Do you rebalance or not?

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invest2bfree
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Do you rebalance or not?

Post by invest2bfree »

John Bogle in couple of interviews has said that if you have 60/40 portfolio you do not need to re-balance. I remember him saying that you are selling the portfolio which is performing good and buying a non performer.

If yes, what is the strategy in taxable.

More of my portfolio is concentrated in taxable.

Imaging I have $1,000,000 and it is 600K VT and 400K BND.

If VT falls 33% and it is 400K. Do I sell 120k in bonds and buy the stocks?

Do I sell VT and buy VTI\VXUS so I lock in the losses and lower my cost basis?

In taxable is it okay for me to just target dividends and interest to the funds that have performed poorly in this case VT than actually re balancing?
60% VT, 40% BND.
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whodidntante
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Re: Do you rebalance or not?

Post by whodidntante »

I rebalance as long as I can do so without generating a tax bill. But I agree you don't need to.

I purposely buy into higher volatility assets like SCV and rebalance into lower volatility assets if things get too far out of line. However, my annual contributions are a small percentage of my portfolio at this point. I've probably sold a minimum of 100k of SCV to put things back in line this year. I don't track it as closely as some of y'all do.
NiceUnparticularMan
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Re: Do you rebalance or not?

Post by NiceUnparticularMan »

High level observation: if you have a large enough portfolio relative to what you need to do with it, within a pretty broad range of reasonable allocation plans, very little will matter in terms of meeting those needs.

Little bit lower observation but not much lower: so if you start with a large portfolio somewhere close to the middle of a reasonable range, then you can drift quite a bit and still stay within a reasonable range.

Final conclusion: so yeah, I tend to agree if you are starting close to the middle of the reasonable range, you don't necessarily need to worry about rebalancing much per se. Indeed, in a taxable account, it could be reasonable to avoid rebalancing per se, instead using only already-taxed income or necessary withdrawals to mitigate drift.

And you could always revisit that decision if things got really out of whack, although in cases that happens for good reasons (like good stock performance) . . . see the first observation above.
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Re: Do you rebalance or not?

Post by jebmke »

My re-balance policy calls for re-balancing on the downside but not on the upside. ie., I don't intend to sell equity.
When you discover that you are riding a dead horse, the best strategy is to dismount.
dbr
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Re: Do you rebalance or not?

Post by dbr »

That is one of those Bogle soundbites that is perplexing.

The essential idea is that rebalancing is done when the portfolio has migrated to a point where the risk is too low, or, most often, too high. Because stocks on average over time return more than bonds not rebalancing or adjusting allocation when contributing or withdrawing will eventually result in the portfolio drifting to a higher stock allocation than the investor would want. Mr. Bogle also thinks asset allocations should hold more in bonds as people age. You just can't reconcile the two things.

It is true that when you rebalance you sell something has has performed better and buy something that has not performed as well. You have to do that if you want to control risk. If risk means nothing to you, or you have a different idea of what is at risk, then you just hold all stocks and you hold only something that on average performs best. If risk means nothing to you, you should be 100% stocks and then you also don't have to rebalance.

I don't know if Mr. Bogle was ever aware how much confusion can be derived from some of the things he has said.

I agree that a fetish can be made of rebalancing, especially when it is presented as a tricky and difficult thing that the average investor is unlikely to be able to manage.

PS For the first time in ten years I decided after the big stock run-ups we have had that I would rebalance a little. My general scheme is to follow a 5/25 rule.
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invest2bfree
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Re: Do you rebalance or not?

Post by invest2bfree »

jebmke wrote: Sun Jul 18, 2021 9:52 am My re-balance policy calls for re-balancing on the downside but not on the upside. ie., I don't intend to sell equity.
Thanks this is innovative will try to follow this.

So basically stocks can go out of line upwards.
60% VT, 40% BND.
NiceUnparticularMan
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Re: Do you rebalance or not?

Post by NiceUnparticularMan »

whodidntante wrote: Sun Jul 18, 2021 9:47 am I rebalance as long as I can do so without generating a tax bill. But I agree you don't need to.

I purposely buy into higher volatility assets like SCV and rebalance into lower volatility assets if things get too far out of line. However, my annual contributions are a small percentage of my portfolio at this point. I've probably sold a minimum of 100k of SCV to put things back in line this year. I don't track it as closely as some of y'all do.
I guess I didn't really answer the question of what I actually do.

What I actually do is whenever we are going to make a large(ish) investment in our taxable accounts, I gather the necessary data from our accounts into a spreadsheet, and figure out what I should more or less be doing to get reasonably close to my target allocations. So far, I could always just buy whatever in taxable, then rebalance in tax-deferred accounts. This usually happens at least once a year in the spring, when we are investing bonuses and restricted stock is maturing, but sometimes maybe also another time of the year if we decide to exercise some options toward the close of the calendar/tax year. And once we did it because of a modest inheritance.

