Never Ever Rebalance Bonds into Stocks?

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Artsdoctor
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Artsdoctor »

aristotelian wrote: Wed Sep 23, 2020 1:43 pm
Doc wrote: Wed Sep 23, 2020 1:25 pm
aristotelian wrote: Wed Sep 23, 2020 1:04 pm There is something to be said for liquidity. An investor may view their bond allocation in terms of X years' expenses and be unwilling to see their bond allocation drop below that number.
That'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.
I'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.
Does going from bond to stock increase risk or does it maintain risk?

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.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Doc »

aristotelian wrote: Wed Sep 23, 2020 1:04 pm There is something to be said for liquidity. An investor may view their bond allocation in terms of X years' expenses and be unwilling to see their bond allocation drop below that number.
You are not addressing rebalancing as a risk maintenance concept. If rebalancing to a target AA in a market crash is going to cause you to drop below your "safe bond allocation" than I suggest your original AA was too high to begin with.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Doc »

HomerJ wrote: Wed Sep 23, 2020 1:48 pm Once you get close to retirement, controlling risk is about dollar amounts, not percentages.
You just change your AA as you age.

Some people use an "age in bonds" metric to define their AA so as they age their AA goes down. But if you have more than you are going to ever spend your AA might as well go up as you age as you only maintain enough bonds to cover your expenses until you die.

Changing you AA over time is not the same as changing it because you were 20 days older in late March than on March 1st.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Blue456 »

Doc wrote: Wed Sep 23, 2020 12:55 pm I don't understand this whole thread. I had always thought that we rebalanced to control risk not to influence return.
Imagine being 60 years old and having portfolio of 60/40 of $1,000,000. So that’s $600,000 in equity and $400,000 in bonds.

Now the following scenario occurs:
2030: Equity drops 50% —> you rebalance and now have total portfolio of $700,000 with $420,000 in equity and $280,000 in bonds
2031: Equity drops 80% —> you rebalance and now have total portfolio of $364,000
2032-2050: stock market returns are zero.

You are left to retire on 37% of your original portfolio for the next 20 years. Finally when you are 80 the market takes off and by the time you are 90 you doubled or tripled your money. Yet it doesn’t matter at that point.

The OP is suggesting that you never rebalance into equity. In the above scenario you end up having $600,000 in bonds and $40,000 equity. You are left with 64% of your original portfolio.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by aristotelian »

Doc wrote: Wed Sep 23, 2020 2:20 pm
aristotelian wrote: Wed Sep 23, 2020 1:04 pm There is something to be said for liquidity. An investor may view their bond allocation in terms of X years' expenses and be unwilling to see their bond allocation drop below that number.
You are not addressing rebalancing as a risk maintenance concept. If rebalancing to a target AA in a market crash is going to cause you to drop below your "safe bond allocation" than I suggest your original AA was too high to begin with.
No, I was just viewing my allocation in terms of years expenses to last through a poor sequence. If it helps me sleep at night and I can follow my plan then my AA was fine. Whether I set the original allocation at 80/20 or 60/40, the rebalancing strategy would be the same. If stocks stay down, I will eventually rebalance through spending down bonds to the original AA. You are viewing risk purely in terms of a % of stocks. I am suggesting you also consider the need for liquidity during an extended drawdown, so the quantity of safe assets is as important as the %. A different system may work for another investor. Doesn't mean either is "wrong".
Last edited by aristotelian on Wed Sep 23, 2020 2:50 pm, edited 2 times in total.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by HomerJ »

Doc wrote: Wed Sep 23, 2020 2:28 pm
HomerJ wrote: Wed Sep 23, 2020 1:48 pm Once you get close to retirement, controlling risk is about dollar amounts, not percentages.
You just change your AA as you age.

Some people use an "age in bonds" metric to define their AA so as they age their AA goes down. But if you have more than you are going to ever spend your AA might as well go up as you age as you only maintain enough bonds to cover your expenses until you die.

Changing you AA over time is not the same as changing it because you were 20 days older in late March than on March 1st.
Read my post again. You don't address the risk that I pointed out at all.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by HomerJ »

Blue456 wrote: Wed Sep 23, 2020 2:31 pm
Doc wrote: Wed Sep 23, 2020 12:55 pm I don't understand this whole thread. I had always thought that we rebalanced to control risk not to influence return.
Imagine being 60 years old and having portfolio of 60/40 of $1,000,000. So that’s $600,000 in equity and $400,000 in bonds.

Now the following scenario occurs:
2030: Equity drops 50% —> you rebalance and now have total portfolio of $700,000 with $420,000 in equity and $280,000 in bonds
2031: Equity drops 80% —> you rebalance and now have total portfolio of $364,000
2032-2050: stock market returns are zero.

You are left to retire on 37% of your original portfolio for the next 20 years. Finally when you are 80 the market takes off and by the time you are 90 you doubled or tripled your money. Yet it doesn’t matter at that point.

