Does going from bond to stock increase risk or does it maintain risk?aristotelian wrote: ↑Wed Sep 23, 2020 1:43 pmI'm not sure I see rebalancing that way, especially when going from bond to stock, which increases risk. Perhaps risk management is one purpose but it does not have to be the only purpose. IMO the purpose of rebalancing is to provide a rules based system to avoid market timing. The risk management comes from the original choice of the asset allocation. Your rebalancing system is just your way of maintaining your allocation.Doc wrote: ↑Wed Sep 23, 2020 1:25 pmThat's a reasonable position but the OP was asking about rebalncing which is a risk management tool. The position you suggest is more like an insurance concept. It is protecting against the risk not trying to control it. And like any insurance it comes with some expense. In this case it is lower return if the risk doesn't materialize similar to the price of that fire insurance if you never have a fire.
Having an AA is a terrific rules-based system and it creates discipline. When you're pouring new money into your portfolio, you put the money where it's needed most and having an AA is a superb tool to use in doing this.
A lot of people may maintain their asset allocation but I suspect that more people will lighten up on stocks as they get older ("older" is subjective, to be sure). The question that many grapple with (including the OP, I think) is whether to do it naturally (just don't buy any more equities) or do it actively (sell those equities to get to a new asset allocation). Some people are just so tax-averse that they will not sell equities in a taxable account no matter what, but that's a different conversation altogether.