The rest of the time, I have zero interest in tracking what is going on with our investments. I typically do not know the answer to questions like how much we currently have invested in terms of liquidation value, our YTD returns, what we have invested in that is up or down more . . . none of that is actionable information for me so I don't gather it. The only thing I do somewhat regularly is look at our taxable account to see if we can sell anything at a substantial loss for tax loss harvesting purposes.
Triple digit golfer
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Re: Do you rebalance or not?

Post by Triple digit golfer »

If you desire a 60/40 portfolio and you don't have close enough to a 60/40 portfolio for your liking, rebalance. If you don't mind the drift or aren't married to 60/40, then let it drift.

To a reasonable extent, I direct new contributions to the lagging assets. If I need to rebalance by buying and selling, I will do so only in tax advantaged accounts.
KlangFool
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Re: Do you rebalance or not?

Post by KlangFool »

OP,

1) You should set a limit and/or tolerance on how far you allow your AA to drift before you rebalance. 5/25 band based rebalancing is a good system. It is triggered maybe once every few years.

2) You should treat portfolio across all accounts as one single portfolio.

3) If you do not maintain your AA within your tolerance, you do not have an AA.

4) You should write all this down in your IPS.

5) What is your AA and what did you do in March 20202? You were tested. What did you do?

6) Rebalancing using new contribution would not work when your portfolio is big enough.

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JS-Elcano
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Re: Do you rebalance or not?

Post by JS-Elcano »

I have a 60/40 portfolio and just recently rebalanced since my AA had gone to nearly 70/30. I keep my AA across all my retirement accounts, including taxable, and so far I have always had enough room in pre-tax accounts to sell stocks and buy bonds; haven't had to touch taxable brokerage account yet, which is all stocks.

I do like rebalancing my 60/40 portfolio because I am selling high and because I am returning to an AA that allows me to sleep at night. My investment strategy is not about chasing highest returns, so I don't mind selling a high-performing asset as long as the return of my portfolio is *good enough* for reaching my retirement goal.

If your retirement funds are invested primarily in a taxable brokerage account, then this is a harder decision because of the taxable event and because of the need to hold bonds in taxable, which incurs additional taxable events (from increased dividends). Do you have no access to any tax-deferred accounts?
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Re: Do you rebalance or not?

Post by KlangFool »

invest2bfree wrote: Sun Jul 18, 2021 9:57 am
jebmke wrote: Sun Jul 18, 2021 9:52 am My re-balance policy calls for re-balancing on the downside but not on the upside. ie., I don't intend to sell equity.
Thanks this is innovative will try to follow this.

So basically stocks can go out of line upwards.
What happened if the stock keep going up and then drops by 50%? This rebalancing strategy increases RISK during a stock bubble. And, a stock bubble is when you need the RISK management of your AA.

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Re: Do you rebalance or not?

Post by jebmke »

invest2bfree wrote: Sun Jul 18, 2021 9:57 am
jebmke wrote: Sun Jul 18, 2021 9:52 am My re-balance policy calls for re-balancing on the downside but not on the upside. ie., I don't intend to sell equity.
Thanks this is innovative will try to follow this.

So basically stocks can go out of line upwards.
I wouldn't use the term out-of-line since that implies lack of intent. I am intentionally allowing my equity allocation to drift up over time. So, given that stocks should outperform fixed income, my "line" is for increasing equity. I changed my plan a couple of years ago from a fixed allocation target to what it is today.
When you discover that you are riding a dead horse, the best strategy is to dismount.
jebmke
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Re: Do you rebalance or not?

Post by jebmke »

KlangFool wrote: Sun Jul 18, 2021 10:18 am What happened if the stock keep going up and then drops by 50%?
Then I re-balance and purchase equity, assuming I pass through the lower band.
When you discover that you are riding a dead horse, the best strategy is to dismount.
KlangFool
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Re: Do you rebalance or not?

Post by KlangFool »

jebmke wrote: Sun Jul 18, 2021 10:20 am
KlangFool wrote: Sun Jul 18, 2021 10:18 am What happened if the stock keep going up and then drops by 50%?
Then I re-balance and purchase equity.
And, do not recover for 10+ years plus you are unemployed.

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pasadena
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Re: Do you rebalance or not?

Post by pasadena »

dbr wrote: Sun Jul 18, 2021 9:53 am That is one of those Bogle soundbites that is perplexing.
Agreed. There are a few of those.

I rebalance with 5/25 bands, but I don't obsess over it and when I have to do it, I do it in a way that won't generate taxes. Most often I wait for new money and buy the lagging asset. I've been known to let my stock allocation drift upwards by more than the band before I did anything about it. I'm more strict on the way down because who doesn't like buying stocks when they're on sale?

If my AA was 60/40 instead of 80/20, I'd probably use 10% bands instead of 5%.
Last edited by pasadena on Sun Jul 18, 2021 10:31 am, edited 1 time in total.
Boglebiker
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Re: Do you rebalance or not?

