How to rebalance during market crashes?
How to rebalance during market crashes?
Hi all,
Suppose I currently rebalance my accounts based on deviation from target, rather than using a time-based system. For example, suppose for simplicity sake I own only two funds - TSM Index and TBM Index - and my targeted allocations are 60% stocks/40% bonds. Let's say my personal rule would be to rebalance when TSM Index gets up to 63% or down to 57%.
My question, for anyone who uses similar rebalancing rules, is do you build anything into your rules to prevent you from continually rebalancing during a stock market crash? I realize that nobody knows when a stock market crash has started or when it will end, but it seems like following the disciplined rebalancing rule mentioned above as a market falls 50% or more could result in a devastating drawdown, even if one has the full knowledge and confidence that the market will eventually reach a new high.
One possible 'solution' might be to incorporate an additional rule that I can only rebalance once every 90 days (or can only rebalance in the same direction once every 90 days), or something like that. Obviously, 90 days is an arbitrary time period and could backfire, but it seems like it would prevent the scenario when I am rebalancing every week as a market crashes. Does anyone use a system like this, or have thoughts on the concept?
Any suggestions, or examples of how you handle this situation with your own portfolio, would be greatly appreciated.
Thanks,
Len
Suppose I currently rebalance my accounts based on deviation from target, rather than using a time-based system. For example, suppose for simplicity sake I own only two funds - TSM Index and TBM Index - and my targeted allocations are 60% stocks/40% bonds. Let's say my personal rule would be to rebalance when TSM Index gets up to 63% or down to 57%.
My question, for anyone who uses similar rebalancing rules, is do you build anything into your rules to prevent you from continually rebalancing during a stock market crash? I realize that nobody knows when a stock market crash has started or when it will end, but it seems like following the disciplined rebalancing rule mentioned above as a market falls 50% or more could result in a devastating drawdown, even if one has the full knowledge and confidence that the market will eventually reach a new high.
One possible 'solution' might be to incorporate an additional rule that I can only rebalance once every 90 days (or can only rebalance in the same direction once every 90 days), or something like that. Obviously, 90 days is an arbitrary time period and could backfire, but it seems like it would prevent the scenario when I am rebalancing every week as a market crashes. Does anyone use a system like this, or have thoughts on the concept?
Any suggestions, or examples of how you handle this situation with your own portfolio, would be greatly appreciated.
Thanks,
Len
Re: How to rebalance during market crashes?
When the market is going down, I try to rebalance only on so-called RBDs (really bad days, search the forum with "livesoft RBD" for more info). So if the market is dropping 2% every day for 10 weeks in a row, that will not trigger rebalancing. But if it drops 4% (or other algorithmically determined amount) in a single day, that will trigger rebalancing. There is a whole science behind it that is explained in other threads.
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Re: How to rebalance during market crashes?
You may find the following article linked from the Wiki useful:
http://www.tdainstitutional.com/pdf/Opp ... yanani.pdf
Cheers,
513
http://www.tdainstitutional.com/pdf/Opp ... yanani.pdf
Cheers,
513
Re: How to rebalance during market crashes?
513 - that FP Journal article is actually the basis for how I currently rebalance my portfolio, but doesn't really address the issue of what would happen if those rules required rapid-fire rebalancing during a stock market crash. Any suggestions for that scenrio?FiveThirteen wrote:You may find the following article linked from the Wiki useful:
http://www.tdainstitutional.com/pdf/Opp ... yanani.pdf
Cheers,
513
Thanks,
Len
Re: How to rebalance during market crashes?
Tell us your actual behavior in August 2011. What did you actually do?
- mephistophles
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Re: How to rebalance during market crashes?
Buy low and sell high. Stick to dollar cost averaging.
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Re: How to rebalance during market crashes?
Len33 --
You said "Let's say my personal rule would be to rebalance when TSM Index gets up to 63% or down to 57%." That's a 5% rebalancing band. The Daryanani article suggests that a much wider band is optimal. If you used a 20% rebalancing band you wouldn't be doing any rapid fire rebalancing. If bonds stayed constant, you would rebalance twice on a 50% drop (with a 60/40 equity/bond AA). The second rebalancing would occur just before the market started to recover.
You said "Let's say my personal rule would be to rebalance when TSM Index gets up to 63% or down to 57%." That's a 5% rebalancing band. The Daryanani article suggests that a much wider band is optimal. If you used a 20% rebalancing band you wouldn't be doing any rapid fire rebalancing. If bonds stayed constant, you would rebalance twice on a 50% drop (with a 60/40 equity/bond AA). The second rebalancing would occur just before the market started to recover.
Re: How to rebalance during market crashes?
This is a misconception. You should rethink what's going on. The worst that happens is you buy average, sell average, instead of buy low, sell high.Len33 wrote:`....but it seems like following the disciplined rebalancing rule mentioned above as a market falls 50% or more could result in a devastating drawdown, even if one has the full knowledge and confidence that the market will eventually reach a new high....'
