II did happen.

But, so far, anyone who has rebalanced the other direction all the way down has done well. Selling bonds and buying stocks back to your target AA in 2000 and 2008 (and 2011 and 2018) made you richer.

But who knows if the future will repeat the past? I have a much higher floor in bonds/cash now (since I'm close to retirement), and I'm not going below it.

I completely understand why you don't want to do it, but I think you're being a little harsh on other people who do rebalance in both directions. I can see both sides.
+1
Also a "one way rebalancer":
Why?
Because some, including myself, especially in retirement, "have more to lose than to gain".
Theoretically, the purpose of rebalancing it to mitigate risk vs increase returns and volatility.

For some, "one way rebalancing" establishes a glide path variable allocation. Similar to using a Target Date Fund.

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Nowizard
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Re: Rebalancing into stocks when they fall is unrealistic

Post by Nowizard » Fri Mar 13, 2020 10:17 am

This thread points out one issue that recurs, that being statements often made from a perspective that does not take into account individual circumstances. I worry about new investors, those with smaller portfolios and those with shorter time horizons primarily.

Tim

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Sandtrap
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Re: Rebalancing into stocks when they fall is unrealistic

Post by Sandtrap » Fri Mar 13, 2020 10:18 am

zhimbo wrote:
Thu Mar 12, 2020 10:48 pm
"So after stocks have fallen drastically, and you have become substantially poorer, you should dial up risk?"

"There's no law saying you can't reduce risk after your investments have done well."

Rebalancing is maintaining a predetermined level of long-term risk, not dialing up or dialing down.
+1
Great point.
. . . excellent avatar. . .

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Forester
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Re: Rebalancing into stocks when they fall is unrealistic

Post by Forester » Fri Mar 13, 2020 10:18 am

Beliavsky wrote:
Thu Mar 12, 2020 10:45 pm
The common advice to decide on a stock/bond allocation and to rebalance to it periodically is unrealistic. In this market you would be selling bonds to buy stocks. VIX is 75, about 5 times its usual level. So after stocks have fallen drastically, and you have become substantially poorer, you should dial up risk? My wife is saying we need to exit stocks entirely, and I am trying to resist. If I insisted on rebalancing to get to our allocation of 2 months ago, she might divorce me.

Rebalancing out of stocks when they have outperformed bonds is feasible. There's no law saying you can't reduce risk after your investments have done well. it's the rebalancing into stocks with existing money that I oppose.

One reason stocks have fallen is that big parts of the travel and entertainment industries are being shut down. Many people will lose their jobs or have their hours cut back. If your income is stable and you are continuing to save, you can gradually rebalance into stocks by earmarking new savings for stocks.
But if you had bought stocks in about October 2008 (from memory), halfway through the bear market, that would soon be proven to have been "buying low", even if stocks did fall some more.

Elysium
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Re: Rebalancing into stocks when they fall is unrealistic

Post by Elysium » Fri Mar 13, 2020 10:20 am

Rebalancing when stocks have gone up by a lot like last year into bonds makes sense, and not rebalancing when stocks have gone down a lot like this year from bonds also make sense. But how many actually do one or the other or both. The answer is very few.

Selling stocks that are going up a lot is very difficult, and buying stocks that are going down by a lot is extremely difficult. Selling what's up is slightly more easier than buying what's down.

Many people just let stocks run and sit on the gains because of plain inertia and fear of missing out on more. I did this myself too. Usually at end of year, typically last week of December I do a complete check of how everything has performed, look at future investments, growth, goals, etc, and do a trimming if needed. This year due to a combination of factors I did not do the rebalancing even though the target percentage of equities above allocation was met. I let it run. Then again checked mid February to see where things are and saw the growth was getting out of control. I figured if this continued I will rebalance by end of February. Turns out I didn't need to do it. Market did it for me.

Now I am below allocation, and I have to make a decision to sell bonds and buy stocks. I have figured out a couple of accounts where I am going to do this. I will keep bonds safe in one or two accounts that I would not rebalance out of. Today if markets were down I would be buying, but they are not. I will wait to see if there are further drops, I need bonds to be up in order to sell them and buy stocks.