Post by Boglebiker »

I don’t so much “re-balance”, but I do try to maintain balance by allocating new purchases to those sectors that are falling behind. This is tough enough to do for me as it seems one particular asset class has underperformed since I started investing, but still I try to stick to my chosen asset allocation and stay the course.
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Re: Do you rebalance or not?

Post by jebmke »

KlangFool wrote: Sun Jul 18, 2021 10:22 am
jebmke wrote: Sun Jul 18, 2021 10:20 am
KlangFool wrote: Sun Jul 18, 2021 10:18 am What happened if the stock keep going up and then drops by 50%?
Then I re-balance and purchase equity.
And, do not recover for 10+ years plus you are unemployed.

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I am retired
When you discover that you are riding a dead horse, the best strategy is to dismount.
NiceUnparticularMan
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Re: Do you rebalance or not?

Post by NiceUnparticularMan »

Boglebiker wrote: Sun Jul 18, 2021 10:29 am I don’t so much “re-balance”, but I do try to maintain balance by allocating new purchases to those sectors that are falling behind. This is tough enough to do for me as it seems one particular asset class has underperformed since I started investing, but still I try to stick to my chosen asset allocation and stay the course.
Don't you mean you have been doing a better job buying low with one particular asset class? :happy

Somewhat seriously, this is one reason I don't mind rebalancing. To me, at least, it is a way of reminding myself the important bit during accumulation is buying, and buying low is still preferable.
Notsobad
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Re: Do you rebalance or not?

Post by Notsobad »

Triple digit golfer wrote: Sun Jul 18, 2021 10:04 am If you desire a 60/40 portfolio and you don't have close enough to a 60/40 portfolio for your liking, rebalance. If you don't mind the drift or aren't married to 60/40, then let it drift.

To a reasonable extent, I direct new contributions to the lagging assets. If I need to rebalance by buying and selling, I will do so only in tax advantaged accounts.
This is what I attempt to do.
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bertilak
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Re: Do you rebalance or not?

Post by bertilak »

NiceUnparticularMan wrote: Sun Jul 18, 2021 9:51 am High level observation: if you have a large enough portfolio relative to what you need to do with it, within a pretty broad range of reasonable allocation plans, very little will matter in terms of meeting those needs.

Little bit lower observation but not much lower: so if you start with a large portfolio somewhere close to the middle of a reasonable range, then you can drift quite a bit and still stay within a reasonable range.

Final conclusion: so yeah, I tend to agree if you are starting close to the middle of the reasonable range, you don't necessarily need to worry about rebalancing much per se. Indeed, in a taxable account, it could be reasonable to avoid rebalancing per se, instead using only already-taxed income or necessary withdrawals to mitigate drift.

And you could always revisit that decision if things got really out of whack, although in cases that happens for good reasons (like good stock performance) . . . see the first observation above.
Those are all my thoughts as well.
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Marseille07
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Re: Do you rebalance or not?

Post by Marseille07 »

invest2bfree wrote: Sun Jul 18, 2021 9:57 am
jebmke wrote: Sun Jul 18, 2021 9:52 am My re-balance policy calls for re-balancing on the downside but not on the upside. ie., I don't intend to sell equity.
Thanks this is innovative will try to follow this.

So basically stocks can go out of line upwards.
Why innovative? You realize that doing this would lead to more aggressive AA than you intended, right?

Say you intend to be 70/30, market crashes (AA now 60/40), you reset it to 70/30 then...market goes up, you end up at 80/20.

If you want to maintain 70/30 then you need to be rebalancing both sides, not just the downside and skipping the upside.
dbr
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Re: Do you rebalance or not?

Post by dbr »

It is probably relevant to consider the context in which Mr. Bogle made that comment. A lot of these soundbites are part of interviews or conversations about some topic at the moment and should not be taken as isolated commandments about how to invest.
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Re: Do you rebalance or not?

Post by sandan »

If I can rebalance without incurring capital gain taxes, I do it. If I can't, I wait it out and slowly shift via dividends etc. Life events have also accelerated this process for me multiple times.

-Adjusting balances are likely to help with the reduction of portfolio volatility but are unlikely to affect returns.
-Savings on capital gain taxes can definitely increase expected real returns.
Last edited by sandan on Sun Jul 18, 2021 10:55 am, edited 1 time in total.
Marseille07
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Re: Do you rebalance or not?

Post by Marseille07 »

dbr wrote: Sun Jul 18, 2021 9:53 am It is true that when you rebalance you sell something has has performed better and buy something that has not performed as well. You have to do that if you want to control risk.
As you see some posters suggesting to only rebalance into stocks and not out of stocks, I don't quite buy the notion that they want to "control risk."

Seems like they're fine resetting their AA at the bottom and let it run hot during the recovery.
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Re: Do you rebalance or not?

Post by dbr »

Marseille07 wrote: Sun Jul 18, 2021 10:54 am
dbr wrote: Sun Jul 18, 2021 9:53 am It is true that when you rebalance you sell something has has performed better and buy something that has not performed as well. You have to do that if you want to control risk.
As you see some posters suggesting to only rebalance into stocks and not out of stocks, I don't quite buy the notion that they want to "control risk."