The OP is suggesting that you never rebalance into equity. In the above scenario you end up having $600,000 in bonds and $40,000 equity. You are left with 64% of your original portfolio.
This is a good example.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Doc »

For all of you that have a concern about having "enough" FI to last for "whatever" I suggest taking that "enough" and putting it in Treasuries but having those Treasuries as part of the fixed income portion of your AA. So you would still rebalnce into stocks in a market cash at least until your total FI dropped below your "enough".

If you wanted to have a three part AA: Stocks/Bonds/"Enough" that's fine. But that doesn't' mean you shouldn't rebalnce in a market crash. It just sets a lower limit on it. But that limit should be defined before the crash not when it happens.

And I suggest the "Never Ever" is not the limit.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Leesbro63 »

Doc wrote: Wed Sep 23, 2020 2:57 pm For all of you that have a concern about having "enough" FI to last for "whatever" I suggest taking that "enough" and putting it in Treasuries but having those Treasuries as part of the fixed income portion of your AA. So you would still rebalnce into stocks in a market cash at least until your total FI dropped below your "enough".

If you wanted to have a three part AA: Stocks/Bonds/"Enough" that's fine. But that doesn't' mean you shouldn't rebalnce in a market crash. It just sets a lower limit on it. But that limit should be defined before the crash not when it happens.

And I suggest the "Never Ever" is not the limit.
So what should this “rare” rebalancing threshold be? When stocks fall 50% from peak?
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Blue456 »

Doc wrote: Wed Sep 23, 2020 2:57 pm And I suggest the "Never Ever" is not the limit.
So do you ever rebalance out of “enough?” Or is enough the “Never Ever,” limit?
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Doc »

Leesbro63 wrote: Wed Sep 23, 2020 3:00 pm
Doc wrote: Wed Sep 23, 2020 2:57 pm For all of you that have a concern about having "enough" FI to last for "whatever" I suggest taking that "enough" and putting it in Treasuries but having those Treasuries as part of the fixed income portion of your AA. So you would still rebalnce into stocks in a market cash at least until your total FI dropped below your "enough".

If you wanted to have a three part AA: Stocks/Bonds/"Enough" that's fine. But that doesn't' mean you shouldn't rebalnce in a market crash. It just sets a lower limit on it. But that limit should be defined before the crash not when it happens.

And I suggest the "Never Ever" is not the limit.
So what should this “rare” rebalancing threshold be? When stocks fall 50% from peak?
It's not how much stocks fall. It's when your FI gets too low to feed you over the next "X" years. Each of us will have a different "X". I've never hit it myself.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Uncorrelated »

One-way rebalancing methods beak fundamental optimization principles, such as Bellman's principle of optimality. It is trivial to show that all asset allocation strategies that break this principle are suboptimal.

Just pick a simple asset allocation and rebalance regularly. It is possible to do better than this, but not by following the advice of ERN, McClung or other popular bloggers.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Northern Flicker »

willthrill81 wrote: Tue Sep 22, 2020 3:20 pm
If you own individual TIPS as in a TIPS ladder, then when each TIPS matures, you will be taxed on the total gain, including the inflation adjustment. When you sell stocks, you will be taxed on the capital gain (i.e. the difference between the price you paid and sold for), which presumably includes the 'full inflation gain', if any, that the stocks experienced. Stocks don't offer a free lunch here.
TIPS do not defer taxes on the inflation adjustment until maturity. This is treated as taxable income in the year each adjustment us made despite the fact that you don't realize tge income.

A TIPS fund will distribute the inflation adjustments as dividend distributions, giving you the choice of realizing the income or reinvesting it. A directly held TIPS essentially reinvests the inflation correction as its only option. But the inflation correction is always taxable in the year it is applied to principal.

i-bonds defer taxes on all interest until the bond is cashed, both the yield and inflation correction. But you do not have the option of realizing the interest without cashing in the bond, as far as I know.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Northern Flicker »

Regarding rebalancing after a crash... if you were comfortable with a 55/45 allocation before a market crash, why would the same allocation become more risky after the crash? The downside risk was obviously much greater before the crash.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Doc »

Northern Flicker wrote: Wed Sep 23, 2020 4:04 pm Regarding rebalancing after a crash... if you were comfortable with a 55/45 allocation before a market crash, why would the same allocation become more risky after the crash? The downside risk was obviously much greater before the crash.
Well said.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by KlangFool »

Northern Flicker wrote: Wed Sep 23, 2020 4:04 pm Regarding rebalancing after a crash... if you were comfortable with a 55/45 allocation before a market crash, why would the same allocation become more risky after the crash? The downside risk was obviously much greater before the crash.

Northern Flicker,

Because the RISK is more than a percentage. It is a fixed number too.