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Re: How to rebalance during market crashes?
Vanguard has done some paper on analyis of at which point rebalancing mantains the same risk/ return properties AND is most cost effective. I believe they found holding off for at least a 5% allocation shift done yearly. That allowed something like 18 transactions EVER for a mix of stocks and bonds. They found rebalancing any more then that did nothing to improve return or risk, but lost more money in transaction and tax drag.
Good luck.
Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” |
-Jack Bogle
Re: How to rebalance during market crashes?
When markets are calm, all my rebalancing is done simply by allocating new funds accordingly.
During crashes, I have a 5% deviation trigger. During 2008, that trigger was hit on a daily basis for a week. I hit it a few times last fall as well, but not so frequently. I also hit it again about a week ago, this time causing me to move money into bonds.
During 2008, it happened so often I really had to do convolutions in moving money around, as I was hitting 401k frequent trading restrictions. So I may not have always have rebalanced into my first choice fund. For example, I may have needed to buy an intl. fund in 401k instead of taxable, or a low ER active fund temporarily, or an S&P 500 instead of a TSM temporarily, or buy a slightly higher cost fund in a diferent account. I sorted it all out afterwards. I had to break some rules (buy index, buy low cost, use efficient tax placement, etc.), but my main rule was for in the short term keep risk profile contant. But I tried to keep my risk profile as constant as I could.
During crashes, I have a 5% deviation trigger. During 2008, that trigger was hit on a daily basis for a week. I hit it a few times last fall as well, but not so frequently. I also hit it again about a week ago, this time causing me to move money into bonds.
During 2008, it happened so often I really had to do convolutions in moving money around, as I was hitting 401k frequent trading restrictions. So I may not have always have rebalanced into my first choice fund. For example, I may have needed to buy an intl. fund in 401k instead of taxable, or a low ER active fund temporarily, or an S&P 500 instead of a TSM temporarily, or buy a slightly higher cost fund in a diferent account. I sorted it all out afterwards. I had to break some rules (buy index, buy low cost, use efficient tax placement, etc.), but my main rule was for in the short term keep risk profile contant. But I tried to keep my risk profile as constant as I could.
Re: How to rebalance during market crashes?
If the market drops 2% a day for ten weeks in a row, assuming no holidays or market-closing triggers, a 100K investment will be worth 40K. That won't trigger a rebalance, but a drop from 100K to 96K will? Strange.livesoft wrote:When the market is going down, I try to rebalance only on so-called RBDs (really bad days, search the forum with "livesoft RBD" for more info). So if the market is dropping 2% every day for 10 weeks in a row, that will not trigger rebalancing. But if it drops 4% (or other algorithmically determined amount) in a single day, that will trigger rebalancing. There is a whole science behind it that is explained in other threads.
I'd be careful using the term "science" here unless you've had it published in peer-reviewed journals.
Re: How to rebalance during market crashes?
Here's the Vanguard paper:staythecourse wrote:Vanguard has done some paper on analyis of at which point rebalancing mantains the same risk/ return properties AND is most cost effective. I believe they found holding off for at least a 5% allocation shift done yearly. That allowed something like 18 transactions EVER for a mix of stocks and bonds. They found rebalancing any more then that did nothing to improve return or risk, but lost more money in transaction and tax drag.
Good luck.
http://www.vanguard.com/pdf/icrpr.pdf
The most effective were, in order:
Never: 9.1% Average annualized return
Quarterly 10% bands: 8.9%
Quarterly 5% bands: 8.8%
Monthly 5% bands: 8.8%
Annually 10% bands: 8.7%
Quarterly 1% bands: 8.7%
As for the original post, one strategy is to stick with your original rebalancing strategy, such as 5% bands on a specific predetermined date, and then only rebalance with new money. If you can't with new money, at the very least just stick with your original plan. Everything else is out of your hands really since you can't see the future.
But yea, time intervals is a key component of a good rebalancing plan in my opinion...keeps you from doing anything emotional.
- Taylor Larimore
- Posts: 32839
- Joined: Tue Feb 27, 2007 7:09 pm
- Location: Miami FL
Rebalancing
Hi Len:
Keep investing simple.
Best wishes.
Taylor
Once or twice a year I look at our portfolio. If a fund is significantly different than our desired allocation I rebalance that fund. That's it.Any suggestions, or examples of how you handle this situation with your own portfolio, would be greatly appreciated.
Keep investing simple.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
- Aptenodytes
- Posts: 3786
- Joined: Tue Feb 08, 2011 7:39 pm
Re: How to rebalance during market crashes?