Seems like they're fine resetting their AA at the bottom and let it run hot during the recovery.
Right. They aren't interested in controlling risk. No one ever said we have to control risk. It is just assumed that we would want to. But actually if you have no interest in what the risk is the logical thing is to put everything in stocks and rebalancing does not arise. At the other extreme there are investors who could logically put everything in T bills and go away. They don't rebalance either.
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Re: Do you rebalance or not?

Post by Marseille07 »

dbr wrote: Sun Jul 18, 2021 10:58 am Right. They aren't interested in controlling risk. No one ever said we have to control risk. It is just assumed that we would want to. But actually if you have no interest in what the risk is the logical thing is to put everything in stocks and rebalancing does not arise. At the other extreme there are investors who could logically put everything in T bills and go away. They don't rebalance either.
My personal opinion is that nudging works just fine. If my target AA is 70/30 and now 80/20, I simply withdraw from equities. If the market crashes then the AA would automatically move toward 70/30 anyway.
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Re: Do you rebalance or not?

Post by coachd50 »

jebmke wrote: Sun Jul 18, 2021 9:52 am My re-balance policy calls for re-balancing on the downside but not on the upside. ie., I don't intend to sell equity.

So essentially your policy sets your AA just to maintain "dry powder"? Or am I misinterpreting it?
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Re: Do you rebalance or not?

Post by DetroitRick »

I do, approximately yearly. But not always, and only when material and/or to time the market. Over the years, I've made a few changes to my basic allocation, and then will fully rebalance initially to that new plan.

My portfolio is fairly high risk for my age. Due to that, my preference is toward staying closer within those target ranges. If I had a 60/40 or 50/50 portfolio, I would likely rebalance a lot less. But would still do it eventually.
TheDogFather
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Re: Do you rebalance or not?

Post by TheDogFather »

I am currently close to 60/40 overall, but would be very comfortable closer to 50/50 too.

Pre-tax accounts are 100% bonds so any rebalancing of equities to bonds would incur capital gains:

All new investment is going into bonds, whether in pre-tax or taxable. I am ‘soft rebalancing’ with dividends in taxable and in recent years that has meant buying VBTLX with dividends from VTSAX and VTIAX. Also, when I took out funds toward a home purchase I sold equities to help get closer to 60/40 again.

I will continue this approach if equities continue to grow but do not plan to incur capital gains taxes just for the purpose of getting back to a specific allocation. We have more than 30x expenses in bonds, so are comfortable with the length of our runway if there is a big fall in equities.
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Re: Do you rebalance or not?

Post by pasadena »

Marseille07 wrote: Sun Jul 18, 2021 11:07 am If the market crashes then the AA would automatically move toward 70/30 anyway.
The market rebalances my portfolio a lot more often than I do :)

On top of that, rebalancing should really not be required often. In accumulation phase, new money should take care of it. In decumulation, withdrawals will. I've rebalanced like 2 or 3 times in several years of investing. It takes a lot to go beyond 5% drift.
Last edited by pasadena on Sun Jul 18, 2021 11:28 am, edited 1 time in total.
retiredjg
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Re: Do you rebalance or not?

Post by retiredjg »

invest2bfree wrote: Sun Jul 18, 2021 9:32 am John Bogle in couple of interviews has said that if you have 60/40 portfolio you do not need to re-balance. I remember him saying that you are selling the portfolio which is performing good and buying a non performer.

If yes, what is the strategy in taxable.
If accumulating, rebalance in tax-advantaged accounts. If more rebalancing is required, rebalance with contribution and dividends in taxable.

In de-cumulation, rebalance in tax-advantaged accounts. If needed In taxable, rebalance with withdrawals and dividends.

If neither, rebalance in tax-advantaged accounts and if you cannot do enough of that, do what you can in taxable or just live with it - your choice.
Capster1
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Re: Do you rebalance or not?

Post by Capster1 »

I take taxes into consideration. If I am in long-term capital gains, and I'm feeling that portion of the portfolio has pulled me into too much risk, I'll sell a small bit. I don't try to make it some exact number, just take some off the top.
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Re: Do you rebalance or not?

Post by BitTooAggressive »

dbr wrote: Sun Jul 18, 2021 9:53 am That is one of those Bogle soundbites that is perplexing.

The essential idea is that rebalancing is done when the portfolio has migrated to a point where the risk is too low, or, most often, too high. Because stocks on average over time return more than bonds not rebalancing or adjusting allocation when contributing or withdrawing will eventually result in the portfolio drifting to a higher stock allocation than the investor would want. Mr. Bogle also thinks asset allocations should hold more in bonds as people age. You just can't reconcile the two things.

It is true that when you rebalance you sell something has has performed better and buy something that has not performed as well. You have to do that if you want to control risk. If risk means nothing to you, or you have a different idea of what is at risk, then you just hold all stocks and you hold only something that on average performs best. If risk means nothing to you, you should be 100% stocks and then you also don't have to rebalance.

