Over rebalancing

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
User avatar
Topic Author
galeno
Posts: 1640
Joined: Fri Dec 21, 2007 12:06 pm

Over rebalancing

Post by galeno » Thu Mar 12, 2020 12:25 pm

We're 62, retired, and live on a 4% AWR. Port is 40/55/5 since Jan 2017. We would like to be at 50/45/5. But not "over-bet. This market decline is our opportunity.

Our equities are down 16.2% YTD. FI is up 2.4%. Our port is down 13.7% from its peak back in mid January.

Normally we rebalance annually in early January. Due to the market decline I want to over rebalance quarterly.

For every 10% decline I'm thinking of over-rebalancing by 1%. E.g. if we were to rebalance today we'd to to 42/53/5.

Good idea? Or bad?

DesertInvestor
Posts: 140
Joined: Tue Dec 20, 2016 1:04 pm

Re: Over rebalancing

Post by DesertInvestor » Thu Mar 19, 2020 9:40 am

I'm thinking of doing the same. The guy who wrote "money for the rest of us" apparently has a section about it, I just bought it on Audible. I have recently become an advocate of reducing your stock allocation to where you feel comfortable at high valuations and increasing in times like these as you described. Call it market timing, I don't care. Recent have changed the game. I'm going from 60/40 to 80/20, but I have several decades before retirement. How one does this is the challenging part. Lump sum investing concept is no longer something I believe in after long bull markets and as the knife is falling, although I could probably do that right now and be fine long term. I'm thinking of just tripling monthly contributions unless market goes down 50% and then maybe I would lump sum 1/3-1/2 cash.

rbaldini
Posts: 1247
Joined: Mon Mar 23, 2015 3:20 pm

Re: Over rebalancing

Post by rbaldini » Thu Mar 19, 2020 9:48 am

There seems to be almost no evidence for the idea that long term returns following a sudden market decline are greater in the long run. If this is the reason you want to own more stocks, I'd caution against it.

ks289
Posts: 655
Joined: Sun Mar 11, 2012 12:42 pm

Re: Over rebalancing

Post by ks289 » Thu Mar 19, 2020 10:02 am

Scary/risky idea to overbalance but some experts like William Bernstein have discussed this. Intuitively it makes perfect sense that your (LONG TERM) future returns are higher with any strategy that increases your stock %. I'm not sure I have the stomach for the added risk during times like this.

viewtopic.php?t=199349

MotoTrojan
Posts: 9264
Joined: Wed Feb 01, 2017 8:39 pm

Re: Over rebalancing

Post by MotoTrojan » Thu Mar 19, 2020 10:13 am

ks289 wrote:
Thu Mar 19, 2020 10:02 am
Scary/risky idea to overbalance but some experts like William Bernstein have discussed this. Intuitively it makes perfect sense that your (LONG TERM) future returns are higher with any strategy that increases your stock %. I'm not sure I have the stomach for the added risk during times like this.

viewtopic.php?t=199349
I think this is a good way to think about it. Instead of saying you are getting a better deal, you are just increasing your long-term average equity exposure (which should increase expected return, market-timing aside) but also using the current decline as an emotional crutch to make you feel more comfortable bumping up equity.

Same reason a 5% rebalancing band outperforms a daily-rebalancing balanced fund if both have the same 60/40 allocation. Over the longrun, the person with 5% bands will drift towards a long-term average AA of 62.5/37.5, which has a higher expected return.

xxd091
Posts: 142
Joined: Sun Aug 21, 2011 4:41 am
Location: UK

Re: Over rebalancing

Post by xxd091 » Fri Mar 20, 2020 6:04 am

The great a John Bogle was very equivocal on rebalancing
Thought it did not make much difference in the long term
If one could successfully time the market this would not be true but who can?
His statement has been a great comfort to me as I sat out 2000 and 2008
I will sit this one out too
Rebalancing of course occurs naturally as if in Accumulation phase you add monies and same in Deaccumulation phase as money is withdrawn to live on-always keeping your Asset Allocation right
5%rule could be used but aged 73 and 17 years retired I have never had to use it so far
xxd091

User avatar
Topic Author
galeno
Posts: 1640
Joined: Fri Dec 21, 2007 12:06 pm

Re: Over rebalancing

Post by galeno » Fri Mar 20, 2020 3:10 pm

There's very good evidence that over rebalancing is the right thing to do when equities are down 40%.