I am comfortable with an AA of 60/40. But, I am only comfortable if my fixed income portion is at least 5 years of annual expense.


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Re: Never Ever Rebalance Bonds into Stocks?

Post by Blue456 »

Northern Flicker wrote: Wed Sep 23, 2020 4:04 pm Regarding rebalancing after a crash... if you were comfortable with a 55/45 allocation before a market crash, why would the same allocation become more risky after the crash? The downside risk was obviously much greater before the crash.
Read my post:
Blue456 wrote: Wed Sep 23, 2020 2:31 pm Imagine being 60 years old and having portfolio of 60/40 of $1,000,000. So that’s $600,000 in equity and $400,000 in bonds.

Now the following scenario occurs:
2030: Equity drops 50% —> you rebalance and now have total portfolio of $700,000 with $420,000 in equity and $280,000 in bonds
2031: Equity drops 80% —> you rebalance and now have total portfolio of $364,000
2032-2050: stock market returns are zero.

You are left to retire on 37% of your original portfolio for the next 20 years. Finally when you are 80 the market takes off and by the time you are 90 you doubled or tripled your money. Yet it doesn’t matter at that point.

The OP is suggesting that you never rebalance into equity. In the above scenario you end up having $600,000 in bonds and $40,000 equity. You are left with 64% of your original portfolio.
60/40 rebalanced vs 60/40 never rebalanced. Very simple example of how one can be more risky than the other.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Hector »

Seems like your AA is too aggressive for you to sleep well at night. I would adjust AA.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Doc »

KlangFool wrote: Wed Sep 23, 2020 4:15 pm But, I am only comfortable if my fixed income portion is at least 5 years of annual expense.
If your interest and dividends were greater than your annual expenses would you still want another five years of expenses in FI?

None of us has the same circumstances as everyone else. The problem I have with the OP is the "Never Ever". If that is supposed to apply to every single one of us the answer is not only NO it's HECK NO.

If he said "IF XYZ don't rebalnce into stocks" at least we could talk about what XYZ means to each of us.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Leesbro63 »

Doc wrote: Wed Sep 23, 2020 3:34 pm
Leesbro63 wrote: Wed Sep 23, 2020 3:00 pm
Doc wrote: Wed Sep 23, 2020 2:57 pm For all of you that have a concern about having "enough" FI to last for "whatever" I suggest taking that "enough" and putting it in Treasuries but having those Treasuries as part of the fixed income portion of your AA. So you would still rebalnce into stocks in a market cash at least until your total FI dropped below your "enough".

If you wanted to have a three part AA: Stocks/Bonds/"Enough" that's fine. But that doesn't' mean you shouldn't rebalnce in a market crash. It just sets a lower limit on it. But that limit should be defined before the crash not when it happens.

And I suggest the "Never Ever" is not the limit.
So what should this “rare” rebalancing threshold be? When stocks fall 50% from peak?
It's not how much stocks fall. It's when your FI gets too low to feed you over the next "X" years. Each of us will have a different "X". I've never hit it myself.
But if your fixed income is too low, how does selling some of the remaining FI to buy stock (that may continue to go down) help?
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Leesbro63 »

Northern Flicker wrote: Wed Sep 23, 2020 4:04 pm Regarding rebalancing after a crash... if you were comfortable with a 55/45 allocation before a market crash, why would the same allocation become more risky after the crash? The downside risk was obviously much greater before the crash.
Because to get back to 55/45 after a crash, you have to convert some of the remaining safe money into risk money.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by KlangFool »

Doc wrote: Wed Sep 23, 2020 4:32 pm
KlangFool wrote: Wed Sep 23, 2020 4:15 pm But, I am only comfortable if my fixed income portion is at least 5 years of annual expense.
If your interest and dividends were greater than your annual expenses would you still want another five years of expenses in FI?

None of us has the same circumstances as everyone else. The problem I have with the OP is the "Never Ever". If that is supposed to apply to every single one of us the answer is not only NO it's HECK NO.

If he said "IF XYZ don't rebalnce into stocks" at least we could talk about what XYZ means to each of us.

Doc,

<<If your interest and dividends were greater than your annual expenses would you still want another five years of expenses in FI?>>


The numbers do not add up. Intererest/Dividend is around 2%.


A) In order for this to be true, my portfolio needs to be 50X expense.


B) My AA is 60/40. So, my FI would be at 20 years of expense. It is not at my minimum level of 5 years of expense.


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Re: Never Ever Rebalance Bonds into Stocks?

Post by mrspock »

Pretty sure John Bogle talked about this in Common Sense Mutual Fund Investing or perhaps some interview I watched. I think his position on this was that you could either rebalance regularly (yearly or quarterly), or just leave things alone when things tank. Both result in reasonably good outcomes.