I don't know if Mr. Bogle was ever aware how much confusion can be derived from some of the things he has said.

I agree that a fetish can be made of rebalancing, especially when it is presented as a tricky and difficult thing that the average investor is unlikely to be able to manage.

PS For the first time in ten years I decided after the big stock run-ups we have had that I would rebalance a little. My general scheme is to follow a 5/25 rule.
Well if someone says something confusing or contradictory I tend to ignore the statement. Don’t base anything off one sound byte that someone says , even Bogle.

Not knowing specifics I suspect he tried to communicate do rebalancing in taxable accounts via new monies or withdrawals, rather then generating a taxable event if possible. But in a huge market drop it’s wise to rebalance even in a taxable account.
Normchad
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Re: Do you rebalance or not?

Post by Normchad »

I kinda sorta rebalance.

I look at everything every January 1, and if things are wildly out of whack, I consider fixing it.

Usually the fix is either sell a bunch of stock in my 401K and buy bonds, or I just redirect future taxable account contributions to whatever needs to get bumped up.

Typically though, I do this not due to market changes, but due to changes in what I want my AA to be. For the first 20+ years,mi was 100% stocks. Then 5-6 years ago, I consciously decided to head towards 60/40 since I was nearing the end. So that has had as much to do with me shifting asset classes as anything else,really.

I’ve got a lot of money in a VG Life-strategy fund now, so I don’t expect to be doing a lot of rebalancing in the future based on market changes.
Tamalak
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Re: Do you rebalance or not?

Post by Tamalak »

I don't rebalance, I just contribute to whatever is lower compared to my AA.

When I start withdrawals, I'll withdraw from whatever is greater.
Shalom Aleichem
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Re: Do you rebalance or not?

Post by Shalom Aleichem »

KlangFool wrote: Sun Jul 18, 2021 10:52 am
jebmke wrote: Sun Jul 18, 2021 10:36 am
KlangFool wrote: Sun Jul 18, 2021 10:22 am
jebmke wrote: Sun Jul 18, 2021 10:20 am
KlangFool wrote: Sun Jul 18, 2021 10:18 am What happened if the stock keep going up and then drops by 50%?
Then I re-balance and purchase equity.
And, do not recover for 10+ years plus you are unemployed.

KlangFool
I am retired
jebmke,

So, please explain how would this work out for you if the stock market keep crashing and you keep selling the bond to buy the stock? Eventually, you would run out of money.

KlangFool
If you’re retired presumably you have around 5 years expenses in cash equivalents and another 5-10 in bonds. Both should be relatively low volatility and should ensure against the market being down for 15 years. If the market is down more than 15 years you’d be in trouble but so would a lot of people as that’s a really uncommon situation. Plus if you’re retired presumably you also have social security so you won’t be eating leaves and cat food.
Shalom Aleichem
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Re: Do you rebalance or not?

Post by Shalom Aleichem »

When I looked at portfolio visualizer and ticked off the various options for rebalancing at some time periods (rebalancing say every month vs quarter vs semiannual and so on) returns and or alpha go up and at other rebalancing intervals they go down. It seems to me rebalancing could help under some situations or hurt under others. Personally I don’t regularly rebalance. I recently thought my aa was more aggressive than I’d like and switched from around 100/0 give or take to around 95/5 or 90/0 give or take
etfan
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Re: Do you rebalance or not?

Post by etfan »

My favorite solution is to buy self balancing funds (target dates, Life Strategy, etc).
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Re: Do you rebalance or not?

Post by KlangFool »

Shalom Aleichem wrote: Sun Jul 18, 2021 5:21 pm
KlangFool wrote: Sun Jul 18, 2021 10:52 am
jebmke wrote: Sun Jul 18, 2021 10:36 am
KlangFool wrote: Sun Jul 18, 2021 10:22 am
jebmke wrote: Sun Jul 18, 2021 10:20 am
Then I re-balance and purchase equity.
And, do not recover for 10+ years plus you are unemployed.

KlangFool
I am retired
jebmke,

So, please explain how would this work out for you if the stock market keep crashing and you keep selling the bond to buy the stock? Eventually, you would run out of money.

KlangFool
If you’re retired presumably you have around 5 years expenses in cash equivalents and another 5-10 in bonds. Both should be relatively low volatility and should ensure against the market being down for 15 years. If the market is down more than 15 years you’d be in trouble but so would a lot of people as that’s a really uncommon situation. Plus if you’re retired presumably you also have social security so you won’t be eating leaves and cat food.
But, if you rebalance by selling the bond to buy the stock without limit, you could be down to 5 years. And, if you rebalance by selling CASH to buy the stock, you could be down to ZERO year.

The market could be down by 5 years and you would be in trouble.

KlangFool
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Shalom Aleichem
Posts: 263
Joined: Tue Mar 16, 2021 8:55 pm

Re: Do you rebalance or not?