Google it.

If stocks are down > 40% on Jan 7th I'm over rebalancing to 50% stocks.

If they're down again > 40% on Jan 6 2022 I'll over rebalance to 60%.

Rinse and repeat until I hit 80% stocks. That's my max.

I did that in the 2000-2002 and the 2008 bears. We made a lot of money both times.

herpfinance
Posts: 231
Joined: Tue Nov 18, 2014 4:52 pm
Location: Denmark

Re: Over rebalancing

Post by herpfinance » Sat Mar 21, 2020 5:51 pm

xxd091 wrote:
Fri Mar 20, 2020 6:04 am
The great a John Bogle was very equivocal on rebalancing
Thought it did not make much difference in the long term
If one could successfully time the market this would not be true but who can?
His statement has been a great comfort to me as I sat out 2000 and 2008
I will sit this one out too
Rebalancing of course occurs naturally as if in Accumulation phase you add monies and same in Deaccumulation phase as money is withdrawn to live on-always keeping your Asset Allocation right
5%rule could be used but aged 73 and 17 years retired I have never had to use it so far
xxd091
To be fair, Bogle actually did perform some kind of market timing in 2000, but it was based on astronomical valuations and his personal health circumstances not being the best.

https://youtu.be/k6ra5POdsYg?t=113
"The intelligent investor is a realist who sells to optimists and buys from pessimists" - Benjamin Graham

thibaulthib
Posts: 103
Joined: Mon Nov 12, 2018 8:46 am

Re: Over rebalancing

Post by thibaulthib » Thu Mar 26, 2020 8:18 am

Hello Galeno,

Great subject! I have a similar thought/request:

I'm 30 yo, my current AA is 80/20 and I found out after this 35% market decline, that my risk tolerance is quite high.

I would like to over rebalance from 80/20 to something more aggressive towards stocks, but not "over-bet" either. I also believe this market decline is a great opportunity to do so.

For every 10% decline I'm thinking of over-rebalancing by 2%, which today would lead me to 86/14.

What do you think about such "strategy" ? Does it still make sense to hold bonds if its allocation is less than 20% ?

User avatar
Topic Author
galeno
Posts: 1640
Joined: Fri Dec 21, 2007 12:06 pm

Re: Over rebalancing

Post by galeno » Thu Mar 26, 2020 11:04 am

Be aware that I'm older and more conservative than you.

A port should be between 20% and 80% stocks.

We were 80% stocks for the 2000-2002 bear. We rebalanced back to 80% for 3 years in a row. It was tough.

I assume every bear will last 4 years. You should too. Always keep some powder dry.

With 80% stocks you dont need a bond fund.

User avatar
Topic Author
galeno
Posts: 1640
Joined: Fri Dec 21, 2007 12:06 pm

Re: Over rebalancing

Post by galeno » Thu Mar 26, 2020 3:20 pm

Started the year with 35% VWRD + 5% WSML = 40% stocks. Now at 31.8% VWRD + 4.1% WSML = 35.9% stocks. Next January we'd like to be at 50% stocks.

Definitely going to go 10% WSML. Small caps have been pummeled. Overbalancing here is justified.

Thinking of adding 10% VDEM (EM stocks) as I'd like to have more EM exposure and stick with 30% VWRD.

What do you guys think?




USA stocks (SCHB) down 24.2% YTD. PE = 17.7

Non-USA Developed stocks (SCHF) down 25.3% YTD. PE = 13.8

EM stocks (SCHE) down 24.8% YTD. PE = 12.2

USA Small stocks (SCHA) down 33.7% YTD. PE = 15.3

Non-USA Developed Small stocks (SCHC) down 32.8% YTD. PE = 13.6

andrew99999
Posts: 624
Joined: Fri Jul 13, 2018 8:14 pm

Re: Over rebalancing

Post by andrew99999 » Thu Mar 26, 2020 11:26 pm

galeno wrote:
Thu Mar 26, 2020 11:04 am
With 80% stocks you dont need a bond fund.
What did you mean by this? What do you use for your other 20%?

thibaulthib
Posts: 103
Joined: Mon Nov 12, 2018 8:46 am

Re: Over rebalancing

Post by thibaulthib » Fri Mar 27, 2020 12:12 am

andrew99999 wrote:
Thu Mar 26, 2020 11:26 pm
galeno wrote:
Thu Mar 26, 2020 11:04 am
With 80% stocks you dont need a bond fund.
What did you mean by this? What do you use for your other 20%?
I think Galeno meant that owning bonds when your stock allocation is over 80% doesnt make sense. But maybe my understanding is wrong.