This thread may also be helpful to you:
http://www.bogleheads.org/forum/viewtopic.php?t=80110
I often find it hard to follow what strategies people are using because often "percentage" or "%" is written when "percentage points" is meant. "Absolute percent" is, I think, a little more clear if it means what I think it means, "percentage points."
I don't get how it would ever make sense to use percentage points or "absolute percentage" in a rebalancing strategy, except possibly in a two-asset portfolio. I have 7 categories, and set my rebalance bands in terms of "percentage." I have one band that is set with respect to the asset category, and one with respect to the total portfolio.
I agree with the point already made that if you are nervous about rebalancing too often, widen your rebalance bands. Simple solution.
http://www.bogleheads.org/forum/viewtopic.php?t=80110
I often find it hard to follow what strategies people are using because often "percentage" or "%" is written when "percentage points" is meant. "Absolute percent" is, I think, a little more clear if it means what I think it means, "percentage points."
I don't get how it would ever make sense to use percentage points or "absolute percentage" in a rebalancing strategy, except possibly in a two-asset portfolio. I have 7 categories, and set my rebalance bands in terms of "percentage." I have one band that is set with respect to the asset category, and one with respect to the total portfolio.
I agree with the point already made that if you are nervous about rebalancing too often, widen your rebalance bands. Simple solution.
Re: How to rebalance during market crashes?
Aptenodytes,
Good point and I was wondering the same thing. Different people may define their band differently and still express it as a percent.
When I say I have 5% triggers, here is what I mean. When the number in red below is >5%, I rebalance (Sorry, the formatting for columns does not work). Another part of the spreadsheet tells me the exact amounts I need to move to be at 0%. But I usually don't rebalance to 0% because I have paychecks coming and I also could easily over-balance the other way.
It really does not trigger too often because my paycheck keeps it balanced. But crashes are "accelerated time".
Large Extended Intl. Bond Cash Deviation
Target 33.65% 16.83% 25.00% 20.89% 3.63%
Current 33.79% 17.46% 24.36% 21.14% 3.26% 2.02%
Good point and I was wondering the same thing. Different people may define their band differently and still express it as a percent.
When I say I have 5% triggers, here is what I mean. When the number in red below is >5%, I rebalance (Sorry, the formatting for columns does not work). Another part of the spreadsheet tells me the exact amounts I need to move to be at 0%. But I usually don't rebalance to 0% because I have paychecks coming and I also could easily over-balance the other way.
It really does not trigger too often because my paycheck keeps it balanced. But crashes are "accelerated time".
Large Extended Intl. Bond Cash Deviation
Target 33.65% 16.83% 25.00% 20.89% 3.63%
Current 33.79% 17.46% 24.36% 21.14% 3.26% 2.02%
Re: How to rebalance during market crashes?
If someone looks only at returns, you are missing half the picture.
I rebalance mainly to keep my risk profile constant. I just rebalanced into bonds because my percent of stocks was getting higher than allowed. At current bond yields, I did not re-balance into bonds for return; I re-balanced because my equity risk during a crash was growing too high.
I rebalance mainly to keep my risk profile constant. I just rebalanced into bonds because my percent of stocks was getting higher than allowed. At current bond yields, I did not re-balance into bonds for return; I re-balanced because my equity risk during a crash was growing too high.
Re: How to rebalance during market crashes?
I limit rebalancing in a down market to no more than every 6 months (using bands).
Another approach, perhaps more useful when approaching retirement is to only rebalance with new money into down allocation.
This maintains the amount in the safe allocation, while allowing you to participate somewhat if the market turns around. So less up side if the market recovers quickly, but less risk if it does not.
Another approach, perhaps more useful when approaching retirement is to only rebalance with new money into down allocation.
This maintains the amount in the safe allocation, while allowing you to participate somewhat if the market turns around. So less up side if the market recovers quickly, but less risk if it does not.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: How to rebalance during market crashes?
A couple points...Len33 wrote:Hi all, Any suggestions, or examples of how you handle this situation with your own portfolio, would be greatly appreciated.
Rebalancing is primarily to manage risk. I do think a modest rebalancing bonus can be captured, but agree with most that it is more often only a nominal improvement (but I will take anything I can get). For me, trading on RBDs suggests timing. How do you know the beginning and end of the crash? Why trade when down 3% today if it may be down another 5% tomorrow? If you use rebalancing bands no timing is required. The bands will tell you if it is time to readjust for risk.
Taxes and transaction costs matter - if you have accounts that are tax deferred and you do not incur transaction costs, then it is no big deal to rebalance more frequently. Conversely, if transaction costs are high or you are trading taxable accounts, then you need to think about those consequences. You may have a tax benefit if you need to do some tax loss harvesting.
There is no free lunch.
Re: How to rebalance during market crashes?