However, I think the catch to this is: the math only works if you stick to this in both good and bad times. That is, when things recover and you are overweight equities (because you've been spending from your bonds) you cannot rebalance into bond whatever your temptation. What you need to do is just spend from your equity side, and not be tempted to sell them to get back to your original AA.

If you don't rebalance on the way down, but do rebalance on the way up, you'd need to goto some dynamic spending model or something to make that work, and even then I'd want to model that out to make sure I don't spend my way into oblivion.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by international001 »

ISn't this passive market timing

Imagine investor A that at 65 years old. From a 50/50 allocation at time T0 because it's a good balance, his stocks go down 50% at time T1. Now he is a 33/67 allocation and he leaves it there
Investor B never saved anything, but at that time T1 he inherits a bunch of cash. He decides to have a good balance and invests on 50/50 AA

Both are in different positions.

IF anyting, you are looking at the past to see how high was the market and predicting that if it was high it's going lower.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Leesbro63 »

international001 wrote: Wed Sep 23, 2020 5:38 pm ISn't this passive market timing

Imagine investor A that at 65 years old. From a 50/50 allocation at time T0 because it's a good balance, his stocks go down 50% at time T1. Now he is a 33/67 allocation and he leaves it there
Investor B never saved anything, but at that time T1 he inherits a bunch of cash. He decides to have a good balance and invests on 50/50 AA

Both are in different positions.

IF anyting, you are looking at the past to see how high was the market and predicting that if it was high it's going lower.
Now you’re back to Kitces work regarding valuations.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Northern Flicker »

Leesbro63 wrote: Wed Sep 23, 2020 4:37 pm
Northern Flicker wrote: Wed Sep 23, 2020 4:04 pm Regarding rebalancing after a crash... if you were comfortable with a 55/45 allocation before a market crash, why would the same allocation become more risky after the crash? The downside risk was obviously much greater before the crash.
Because to get back to 55/45 after a crash, you have to convert some of the remaining safe money into risk money.
You can rebalance gradually by just taking withdrawals from the fixed income side.
Risk is not a guarantor of return.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by drzzzzz »

To me, this question so much depends on whether you are in the accumulation stage of life (working) and have human work capital that will continue to be added to your portfolio (and thus allowing you to follow your asset allocation and rebalance as needed with either stocks or bonds) or spending down your portfolio. In retirement, if you have enough in safe assets (bonds, treasuries, cash, dividends, rental income - whatever you consider safe) to cover expenses for whatever number of years you choose, then why would you deplete those safe assets and rebalance into stocks if you don't need to - unless your goal is legacy issues or being the wealthiest person in the cemetary.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by HomerJ »

Northern Flicker wrote: Wed Sep 23, 2020 4:04 pm Regarding rebalancing after a crash... if you were comfortable with a 55/45 allocation before a market crash, why would the same allocation become more risky after the crash? The downside risk was obviously much greater before the crash.
I was comfortable with $1 million in bonds, not 45%... If I rebalance and I only have $800,000 in bonds, I'm no longer comfortable.

It's really not that hard to understand. You don't have to agree, but it's not hard to understand.

If I get to $1.1 million in bonds during retirement, and a crash happens then, I might rebalance $100,000.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by HomerJ »

Northern Flicker wrote: Wed Sep 23, 2020 7:43 pm
Leesbro63 wrote: Wed Sep 23, 2020 4:37 pm
Northern Flicker wrote: Wed Sep 23, 2020 4:04 pm Regarding rebalancing after a crash... if you were comfortable with a 55/45 allocation before a market crash, why would the same allocation become more risky after the crash? The downside risk was obviously much greater before the crash.
Because to get back to 55/45 after a crash, you have to convert some of the remaining safe money into risk money.
You can rebalance gradually by just taking withdrawals from the fixed income side.
Yep, that's how I would do it.

Instead of rebalancing by selling bonds and buying stocks during a downturn, instead I would just be selling bonds for cash during a stock downturn. I would naturally rebalance that way.

If stocks are up, I'll sell stocks to generate cash. If stocks are down, I'll sell bonds to generate cash.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by HomerJ »

drzzzzz wrote: Wed Sep 23, 2020 7:55 pm To me, this question so much depends on whether you are in the accumulation stage of life (working) and have human work capital that will continue to be added to your portfolio (and thus allowing you to follow your asset allocation and rebalance as needed with either stocks or bonds) or spending down your portfolio. In retirement, if you have enough in safe assets (bonds, treasuries, cash, dividends, rental income - whatever you consider safe) to cover expenses for whatever number of years you choose, then why would you deplete those safe assets and rebalance into stocks if you don't need to - unless your goal is legacy issues or being the wealthiest person in the cemetary.
This.

I don't need to increase my gains by buying stocks low. My goal in retirement is preservation. I won't sell stocks when they are down, but I'm not going to rebalance all my bonds into stocks either.