Post by Shalom Aleichem »

KlangFool wrote: Sun Jul 18, 2021 5:50 pm
Shalom Aleichem wrote: Sun Jul 18, 2021 5:21 pm
KlangFool wrote: Sun Jul 18, 2021 10:52 am
jebmke wrote: Sun Jul 18, 2021 10:36 am
KlangFool wrote: Sun Jul 18, 2021 10:22 am

And, do not recover for 10+ years plus you are unemployed.

KlangFool
I am retired
jebmke,

So, please explain how would this work out for you if the stock market keep crashing and you keep selling the bond to buy the stock? Eventually, you would run out of money.

KlangFool
If you’re retired presumably you have around 5 years expenses in cash equivalents and another 5-10 in bonds. Both should be relatively low volatility and should ensure against the market being down for 15 years. If the market is down more than 15 years you’d be in trouble but so would a lot of people as that’s a really uncommon situation. Plus if you’re retired presumably you also have social security so you won’t be eating leaves and cat food.
But, if you rebalance by selling the bond to buy the stock without limit, you could be down to 5 years. And, if you rebalance by selling CASH to buy the stock, you could be down to ZERO year.

The market could be down by 5 years and you would be in trouble.

KlangFool
True. But to my mind and my plan at least for retirement is 3-5 years expenses in cash equivalents and funds equivalent to get me out to ten years or so in bonds. That should be a fixed amount. Every year as the cash is used up some bonds are converted to cash and stocks to bonds (realistically and practically in a normal market that would mean converting the stocks to cash). So I would always have around 10 years in relatively non volatile vehicles (cash equivalents and bonds) (or let’s say volatile resistant re bonds). Only what’s outside that would be subject to any other investments including equities. That should safely get me out to 10-15 years with social security. As the market has never been down for a twenty year period, everything I calculate as not needed for 20 years would be equities. Knowing me and how few 15 year periods ended down I’d probably put everything I don’t need for 15 years in equities. I think that’s appropriately aggressive but also safe. What do you think?
coffeeblack
Posts: 374
Joined: Wed Jun 19, 2019 10:20 am

Re: Do you rebalance or not?

Post by coffeeblack »

Shalom Aleichem wrote: Sun Jul 18, 2021 6:06 pm
KlangFool wrote: Sun Jul 18, 2021 5:50 pm
Shalom Aleichem wrote: Sun Jul 18, 2021 5:21 pm
KlangFool wrote: Sun Jul 18, 2021 10:52 am
jebmke wrote: Sun Jul 18, 2021 10:36 am

I am retired
jebmke,

So, please explain how would this work out for you if the stock market keep crashing and you keep selling the bond to buy the stock? Eventually, you would run out of money.

KlangFool
If you’re retired presumably you have around 5 years expenses in cash equivalents and another 5-10 in bonds. Both should be relatively low volatility and should ensure against the market being down for 15 years. If the market is down more than 15 years you’d be in trouble but so would a lot of people as that’s a really uncommon situation. Plus if you’re retired presumably you also have social security so you won’t be eating leaves and cat food.
But, if you rebalance by selling the bond to buy the stock without limit, you could be down to 5 years. And, if you rebalance by selling CASH to buy the stock, you could be down to ZERO year.

The market could be down by 5 years and you would be in trouble.

KlangFool
True. But to my mind and my plan at least for retirement is 3-5 years expenses in cash equivalents and funds equivalent to get me out to ten years or so in bonds. That should be a fixed amount. Every year as the cash is used up some bonds are converted to cash and stocks to bonds (realistically and practically in a normal market that would mean converting the stocks to cash). So I would always have around 10 years in relatively non volatile vehicles (cash equivalents and bonds) (or let’s say volatile resistant re bonds). Only what’s outside that would be subject to any other investments including equities. That should safely get me out to 10-15 years with social security. As the market has never been down for a twenty year period, everything I calculate as not needed for 20 years would be equities. Knowing me and how few 15 year periods ended down I’d probably put everything I don’t need for 15 years in equities. I think that’s appropriately aggressive but also safe. What do you think?
So Klangfool how do you do it?
KlangFool
Posts: 21618
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Re: Do you rebalance or not?

Post by KlangFool »

coffeeblack wrote: Sun Jul 18, 2021 6:32 pm
Shalom Aleichem wrote: Sun Jul 18, 2021 6:06 pm
KlangFool wrote: Sun Jul 18, 2021 5:50 pm
Shalom Aleichem wrote: Sun Jul 18, 2021 5:21 pm
KlangFool wrote: Sun Jul 18, 2021 10:52 am

jebmke,

So, please explain how would this work out for you if the stock market keep crashing and you keep selling the bond to buy the stock? Eventually, you would run out of money.

KlangFool
If you’re retired presumably you have around 5 years expenses in cash equivalents and another 5-10 in bonds. Both should be relatively low volatility and should ensure against the market being down for 15 years. If the market is down more than 15 years you’d be in trouble but so would a lot of people as that’s a really uncommon situation. Plus if you’re retired presumably you also have social security so you won’t be eating leaves and cat food.
But, if you rebalance by selling the bond to buy the stock without limit, you could be down to 5 years. And, if you rebalance by selling CASH to buy the stock, you could be down to ZERO year.