When would you rather have rebalanced:Boglenaut wrote:If the market drops 2% a day for ten weeks in a row, assuming no holidays or market-closing triggers, a 100K investment will be worth 40K. That won't trigger a rebalance, but a drop from 100K to 96K will? Strange.livesoft wrote:When the market is going down, I try to rebalance only on so-called RBDs (really bad days, search the forum with "livesoft RBD" for more info). So if the market is dropping 2% every day for 10 weeks in a row, that will not trigger rebalancing. But if it drops 4% (or other algorithmically determined amount) in a single day, that will trigger rebalancing. There is a whole science behind it that is explained in other threads.
I'd be careful using the term "science" here unless you've had it published in peer-reviewed journals.
(a) At every 5% drop as things are going to a 60% drop, or
(b) Once at the end of a 60% drop?
The OP asked
So I gave a tried-and-true method to use.do you build anything into your rules to prevent you from continually rebalancing during a stock market crash?
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Re: How to rebalance during market crashes?
OP, is obviously an intelligent and I suspect young individual. I would suggest 2 possibilities:
1. My favorite: Never rebalance. See the Vanguard paper. Take an allocation you like and keep it forever. 50/50 or 60/40 or even 40/60.
2. Rebalance once a year.
Either of these ways you may look at stock and bond market returns and prices but never have to do anything except once a year in scenario 2.
1. My favorite: Never rebalance. See the Vanguard paper. Take an allocation you like and keep it forever. 50/50 or 60/40 or even 40/60.
2. Rebalance once a year.
Either of these ways you may look at stock and bond market returns and prices but never have to do anything except once a year in scenario 2.
Re: How to rebalance during market crashes?
I don't think it would be crazy to only balance out of stocks and not balance into stocks. This avoids the dreaded death spiral of buying into a declining market. But the outcome depends on whether or not the market recovers. If the market never recovers, the investor is better off. But the problem is, then what? Now the investor has reset the allocation to low stocks. That is the right thing to do if the market does not recover, or not? If the market recovers the investor loses an opportunity for gains and the net effect is paid in lost overall return, keeping in mind that the investor also does not follow momentum upward. However, if the market recovers, there is no major disaster to the investor. This may be a viable strategy for the retired investor with a desire to mitigate risks.
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Re: How to rebalance during market crashes?
exactly, I think the quasi fourth factor of momentum as well as the recommendations of Bogle and Bernstein and others explicitly discourage rebalancing too often. Set wider bands (mine is +/- 5% but there is a component of P/E10 as well as P/E10 trend embedded in the model) and then stick to it. If this is too much drift for you then use new money to pull back toward the midline in the interim.Soren Aabye wrote:Len33 --
You said "Let's say my personal rule would be to rebalance when TSM Index gets up to 63% or down to 57%." That's a 5% rebalancing band. The Daryanani article suggests that a much wider band is optimal. If you used a 20% rebalancing band you wouldn't be doing any rapid fire rebalancing. If bonds stayed constant, you would rebalance twice on a 50% drop (with a 60/40 equity/bond AA). The second rebalancing would occur just before the market started to recover.
I went from 25% stocks to almost 70% stocks between 2007 and 2009. I did most of it in about 6 large buys, in January 2008, July 2008, October 2008, November 2008, February 2009-March 2009, and May 2009. I never felt I was 'buying into a death spiral' but rather was elated about 'buying on sale.' Of note, my IPS does allow for this behavior and also, I was youngish (mid 30s), enough that I could afford the risks.
Re: How to rebalance during market crashes?
FWIW:I don't think it would be crazy to only balance out of stocks and not balance into stocks.
For many years the 401K at work had two funds, an index like global stock fund (US biased) and a bond oriented fund (basically 60% TBM and 40% "blue chips").
You could only rebalance out of the stock fund into the bond oriented fund.
Eventually we moved to a Fidelity run 401K with thousands of options, and only restriction on rebalancing was to curb high frequency rebalancing into and out of funds.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
- zzcooper123
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- Joined: Sat Oct 13, 2007 5:55 pm
Re: How to rebalance during market crashes?
livesoft, do you think downside RBD's are do to extreme loss aversion i.e. "throwing in the towel" ?
Re: How to rebalance during market crashes?
I agree with those above that say to use wider bands. That's the keep it simple solution. The 5/25 rule laid out in Swedroe's book worked great for me in 2008-9, or whenever that was--long time ago now. Wow, and I mean it worked out way beyond my expectations, like as in wonderful!. -- Tet
Re: How to rebalance during market crashes?
You mean "capitulation"? That is really hard to know, but I think that RBDs often (but not always) signal an impending change in momentum.zzcooper123 wrote:livesoft, do you think downside RBD's are do to extreme loss aversion i.e. "throwing in the towel" ?