There is a non-zero risk of an extended downturn in stocks. I don't need the extra money. I don't need to take the risk to generate extra money.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by 9mm »

Leesbro63 wrote: Tue Sep 22, 2020 2:19 pm During 2008-9, I came to the realization that in a Japan-type scenario, rebalancing a mature portfolio (I was age 49 then; I'm 60 now) from bonds into stocks might be a "Pascal's Wager". If you're wrong and stocks keeping going down for a long time, you effectively "flush" good money into bad money that might never recover. Thus negating the reason for "safe" money in the first place. And I amended my investment plan accordingly so that I would never again rebalance from bonds to stocks.

Now, as I get even closer to retirement age, I am wondering what happens if stocks crash and stay down for a long period of time. It might be a "you're dead already" scenario if you DO NOT rebalance into stocks after a crash. In other words, what happens when stocks crash just before or after retirement and we have a 1966-1981 period?

How does one reconcile the "Pascal's Wager" problem with the "you're dead already" problem? n
Rebalancing in general is pointless in my estimation
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Re: Never Ever Rebalance Bonds into Stocks?

Post by jdamo »

This has been a very interesting thread. We are 1-1/2 yrs in retirement and I need to think about this. Homer J makes a great point of saving a safe amount in bonds to add to soc security to cover base expenses. It seems we are in weird times w all the stimulus from the Fed and no one knows how it will play out let alone the pandemic. We could be in for an extended period of flat to down equities. It could be a big chunk of time of our retired lives (?)
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Re: Never Ever Rebalance Bonds into Stocks?

Post by phantom0308 »

You’re missing out on the potential gains by holding a lower stock allocation. This is basically saying I like to reduce risk during a stock downturn but in all other instances I maintain a set risk. It’s fine though you’re going to get lower expected returns by assuming less risk.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by AlohaJoe »

willthrill81 wrote: Tue Sep 22, 2020 9:17 pm His 'stop playing the game' saying makes it sound like stocks are little better than the craps table, which really irks me.
I understand where you're coming from and I feel the same frustration about overly glib statements. But keep in mind Bernstein is a financial advisor who only deals with clients of at least $30,000,000. Given that background, my impression is his comment about "stop playing the game" probably isn't based on his experience working with Bogleheads who have got to 27x expenses. He's probably got in mind his clients who have reached 200x expenses and he still has to work hard to convince them deleverage from the concentrated risk of a family business (or a single industry they think they are experts about) and to put money in munis and Treasuries.
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billthecat
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Re: Never Ever Rebalance Bonds into Stocks?

Post by billthecat »

HomerJ wrote: Wed Sep 23, 2020 8:27 pm
Northern Flicker wrote: Wed Sep 23, 2020 4:04 pm Regarding rebalancing after a crash... if you were comfortable with a 55/45 allocation before a market crash, why would the same allocation become more risky after the crash? The downside risk was obviously much greater before the crash.
I was comfortable with $1 million in bonds, not 45%... If I rebalance and I only have $800,000 in bonds, I'm no longer comfortable.

It's really not that hard to understand. You don't have to agree, but it's not hard to understand.

If I get to $1.1 million in bonds during retirement, and a crash happens then, I might rebalance $100,000.
HomerJ wrote: Wed Sep 23, 2020 8:33 pm
Northern Flicker wrote: Wed Sep 23, 2020 7:43 pm
Leesbro63 wrote: Wed Sep 23, 2020 4:37 pm
Northern Flicker wrote: Wed Sep 23, 2020 4:04 pm Regarding rebalancing after a crash... if you were comfortable with a 55/45 allocation before a market crash, why would the same allocation become more risky after the crash? The downside risk was obviously much greater before the crash.
Because to get back to 55/45 after a crash, you have to convert some of the remaining safe money into risk money.
You can rebalance gradually by just taking withdrawals from the fixed income side.
Yep, that's how I would do it.

Instead of rebalancing by selling bonds and buying stocks during a downturn, instead I would just be selling bonds for cash during a stock downturn. I would naturally rebalance that way.

If stocks are up, I'll sell stocks to generate cash. If stocks are down, I'll sell bonds to generate cash.
Suppose a 60/40 portfolio is the goal based on risk, resulting in $1.2M in FI, with a personal requirement to maintain at least $1.0M in FI. It seems like your strategy is a combination of the two approaches? If the market tanked, you would withdraw from FI to cover expenses, and might rebalance into equity the excess FI above the $1M minimum?
We cannot direct the winds but we can adjust our sails.
Bridgebumbob
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Bridgebumbob »

Very interesting discussion. I am 77 and definitely not in the asset accumulation phase. I decided when I retired 10 years ago that I had 3 financial goals in retirement
1) everybody’s goal- don’t run out of money
2) continue my current lifestyle even if equities tank and do not recover for years
3) leave a nice inheritance to my 2 kids ( have no grandchildren)
I chose a conservative allocation based not on % of equities vs bonds/cash but on actual dollar amounts. $1 million in safe short term treasuries/ CDs and the rest $350k in equities. Plan is to live off safe assets, SS, and modest pension and let equities rise/fall whenever and eventually go to kids plus current house -$800k. So when stocks dropped, I had momentary impulse to rebalance into stocks. Then I thought- let them rise over time as is. If they do so great, if not why flush more $ down the rabbit hole.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by JustinR »

The answer is different depending on if you're accumulating or retired.