The market could be down by 5 years and you would be in trouble.

KlangFool
True. But to my mind and my plan at least for retirement is 3-5 years expenses in cash equivalents and funds equivalent to get me out to ten years or so in bonds. That should be a fixed amount. Every year as the cash is used up some bonds are converted to cash and stocks to bonds (realistically and practically in a normal market that would mean converting the stocks to cash). So I would always have around 10 years in relatively non volatile vehicles (cash equivalents and bonds) (or let’s say volatile resistant re bonds). Only what’s outside that would be subject to any other investments including equities. That should safely get me out to 10-15 years with social security. As the market has never been down for a twenty year period, everything I calculate as not needed for 20 years would be equities. Knowing me and how few 15 year periods ended down I’d probably put everything I don’t need for 15 years in equities. I think that’s appropriately aggressive but also safe. What do you think?
So Klangfool how do you do it?
coffeeblack,

A) I rebalance in both directions: sell stock to buy the bond and vice versa.

B) I set a minimum limit of 5 years of expense in fixed income for rebalancing.

C) I have another 3 years of expense in CASH not counted as part of my portfolio,

KlangFool
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coffeeblack
Posts: 374
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Re: Do you rebalance or not?

Post by coffeeblack »

KlangFool wrote: Sun Jul 18, 2021 6:54 pm
coffeeblack wrote: Sun Jul 18, 2021 6:32 pm
Shalom Aleichem wrote: Sun Jul 18, 2021 6:06 pm
KlangFool wrote: Sun Jul 18, 2021 5:50 pm
Shalom Aleichem wrote: Sun Jul 18, 2021 5:21 pm

If you’re retired presumably you have around 5 years expenses in cash equivalents and another 5-10 in bonds. Both should be relatively low volatility and should ensure against the market being down for 15 years. If the market is down more than 15 years you’d be in trouble but so would a lot of people as that’s a really uncommon situation. Plus if you’re retired presumably you also have social security so you won’t be eating leaves and cat food.
But, if you rebalance by selling the bond to buy the stock without limit, you could be down to 5 years. And, if you rebalance by selling CASH to buy the stock, you could be down to ZERO year.

The market could be down by 5 years and you would be in trouble.

KlangFool
True. But to my mind and my plan at least for retirement is 3-5 years expenses in cash equivalents and funds equivalent to get me out to ten years or so in bonds. That should be a fixed amount. Every year as the cash is used up some bonds are converted to cash and stocks to bonds (realistically and practically in a normal market that would mean converting the stocks to cash). So I would always have around 10 years in relatively non volatile vehicles (cash equivalents and bonds) (or let’s say volatile resistant re bonds). Only what’s outside that would be subject to any other investments including equities. That should safely get me out to 10-15 years with social security. As the market has never been down for a twenty year period, everything I calculate as not needed for 20 years would be equities. Knowing me and how few 15 year periods ended down I’d probably put everything I don’t need for 15 years in equities. I think that’s appropriately aggressive but also safe. What do you think?
So Klangfool how do you do it?
coffeeblack,

A) I rebalance in both directions: sell stock to buy the bond and vice versa.

B) I set a minimum limit of 5 years of expense in fixed income for rebalancing.

C) I have another 3 years of expense in CASH not counted as part of my portfolio,

KlangFool
I see. So when stocks down, sell bonds, buy stocks and vise versa.
I buy and sell in tax advantaged until I can't. Then use cash.
I also have a range from 50/50 to 60/40. So I have build in some tolerance.
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grabiner
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Re: Do you rebalance or not?

Post by grabiner »

I use a version of the 5/25 rule for rebalancing. I will rebalance if a major asset class (bonds, US stocks) is off by more than 25% of its own target, or if a major class or subclass (US small-cap value, emerging markets) is off by 5% of my total portfolio.

But in my taxable account, I will only sell for a capital gain to rebalance if I am outside the 5/25 limits and do not expect that I can fix this with normal inflows. This has never happened, although it came close in 2007; one more year of rises in emerging markets would have taken me over 15%, with a 10% target, and I would have needed to sell. (Instead, the markets fell, so I was able to sell emerging markets for a capital loss and rebalance to the correct allocation in 2008.)

The bond/stock rebalancing can all be done in my employer plan, since that is where I hold all my bonds. I rebalance there every year when I adjust my allocation, and have had to rebalance twice out of cycle when a market crash took me over my target bond allocation.
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Doc
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Re: Do you rebalance or not?

Post by Doc »

Shalom Aleichem wrote: Sun Jul 18, 2021 5:21 pm If you’re retired presumably you have around 5 years expenses in cash equivalents ...
We're retired and keep 3 or 4 weeks of expenses in cash.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
carminered2019
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Re: Do you rebalance or not?

Post by carminered2019 »

I retired, got 20 years in fixed income and do not rebalance. Rebalance is a risk management but you lose out on growth.
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Garco
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Re: Do you rebalance or not?