Re: How to rebalance during market crashes?
tetractyz - would you mind briefly explaining the 5/25 rule that Swedroe advocates and letting me know which of his books you read it in?tetractys wrote:I agree with those above that say to use wider bands. That's the keep it simple solution. The 5/25 rule laid out in Swedroe's book worked great for me in 2008-9, or whenever that was--long time ago now. Wow, and I mean it worked out way beyond my expectations, like as in wonderful!. -- Tet
Thanks,
Len
Re: How to rebalance during market crashes?
My apologies - I was able to easily find this info using a Google search. For those who are unfamiliar, Swedroe advocates rebalancing if an asset class has moved an absolute 5% or a relative 25%.Len33 wrote:tetractyz - would you mind briefly explaining the 5/25 rule that Swedroe advocates and letting me know which of his books you read it in?tetractys wrote:I agree with those above that say to use wider bands. That's the keep it simple solution. The 5/25 rule laid out in Swedroe's book worked great for me in 2008-9, or whenever that was--long time ago now. Wow, and I mean it worked out way beyond my expectations, like as in wonderful!. -- Tet
Thanks,
Len
For tetractyz, and anyone else who uses this method, how many times was this rule triggered for your various asset classes in 2008-2009? Given that your bond asset classes were likely going up while your stocks were going down, did you rebalance each stock asset class more than once? More than twice?
Thanks,
Len
Re: How to rebalance during market crashes?
OP, I think the most important thing for you to realize is that you are totally mistaken about this. You you please explain why you think there is a `devastating drawdown'.
And what is this `dreaded death spiral'? It sounds like nonsense to me.Len33 wrote:`but it seems like following the disciplined rebalancing rule mentioned above as a market falls 50% or more could result in a devastating drawdown, even if one has the full knowledge and confidence that the market will eventually reach a new high.'
I don't object to colorful words. I'm saying the maths is wrong.dbr wrote:I don't think it would be crazy to only balance out of stocks and not balance into stocks. This avoids the dreaded death spiral of buying into a declining market.
Re: How to rebalance during market crashes?
I'm sure having pre written rules for re balancing is safer than winging it. When the market drops below my rebalancing bands I know I have to start re balancing (can't wait for yearly rebalance date). I try to do so on a lagging basis. There is momentum on the upside and the downside. When it is below my band I wait for a down day to do some rebalancing. e.g. if equity target was 50% and I am at 44% (1% below band) and let say that is 20K - I will wait for a down day and maybe rebalance 10k into equities. If it keeps dropping I will continue to keep dropping in some rebalancing money. My short term goal is to get the equity allocation to the bottom of the band. Most of the time the market will "right" itself before I have to keep dropping in money.
I don't like to make large rebalancing moves or large lump sum investment moves. That is just me not based on any recognized theory.
I don't like to make large rebalancing moves or large lump sum investment moves. That is just me not based on any recognized theory.
Re: How to rebalance during market crashes?
The rule is discussed in various forms here. Basically, you should rebalance whenever your portfolio is significantly off from the target. If any individual asset class is off by more than 5% of your total portfolio, or more than 25% of its own allocation, then you buy or sell it. For example, if your target is 10% of your portfolio in REITs, you should rebalance if you get below 7.5% or above 12.5%. If your target is 40% in bonds, you should rebalance if you get below 35% or above 45%.Len33 wrote:tetractyz - would you mind briefly explaining the 5/25 rule that Swedroe advocates and letting me know which of his books you read it in?tetractys wrote:I agree with those above that say to use wider bands. That's the keep it simple solution. The 5/25 rule laid out in Swedroe's book worked great for me in 2008-9, or whenever that was--long time ago now. Wow, and I mean it worked out way beyond my expectations, like as in wonderful!. -- Tet
I use a minor variant; I only apply the 25% rule to a major asset class, not a subclass. My target allocation to bonds is 10%, and that is a major asset class, so my range is 7.5%-12.5%. My target allocation to emerging markets large-cap is also 10%, but the 25% rule applies to my whole international allocation, not to a very volatile but small class such as emerging markets, so my range is 5%-15%. (I have hit 14% in both classes; I sold bonds in my retirement account to rebalance near the 2008 bottom, but did not sell emerging markets stock for a capital gain when that reached 14%.)
Re: How to rebalance during market crashes?
Len, Can't remember what book exactly; here's a list: <http://www.amazon.com/Larry-E.-Swedroe/e/B000APJJ8O> Someone here should be able to point it out.Len33 wrote:tetractyz - would you mind briefly explaining the 5/25 rule that Swedroe advocates and letting me know which of his books you read it in?tetractys wrote:I agree with those above that say to use wider bands. That's the keep it simple solution. The 5/25 rule laid out in Swedroe's book worked great for me in 2008-9, or whenever that was--long time ago now. Wow, and I mean it worked out way beyond my expectations, like as in wonderful!. -- Tet
My personal interpretation of the 5/25 rule is, "rebalance sensibly when an asset is out by 25% or when a major allocation is out by 5%." Major allocation=fixed, international, domestic. Asset=all the subdivisions. Sensibly means taking everything, taxes, costs, etc. into consideration. This works well for my portfolio which is 50 domestic, 25 international, 25 fixed, and divided into 11 assets.