Once you're retired, all you care about is remaining solvent until you're dead.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by international001 »

Doc wrote: Wed Sep 23, 2020 4:13 pm
Northern Flicker wrote: Wed Sep 23, 2020 4:04 pm Regarding rebalancing after a crash... if you were comfortable with a 55/45 allocation before a market crash, why would the same allocation become more risky after the crash? The downside risk was obviously much greater before the crash.
Well said.
That's my point also. The argument can be discarded per reduction to absurd
You are implying that after a crash, it's more likely that stocks will go down in the next few years. IT may be true in the medium term because of momentum. But it's unlikely that you can do a perfect timing and benefit from it. Otherwise, fund managers could have used this knowledge to create returns above the market.
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Leesbro63
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Leesbro63 »

JustinR wrote: Thu Sep 24, 2020 5:01 am The answer is different depending on if you're accumulating or retired.

Once you're retired, all you care about is remaining solvent until you're dead.
This isn’t correct for many of us. Many are concerned to maintain our lifestyles through whatever happens. That’s way different than merely remaining solvent. And many of us want to leave a legacy to heirs or charity.
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siamond
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Re: Never Ever Rebalance Bonds into Stocks?

Post by siamond »

Personally, I view rebalancing in a very straightforward manner: STAY THE COURSE. I defined a plan (based on financial goals, fears, risk mitigation views, behavioral considerations, etc) and I want to stick to the plan, namely a given target Asset Allocation.

Never rebalancing bonds into stocks (aka one-way rebalancing) goes at odds with such 'stay the course' mentality, in my humble opinion. As I have shown in this blog article (see Part 1 and Part 3), one-way rebalancing might lead you astray from your plan for a decade or more. That is WAY too much to stomach, I think.

Now I do understand the fear of 'catching a falling knife'. End of March this year, I did start to blink a bit and wondering how far this could fall, and such sentiment gets much stronger without the benefit of hindsight... It seems to me that it would be much sounder to define a floor for bonds in absolute $$, i.e. a given number of years of non-discretionary expenses, and never rebalance out of such buffer. But when the buffer is full, well, better stick to your AA and rebalance without questioning your plan (the worst thing to do in an emotional time).
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Re: Never Ever Rebalance Bonds into Stocks?

Post by rkhusky »

Leesbro63 wrote: Thu Sep 24, 2020 6:55 am
JustinR wrote: Thu Sep 24, 2020 5:01 am The answer is different depending on if you're accumulating or retired.

Once you're retired, all you care about is remaining solvent until you're dead.
This isn’t correct for many of us. Many are concerned to maintain our lifestyles through whatever happens. That’s way different than merely remaining solvent. And many of us want to leave a legacy to heirs or charity.
The answer comes down in part to evaluating the value one places on these things. Are you willing to risk not being able to maintain your lifestyle in order to leave a legacy? Another part is how much money you have. If you have a sufficient amount saved up, such that you could weather a 50% or 70% drop in the market, you may invest differently than someone who could only afford a 10% market drop before their lifestyle becomes affected.

I think that never rebalancing into stocks is a perfectly fine strategy, if it will meet your needs and lets you sleep well at night. As long as you stay the course and don't abandon the strategy in the future because of perceived market conditions.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by bigskyguy »

Bridgebumbob wrote: Thu Sep 24, 2020 12:21 am Very interesting discussion. I am 77 and definitely not in the asset accumulation phase. I decided when I retired 10 years ago that I had 3 financial goals in retirement
1) everybody’s goal- don’t run out of money
2) continue my current lifestyle even if equities tank and do not recover for years
3) leave a nice inheritance to my 2 kids ( have no grandchildren)
I chose a conservative allocation based not on % of equities vs bonds/cash but on actual dollar amounts. $1 million in safe short term treasuries/ CDs and the rest $350k in equities. Plan is to live off safe assets, SS, and modest pension and let equities rise/fall whenever and eventually go to kids plus current house -$800k. So when stocks dropped, I had momentary impulse to rebalance into stocks. Then I thought- let them rise over time as is. If they do so great, if not why flush more $ down the rabbit hole.
As a 71 year old retiree, I second your comments. The considerations here are in my estimation completely dependent upon whether one is in the accumulation phase, the transition phase into decumulation (which I consider to be the 5 years or so before retiring), or the decumulation phase.