Post by Garco »

@Doc. We're also retired. We keep a few months of expenses in a credit union. There we also have a large LOC, as well as our checking and MM accounts with associated cards. Money goes IN to those credit union accounts from a) Social Security, b) monthly RMD transfers from our investment accounts, and c) on an as-needed basis (for special purposes) withdrawals from our brokerage account.

Within our investment accounts (IRA and 403b), we do rebalance to an approximate 60-40 allocation. But we're not constantly rejiggering things. For example, at present our 403b account is 63% equities, the rest in FI and "guaranteed" (TIAA Traditional).

EDIT to add: After yesterday's partial meltdown, today I'm rebalancing a bit more to reduce the 63% back to 60% equities.
Last edited by Garco on Tue Jul 20, 2021 11:18 am, edited 2 times in total.
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Portfolio7
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Re: Do you rebalance or not?

Post by Portfolio7 »

I have two situations that result in a rebalance.

The first you might call ancillary rebalancing. It's a byproduct of small adjustments I sometimes make to individual funds. This is non-Boglehead, market timing, but it's also only marginally material (i.e. max 2% change in any asset class, 5% in total Bond/Equity ratio.) This is a monthly checkpoint, but an actual rebalance happens usually just 2 or 3 times per year. I also don't really care if I miss one or several checkpoints for family or work reasons, I have a portfolio AA range I consider acceptable and it's always in that range. Most of the time, this first process keeps my risk profile in line with my goals.

The second is my primary rebalance threshold. I use a 5% threshold that applies to Equities/Bonds (I have a slice and dice portfolio, but I don't try to apply rebalance thresholds to each slice.) So, for example, in March of last year equities fell far enough that they comprised 5% less of my portfolio (75/25 went to 69/31). So I sold bonds and bought equities. When equities rose again, I never quite hit the 5% threshold (80/20) because the first process above kept my equity growth somewhat in check. This 5% threshhold doesn't trigger very often, maybe once every few years.
"An investment in knowledge pays the best interest" - Benjamin Franklin
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invest2bfree
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Re: Do you rebalance or not?

Post by invest2bfree »

Portfolio7 wrote: Tue Jul 20, 2021 10:59 am I have two situations that result in a rebalance.

The first you might call ancillary rebalancing. It's a byproduct of small adjustments I sometimes make to individual funds. This is non-Boglehead, market timing, but it's also only marginally material (i.e. max 2% change in any asset class, 5% in total Bond/Equity ratio.) This is a monthly checkpoint, but an actual rebalance happens usually just 2 or 3 times per year. I also don't really care if I miss one or several checkpoints for family or work reasons, I have a portfolio AA range I consider acceptable and it's always in that range. Most of the time, this first process keeps my risk profile in line with my goals.

The second is my primary rebalance threshold. I use a 5% threshold that applies to Equities/Bonds (I have a slice and dice portfolio, but I don't try to apply rebalance thresholds to each slice.) So, for example, in March of last year equities fell far enough that they comprised 5% less of my portfolio (75/25 went to 69/31). So I sold bonds and bought equities. When equities rose again, I never quite hit the 5% threshold (80/20) because the first process above kept my equity growth somewhat in check. This 5% threshhold doesn't trigger very often, maybe once every few years.
Is this in taxable?

When you re-balance out of equities won't you get hit with capital gains?

Sometimes eating up to 25% of gains?
60% VT, 40% BND.
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Portfolio7
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Re: Do you rebalance or not?

Post by Portfolio7 »

invest2bfree wrote: Tue Jul 20, 2021 11:28 am
Portfolio7 wrote: Tue Jul 20, 2021 10:59 am I have two situations that result in a rebalance.

The first you might call ancillary rebalancing. It's a byproduct of small adjustments I sometimes make to individual funds. This is non-Boglehead, market timing, but it's also only marginally material (i.e. max 2% change in any asset class, 5% in total Bond/Equity ratio.) This is a monthly checkpoint, but an actual rebalance happens usually just 2 or 3 times per year. I also don't really care if I miss one or several checkpoints for family or work reasons, I have a portfolio AA range I consider acceptable and it's always in that range. Most of the time, this first process keeps my risk profile in line with my goals.

The second is my primary rebalance threshold. I use a 5% threshold that applies to Equities/Bonds (I have a slice and dice portfolio, but I don't try to apply rebalance thresholds to each slice.) So, for example, in March of last year equities fell far enough that they comprised 5% less of my portfolio (75/25 went to 69/31). So I sold bonds and bought equities. When equities rose again, I never quite hit the 5% threshold (80/20) because the first process above kept my equity growth somewhat in check. This 5% threshhold doesn't trigger very often, maybe once every few years.
Is this in taxable?

When you re-balance out of equities won't you get hit with capital gains?

Sometimes eating up to 25% of gains?
My savings are 100% tax advantaged. You're right, if this were taxable I'd have to rethink it.
"An investment in knowledge pays the best interest" - Benjamin Franklin
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