Usually I'll only rebalance between assets that are out the most in opposite directions; so giving a random example, while the triggered asset may be out by say -26%, one or two others might be out by +12%, so I would rebalance between those. If I can stuff enough money in to rebalance I'll do that. Also to cut way down on transactions, I take into consideration new money that I plan on investing before the year's end, even if I don't have it yet; in other words I rebalance to what the allocations will be as if the future money is already invested.
All through the big downturn I was shoveling paycheck tailings into my portfolio like a mad man, so that helped with rebalancing. And of course the money was going into whatever was dropping fastest. Other than that I think I only had to rebalance from triggers maybe 2 times during the downturn, and then I think once on the upturn. -- Tet
Re: How to rebalance during market crashes?
For me the answer is easy if we look at TSM not as some investment to go up or down, but partial ownership of many companies, with expectations of dividends and cash payments from corporate reorganizations.Len33 wrote:....but it seems like following the disciplined rebalancing rule mentioned above as a market falls 50% or more could result in a devastating drawdown, even if one has the full knowledge and confidence that the market will eventually reach a new high....
If a reasonable price was paid for TSM at the start, and the economy doesn't enter into an extended major depression, then I'm comfortable buying stocks, even with a market fall of 50% or more. Earnings and dividends will continue, or if there is a recession at the moment, they will come back.
Re: How to rebalance during market crashes?
Death spiral concept:
Assets A and B, 50/50.
Let A slowly go to zero. B can rise but more slowly than A declines.
Rebalance.
Total portfolio goes to zero.
That is the concept. I have not worked out an example, say using 1929 onward, to see how fast this drops your portfolio balance.
For bonus points add in that you are retired or lost your job in the depression that caused A to crash, and so you need to not only rebalance but take withdrawals.
If you are for example retired and 40/60 stocks/bonds, and the bonds will cover basic expenses, only rebalancing out of stocks will at least maintain some decent level of safe income. At the expense of greater returns if the market come roaring back to life.
Assets A and B, 50/50.
Let A slowly go to zero. B can rise but more slowly than A declines.
Rebalance.
Total portfolio goes to zero.
That is the concept. I have not worked out an example, say using 1929 onward, to see how fast this drops your portfolio balance.
For bonus points add in that you are retired or lost your job in the depression that caused A to crash, and so you need to not only rebalance but take withdrawals.
If you are for example retired and 40/60 stocks/bonds, and the bonds will cover basic expenses, only rebalancing out of stocks will at least maintain some decent level of safe income. At the expense of greater returns if the market come roaring back to life.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: How to rebalance during market crashes?
Well you just assumed away the problem.If a reasonable price was paid for TSM at the start, and the economy doesn't enter into an extended major depression,
If the market always bounces back fast enough, not only should one rebalance, one should market time and significantly over rebalance (if you start at 50/50 and stocks crash go to 60% or 70% stocks).
An extended major depression may not be entirely likely, but is far from impossible. People alive today experienced the Great Depression, for example.
In early and mid accumulation I rebalanced. But as I get nearer to retirement only rebalancing with new money until retirement and not selling bonds to rebalance has increasing appeal, though for now I have not changed my investment strategy and continue to rebalance with bands.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: How to rebalance during market crashes?
Larry Swedroe has mentioned before that he does something to this effect with his own portfolio. http://www.bogleheads.org/forum/viewtop ... 6#p1161716dbr wrote:I don't think it would be crazy to only balance out of stocks and not balance into stocks. This avoids the dreaded death spiral of buying into a declining market.
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Re: How to rebalance during market crashes?
Clearly no doubt about the `Death spiral concept' when A goes to zero. We're not talking about that.
We're talking about when A drops by 50%.
Then suppose rebalancing band is R% (rebalance when an asset hits 50% +/- R%).
What happens when R%=10%? 5%? 1%? 0.1%? 0.01%? Etc.
Takes the limit as R goes to zero.
Is it a `Death spiral concept', or do you simply buy stocks at a range of prices on the way down?
We're talking about when A drops by 50%.
Then suppose rebalancing band is R% (rebalance when an asset hits 50% +/- R%).
What happens when R%=10%? 5%? 1%? 0.1%? 0.01%? Etc.
Takes the limit as R goes to zero.
Is it a `Death spiral concept', or do you simply buy stocks at a range of prices on the way down?
Rodc wrote:Death spiral concept:
Assets A and B, 50/50.
Let A slowly go to zero. B can rise but more slowly than A declines.
Rebalance.
Total portfolio goes to zero.