Might I suggest that for the purposes of clarity that further postings on this thread include which phase the poster happens to be in. It may well make the discussion more relabel than and understandable.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by bigskyguy »

Relavent - sorry for the old guy finger slip.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by minimalistmarc »

I’m 100% equities, so I never rebalance into stocks, although I did sink my emergency fund into equities in March/April
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Chicken Little »

Why can't you adjust your rebalancing bands and/or frequency when transitioning from accumulation to retirement? If you are 35, write it down on the paper now.

I am way more conservative than most, but isn't this is guarding against an especially unlikely scenario? The last two times this was even remotely possible, the Fed/Treasury/Congress/Executive stepped in to set the floor. I don't envision any scenario where that is not the playbook, and I don't see how you can otherwise survive, from an investment standpoint, if they fail next time.

But just to be on the safe side...If your rebalancing band was 5%, why not kick it up to 25% or 50%? That way, you're not nickel-diming yourself on the way down?

Aren't you allowed to write that down now?

If you don't want to catch a falling knife, step 1 is not sticking your hand out?
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Re: Never Ever Rebalance Bonds into Stocks?

Post by HomerJ »

billthecat wrote: Thu Sep 24, 2020 12:11 am
HomerJ wrote: Wed Sep 23, 2020 8:27 pm
Northern Flicker wrote: Wed Sep 23, 2020 4:04 pm Regarding rebalancing after a crash... if you were comfortable with a 55/45 allocation before a market crash, why would the same allocation become more risky after the crash? The downside risk was obviously much greater before the crash.
I was comfortable with $1 million in bonds, not 45%... If I rebalance and I only have $800,000 in bonds, I'm no longer comfortable.

It's really not that hard to understand. You don't have to agree, but it's not hard to understand.

If I get to $1.1 million in bonds during retirement, and a crash happens then, I might rebalance $100,000.
HomerJ wrote: Wed Sep 23, 2020 8:33 pm
Northern Flicker wrote: Wed Sep 23, 2020 7:43 pm
Leesbro63 wrote: Wed Sep 23, 2020 4:37 pm
Northern Flicker wrote: Wed Sep 23, 2020 4:04 pm Regarding rebalancing after a crash... if you were comfortable with a 55/45 allocation before a market crash, why would the same allocation become more risky after the crash? The downside risk was obviously much greater before the crash.
Because to get back to 55/45 after a crash, you have to convert some of the remaining safe money into risk money.
You can rebalance gradually by just taking withdrawals from the fixed income side.
Yep, that's how I would do it.

Instead of rebalancing by selling bonds and buying stocks during a downturn, instead I would just be selling bonds for cash during a stock downturn. I would naturally rebalance that way.

If stocks are up, I'll sell stocks to generate cash. If stocks are down, I'll sell bonds to generate cash.
Suppose a 60/40 portfolio is the goal based on risk, resulting in $1.2M in FI, with a personal requirement to maintain at least $1.0M in FI. It seems like your strategy is a combination of the two approaches? If the market tanked, you would withdraw from FI to cover expenses, and might rebalance into equity the excess FI above the $1M minimum?
That's a pretty good characterization of my plan.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Tattarrattat »

"Staying the course" can mean different things. The common usage is to frequently re-balance to a set AA, the way a target or fixed allocation fund does. For an accumulator, that's the most coherent way to understand and apply the term. But for a decumulator who is no longer adding capital, the term can mean an asset allocation that you don't try to actively control. It is legitimate to retire at, say, 50/50, then avoid subsequent active adjustments, allowing the AA to drift in accord with market returns. If markets are strong, momentum effect takes over and you're worth more, with a higher AA, and you just let it ride. If markets are weak in a prolonged way, you don't chase good money after bad, have a lower AA, and protect some capital. You live with the outcome either way. You can do a "never buy stocks" half-version of this, where you take some money off the table in good markets (sell stocks), giving up some of the advantages of the momentum effect but not adding to stocks in a downturn, preserving the damage control aspects. As you withdraw funds, you of course are obliged to make the decision of which class of assets to withdraw from, which itself is inherently an active AA decision. Whether these are better approaches than the conventional sense of asset allocation ultimately will depend on the market sequence you encounter.
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Re: Never Ever Rebalance Bonds into Stocks?

Post by aj76er »

Blue456 wrote: Tue Sep 22, 2020 3:51 pm
Leesbro63 wrote: Tue Sep 22, 2020 2:19 pm During 2008-9, I came to the realization that in a Japan-type scenario, rebalancing a mature portfolio (I was age 49 then; I'm 60 now) from bonds into stocks might be a "Pascal's Wager". If you're wrong and stocks keeping going down for a long time, you effectively "flush" good money into bad money that might never recover. Thus negating the reason for "safe" money in the first place. And I amended my investment plan accordingly so that I would never again rebalance from bonds to stocks.