The other option is not to do anything and let market do the rebalancing for you. There is nothing wrong with that approach. Perhaps rebalancing should be limited to extremes, such as 10% deviation in either direction, that will ensure you are getting maximum gains when stocks are up, and maximum discounts when stocks are down. This would have made me buy once at end of October 2008, instead of buying from the beginning of year and running out of bond money I am willing to exchange other than new contributions by August 2008.

mrwalken
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Re: Rebalancing into stocks when they fall is unrealistic

Post by mrwalken » Fri Mar 13, 2020 10:40 am

I've never rebalanced on the way up. I just don't invest as much new money into stocks. For instance, since Dec 2018, all my new money has gone into HYS accounts since stock gains alone were keeping me at 60/40. There has never been a point where stocks have gone up so fast that they have pushed me way out of 60/40 while all my new money is staying as cash.

I do rebalance on the way down, as stock drops tend to me more dramatic (like this one), pushing me way below 60/40. Cash is convenient in these circumstances, although I don't really refer to it as dry powder.

So I guess, my rebalancing strategy effectively equates to sometimes delaying putting cash into the market until it drops, so as to stay more or less at 60/40 all the time.

MotoTrojan
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Re: Rebalancing into stocks when they fall is unrealistic

Post by MotoTrojan » Fri Mar 13, 2020 10:43 am

If you are going to time the market by reducing equity exposure during bouts of volatility, at-least make it objective and quantitative rather than subjective and qualitative:

viewtopic.php?t=281691

I'm sorry that you and your wife didn't have a clear enough plan and strong enough conviction to keep with it. I suspect you'll regret cashing out if you go that route.

garlandwhizzer
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Re: Rebalancing into stocks when they fall is unrealistic

Post by garlandwhizzer » Fri Mar 13, 2020 11:31 am

SimpleGift wrote:

There are many Bogleheads, mostly in retirement (including myself), who are one-way rebalancers such as you describe. When stocks do well, we rebalance into bonds. When stocks sell off, we sit tight with our large allocation to high-quality bonds and do nothing.

However, personally, we are in retirement with a portfolio value that we consider "enough" — so safety of our nest egg is more important to us than achieving the highest returns. For young accumulators, the rebalancing decision is likely to be different.
Same here, exactly my situation and strategy.

Garland Whizzer

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Rowan Oak
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Re: Rebalancing into stocks when they fall is unrealistic

Post by Rowan Oak » Fri Mar 13, 2020 12:16 pm

I have always rebalanced all the way down and all the way up. It's part of my Investment policy statement (IPS). As far as bear markets and corrections I continue to rebalance on the way down. The reason: I've always thought that is what you must do to maintain your chosen asset allocation and risk profile. What's the point of a chosen asset allocation if you aren't going to stick with it. If my stock index funds get 5-6% above or below my AA I buy when down sell when up. Isn't it that simple?

Maybe I've read too many of livesoft's posts over the years about RBDs (Really Bad Days) and rebalancing and in some cases overbalancing. I tend to agree except I don't "overbalance".

In another topic, siamond made some really good points about the behavioral aspect of rebalalancing in a down stock market:
siamond wrote:
Thu Mar 12, 2020 4:00 pm
I must say that a carefully designed rebalancing procedure (following the principles described here) is proving really helpful. I initiated one round today (unsurprisingly). It's not so much that I hope for a significant rebalancing 'bonus' of sorts, I know better, but it does help from a behavioral standpoint:
- a rebalancing trigger feels like an opportunity, a positive sentiment
- it gives me something to do, an action to take (it's easy to say 'stay the course', but we all itch to do *something*)
- it's a mechanical process, no hesitation, no regret, no hidden 'market timing' decision

This chain of events made me realize I needed to clean up my act with Roth conversions though. I didn't have a mechanical procedure in place for those. I did a first round of it a week ago, admittedly impulse-driven. Then cursed myself. I did another round two days ago. Then cursed myself again today. Enough with that. I just updated my IPS and formalized a simple logical process (e.g. do 90% of it 1st week of January, fill the gaps as my tax picture gets more refined end of December). Stay calm, follow thoughtful predefined rules, which helps in turn to stay calm.

In the midst of all the troubles and concerns, this is a small silver lining of sorts. This situation is a unique learning opportunity. Observe yourself! Live and learn!
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

jeblers
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Re: Rebalancing into stocks when they fall is unrealistic

Post by jeblers » Fri Mar 13, 2020 12:18 pm

The only thing that is unrealistic was your risk assessment when you created your portfolio, you over estimated the risk that you were willing to take on.

hexagon
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Re: Rebalancing into stocks when they fall is unrealistic

Post by hexagon » Fri Mar 13, 2020 12:28 pm

Triple digit golfer wrote:
Fri Mar 13, 2020 4:39 am
It is not unrealistic. I did it yesterday.
+1

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