That is the concept. I have not worked out an example, say using 1929 onward, to see how fast this drops your portfolio balance.
For bonus points add in that you are retired or lost your job in the depression that caused A to crash, and so you need to not only rebalance but take withdrawals.
If you are for example retired and 40/60 stocks/bonds, and the bonds will cover basic expenses, only rebalancing out of stocks will at least maintain some decent level of safe income. At the expense of greater returns if the market come roaring back to life.
Re: How to rebalance during market crashes?
That may be the problem because I think that is exactly what people were talking about.Clearly no doubt about the `Death spiral concept' when A goes to zero. We're not talking about that.
Not to zero per se, but drop 80%, 90% with no recovery or no recovery for many years.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: How to rebalance during market crashes?
I think that is what the OP is concerned about, or at least the idea of big losses from throwing good money after bad.Rodc wrote:That may be the problem because I think that is exactly what people were talking about.Clearly no doubt about the `Death spiral concept' when A goes to zero. We're not talking about that.
Not to zero per se, but drop 80%, 90% with no recovery or no recovery for many years.
During that last downturn, and even in the little pullback last year, it was obvious that many investors were fearful of a "death spiral." On the other hand there were those prepared and with an understanding of market history who took this as opportunity, or in the case of retirees, in stride.
Yap, threads of 200 day moving averages, gold, and all those quagmires of fear. -- Tet
Re: How to rebalance during market crashes?
I had a problem with this question because it didn't happen to me and I had to figure out why.Len33 wrote:Suppose I currently rebalance my accounts based on deviation from target, rather than using a time-based system. For example, suppose for simplicity sake I own only two funds - TSM Index and TBM Index - and my targeted allocations are 60% stocks/40% bonds. Let's say my personal rule would be to rebalance when TSM Index gets up to 63% or down to 57%.
My question, for anyone who uses similar rebalancing rules, is do you build anything into your rules to prevent you from continually rebalancing during a stock market crash?
First, a band is usually applied to the AA not the underlying index. So you index at 57% means you AA is 57/97=.588 and you don't pull the trigger.
Second, I think the 5/25% is more common than the 3%/(whatever) that you use so your bands are tighter.
Third, most of our Treasuries were in TIPS which also tanked with the stock market making the change in AA for a given drop in TSM less.
Fourth, I don't look every single day so a few days of +/- 3% in TSM kept me from being whipsawed. I think that looking at your AA on an annual basis is too long but by the same token every day is too short. To be honest with myself if the market is very volatile I probably expand my bands slightly or at least wait a few days to see if we are seeing a short term drop. As others have mentioned rebalancing should be a risk abatement process not a loss prevention process. The main idea of adjusting your AA for risk reduction purposes means that the market meltdown has a smaller effect. It's too late to buy home insurance when the fire trucks are coming down the street.
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.
Re: How to rebalance during market crashes?
I don't think it would go towards zero rebalancing, because as the market fell, dividend yield went up--which is my point really.Rodc wrote:Death spiral concept:
Assets A and B, 50/50.
Let A slowly go to zero. B can rise but more slowly than A declines.
Rebalance.
Total portfolio goes to zero.
That is the concept. I have not worked out an example, say using 1929 onward, to see how fast this drops your portfolio balance.
Now if you had to withdraw, and spend more than about 2/3 of peak dividends (or somewhere thereabouts), then at some point it would have started to look a bit scary. But should have recovered I believe, depending how close you were to 2/3.
Last edited by lazyday on Tue Apr 10, 2012 12:35 pm, edited 1 time in total.
Re: How to rebalance during market crashes?
I'm thinking significantly more extended and/or severe than the Great Depression in the U.S. In which case many or most plans might fail.Rodc wrote:Well you just assumed away the problem.If a reasonable price was paid for TSM at the start, and the economy doesn't enter into an extended major depression,
If the market always bounces back fast enough, not only should one rebalance, one should market time and significantly over rebalance (if you start at 50/50 and stocks crash go to 60% or 70% stocks).
An extended major depression may not be entirely likely, but is far from impossible. People alive today experienced the Great Depression, for example.
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Re: How to rebalance during market crashes?
It will be best if we avoid any repeat of the Great Depression...lazyday wrote: I'm thinking significantly more extended and/or severe than the Great Depression in the U.S. In which case many or most plans might fail.
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Re: How to rebalance during market crashes?
Can't argue with that, even if not for me.Rodc wrote:....But as I get nearer to retirement only rebalancing with new money until retirement and not selling bonds to rebalance has increasing appeal, though for now I have not changed my investment strategy and continue to rebalance with bands.
To tell the truth, I do have a tiny portion of portfolio (currently 2.5%, likely eventually grow) in cash&bonds which I don't rebalance, but would apply into the market when any asset class both seems very cheap, and falls from peak by more than 90%--or US market by more than 80% from peak. According to my IPS.