Now, as I get even closer to retirement age, I am wondering what happens if stocks crash and stay down for a long period of time. It might be a "you're dead already" scenario if you DO NOT rebalance into stocks after a crash. In other words, what happens when stocks crash just before or after retirement and we have a 1966-1981 period?

How does one reconcile the "Pascal's Wager" problem with the "you're dead already" problem? n
1) Have two portfolios:
Portfolio one. I-bonds, TIPS, CDs and other safe income that covers your very basic expenses for 5, 10, 15, 20 years. You draw the line how much makes you comfortable.
Portfolio two. 100/0, 90/10, 80/20, 70/30, 60/40.... etc.
Don’t rebalance from portfolio 2 to portfolio 1. Do rebalance within Portfolio two.
2) Diversify risk by investing internationally?
+1

As I approach the time to start de-risking my portfolio, this is the method I’m leaning towards using. And I believe this is how Bernstein and Swenson think about risking as well.

Total Portfolio = Risk-on Assets + Risk-off Assets

Never rebalance from Risk-off to Risk-on

Risk-on: Equities, Bonds, Real-estate, Precious metals, Commodities

Risk-off: Cash, T-bills, CDs, I-bonds, EE-bonds, TIPS held to duration, Stable value funds, Money market funds

Risk-on portfolio should be equity oriented (e.g. 100/0, 90/10, 80/20, 70/30, 60/40), and should be rebalanced regularly.

Risk-off should be X number of RLE, which is traditionally calculated as your non-discretionary budget subtracting SSN and pensions. I would go further and subtract a worst-case withdrawal rate as taken from the Risk-on portfolio. For example, 2% to 2.5% of initial portfolio balance.

Example:

Risk-on portfolio of $1,000,000

Assume a worst-case WR of 2% ($20,000 per year).

Say your non-discretionary budget is $50,000 and you expect to receive $20,000 per year in SSN benefits (CPI adjusted).

RLE = $50,000 - $20,000 - $20,000 = $10,000

Say you want 20X years of RLE as Risk-off portfolio size, this would be:

Risk-off portfolio = $10,000 x 20 = $200,000
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Re: Never Ever Rebalance Bonds into Stocks?

Post by dbr »

There is nothing wrong for someone probably in retirement to never rebalance into stocks if they want, depending on where they are starting in the first place. Over a complete range of statistical outcomes such a strategy is probably not optimal, but one may not care. Probably too much is made of it either way, just as too much is made of maintaining buckets of cash and the like. I think for earlier parts of an investing life maintaining a proportional allocation between stocks and bonds is the most sensible way to maintain control of risk and targeted return. A person taking their investment plan primarily from motivations to hand on a legacy should probably think differently as well.

We've arrived at a point where we don't rebalance at all other than the happenstance result of what we sell to take withdrawals, which varies depending on circumstances and tax reasons.
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Leesbro63
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Re: Never Ever Rebalance Bonds into Stocks?

Post by Leesbro63 »

Blue456 wrote: Tue Sep 22, 2020 3:51 pm
Leesbro63 wrote: Tue Sep 22, 2020 2:19 pm During 2008-9, I came to the realization that in a Japan-type scenario, rebalancing a mature portfolio (I was age 49 then; I'm 60 now) from bonds into stocks might be a "Pascal's Wager". If you're wrong and stocks keeping going down for a long time, you effectively "flush" good money into bad money that might never recover. Thus negating the reason for "safe" money in the first place. And I amended my investment plan accordingly so that I would never again rebalance from bonds to stocks.

Now, as I get even closer to retirement age, I am wondering what happens if stocks crash and stay down for a long period of time. It might be a "you're dead already" scenario if you DO NOT rebalance into stocks after a crash. In other words, what happens when stocks crash just before or after retirement and we have a 1966-1981 period?

How does one reconcile the "Pascal's Wager" problem with the "you're dead already" problem? n
1) Have two portfolios:
Portfolio one. I-bonds, TIPS, CDs and other safe income that covers your very basic expenses for 5, 10, 15, 20 years. You draw the line how much makes you comfortable.
Portfolio two. 100/0, 90/10, 80/20, 70/30, 60/40.... etc.
Don’t rebalance from portfolio 2 to portfolio 1. Do rebalance within Portfolio two.
2) Diversify risk by investing internationally?
What you're talking about is basically "buckets". This has been discussed here many times. The bottom line is that it's just mental accounting for a lower overall equity allocation.

Say your overall nest egg has portfolio #1 that's 30% I-Bonds, TIPS, CDs and other safe income that covers for up to 20 years. Portfolio 2 is 60/40. You're just fooling yourself because what you really have is one portfolio that's 42% stock and 58% Equity. Call it 40/60. It's just a head game. Why play a game like that? Just be honest with yourself and use the less aggressive 40/60 portfolio.
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