Re: How to rebalance during market crashes?
Agreed.The Wizard wrote:It will be best if we avoid any repeat of the Great Depression...lazyday wrote: I'm thinking significantly more extended and/or severe than the Great Depression in the U.S. In which case many or most plans might fail.
Re: How to rebalance during market crashes?
If the price goes towards zero the yield can go to infinity and you still lose big (big percentage of nearly zero can be a very small number). And if things like that happen, as in the late great recession many companies stopped paying dividends at all. Question for anyone, what did dividends do in the thirties? Not in percent but in dollars and cents. Did the dividends rise enough to make a dent out of the 80% drop? (I suspect not).I don't think it would go towards zero rebalancing, because as the market fell, dividend yield went up--which is my point really
As far as I know, treasuries held up fine. Many lost their jobs and needed investments to live on for an extended time (if they had any, most did not) and would have done much better with 50/50 no rebalancing than someone who keep rebalancing down. Now of course if you did not need your money for rent and food and had a decade or so to sit tight rebalancing was likely better.I'm thinking significantly more extended and/or severe than the Great Depression in the U.S. In which case many or most plans might fail.
I have no idea how likely a (near) death spiral is, so far I have never worried about it personally. But I don't think worrying about it is crazy. I am not advocating worry, people asked what it was and I told them.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: How to rebalance during market crashes?
How do you know when you are at the end? In the meantime, you didn't rebalance for a 55% drop and you'll miss an opportunity if the market recovers.livesoft wrote: When would you rather have rebalanced:
(a) At every 5% drop as things are going to a 60% drop, or
(b) Once at the end of a 60% drop?
Basically, setting the parameters for the trigger threshold or frequency determines the sensitivity. Too tight and you find yourself re-balancing all the way down, or too loose and you completely miss the chance. The tighter triggers are actually the more conservative... loose bands means you'll be outside your AA for longer periods of time.
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Re: How to rebalance during market crashes?
The problem is that a true "L-shaped" downturn like Japan is something of an outlier in the recent history of developed market stock indexes. Even the equity markets in Germany and Italy eventually recovered their growth trends after World War II. This doesn't mean an L-shaped downturn might not happen in the U.S. — but to even invest in equities to begin with, one has to have a fairly strong belief in the resiliency of U.S. corporations and global capitalism. So far, so good!lazyday wrote:I'm thinking significantly more extended and/or severe than the Great Depression in the U.S. In which case many or most plans might fail.
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Re: How to rebalance during market crashes?
Have you even read anything about the RBD strategy? Your text suggests you may be clueless about it. That's perfectly OK.Boglenaut wrote:How do you know when you are at the end? In the meantime, you didn't rebalance for a 55% drop and you'll miss an opportunity if the market recovers.livesoft wrote: When would you rather have rebalanced:
(a) At every 5% drop as things are going to a 60% drop, or
(b) Once at the end of a 60% drop?
Basically, setting the parameters for the trigger threshold or frequency determines the sensitivity. Too tight and you find yourself re-balancing all the way down, or too loose and you completely miss the chance. The tighter triggers are actually the more conservative... loose bands means you'll be outside your AA for longer periods of time.
Re: How to rebalance during market crashes?
Rodc wrote:Death spiral concept:
Assets A and B, 50/50.
Let A slowly go to zero. B can rise but more slowly than A declines.
Rebalance.
Total portfolio goes to zero.
That is the concept. I have not worked out an example, say using 1929 onward, to see how fast this drops your portfolio balance.
For bonus points add in that you are retired or lost your job in the depression that caused A to crash, and so you need to not only rebalance but take withdrawals.
If you are for example retired and 40/60 stocks/bonds, and the bonds will cover basic expenses, only rebalancing out of stocks will at least maintain some decent level of safe income. At the expense of greater returns if the market come roaring back to life.
555 wrote:Clearly no doubt about the `Death spiral concept' when A goes to zero. We're not talking about that.
We're talking about when A drops by 50%.
Then suppose rebalancing band is R% (rebalance when an asset hits 50% +/- R%).
What happens when R%=10%? 5%? 1%? 0.1%? 0.01%? Etc.
Takes the limit as R goes to zero.
Is it a `Death spiral concept', or do you simply buy stocks at a range of prices on the way down?
Rodc you should reread the OP. It's quite clear that the OP is not taking about A->0.Rodc wrote:That may be the problem because I think that is exactly what people were talking about.
Not to zero per se, but drop 80%, 90% with no recovery or no recovery for many years.
He's talking about A is halved and R is small. OP mistakenly believes this leads to a `devastating drawdown'.
This is a mistake. Without rebalancing the balance would drop to 75% of it's earlier value (say B constant), while no matter when and how often you rebalance, the balance would drop to at least 70.7106781% of it's earlier value.