alex123711
Posts: 155
Joined: Sun May 20, 2018 5:01 am

Re: Over rebalancing

Post by alex123711 » Fri Mar 27, 2020 12:25 am

thibaulthib wrote:
Fri Mar 27, 2020 12:12 am
andrew99999 wrote:
Thu Mar 26, 2020 11:26 pm
galeno wrote:
Thu Mar 26, 2020 11:04 am
With 80% stocks you dont need a bond fund.
What did you mean by this? What do you use for your other 20%?
I think Galeno meant that owning bonds when your stock allocation is over 80% doesnt make sense. But maybe my understanding is wrong.
So cash instead? Wouldn't bonds still be better than cash?

thibaulthib
Posts: 103
Joined: Mon Nov 12, 2018 8:46 am

Re: Over rebalancing

Post by thibaulthib » Fri Mar 27, 2020 4:19 am

galeno wrote:
Fri Mar 20, 2020 3:10 pm
There's very good evidence that over rebalancing is the right thing to do when equities are down 40%.

Google it.

If stocks are down > 40% on Jan 7th I'm over rebalancing to 50% stocks.

If they're down again > 40% on Jan 6 2022 I'll over rebalance to 60%.

Rinse and repeat until I hit 80% stocks. That's my max.

I did that in the 2000-2002 and the 2008 bears. We made a lot of money both times.
Galeno, doing this also mean that the older you get, the more volatile your portfolio becomes again.

I got few questions:
1) Are you ok with this?
2) Does it mean that even if the market is down 50%, with 80/20 AA, meaning your AA becomes 40/60, you still have made more money than if you were not "rinsing and repeating" by over rebalancing 10% to stock when then market is down 50%?

User avatar
Topic Author
galeno
Posts: 1640
Joined: Fri Dec 21, 2007 12:06 pm

Re: Over rebalancing

Post by galeno » Fri Mar 27, 2020 5:06 am

With a 80/20 port you don't NEED bonds. But you should use them anyway.

Our 40/60 port, which is now 36/64, is very conservative for us. The Vanguard Target Retirement Fund 2020 has 50% equity. The 2025 fund has 60%.

I'm a big fan of the 60/40 port. I let my wife and older daughter talk me into going to a conservative 40/60 port in 2017.

I see this bear market as an opportunity to increase our equity allocation on the cheap.

thibaulthib
Posts: 103
Joined: Mon Nov 12, 2018 8:46 am

Re: Over rebalancing

Post by thibaulthib » Fri Mar 27, 2020 5:53 am

galeno wrote:
Fri Mar 27, 2020 5:06 am
With a 80/20 port you don't NEED bonds. But you should use them anyway.

Our 40/60 port, which is now 36/64, is very conservative for us. The Vanguard Target Retirement Fund 2020 has 50% equity. The 2025 fund has 60%.

I'm a big fan of the 60/40 port. I let my wife and older daughter talk me into going to a conservative 40/60 port in 2017.

I see this bear market as an opportunity to increase our equity allocation on the cheap.
Sorry I'm lost, I thought you were 60/40 now ? Or 80/20 ?

User avatar
Topic Author
galeno
Posts: 1640
Joined: Fri Dec 21, 2007 12:06 pm

Re: Over rebalancing

Post by galeno » Fri Mar 27, 2020 9:33 am

Our AAs over 36.25 years.

1984-2005: 80/20. 22 yr

2006-2008: 60/40. 03 yr

2009-2010: 70/30. 02 yr

2011-2016: 60/40. 06 yr

2017-2019: 40/60. 03 yr

User avatar
Topic Author
galeno
Posts: 1640
Joined: Fri Dec 21, 2007 12:06 pm

Re: Over rebalancing

Post by galeno » Sat Mar 28, 2020 8:06 am

Here's a guy who likes over rebalancing too.

https://humbledollar.com/2020/03/money-and-me/

Joe_R95
Posts: 39
Joined: Tue Dec 15, 2015 10:45 pm

Re: Over rebalancing

Post by Joe_R95 » Sat Mar 28, 2020 9:14 am

alex123711 wrote:
Fri Mar 27, 2020 12:25 am
thibaulthib wrote:
Fri Mar 27, 2020 12:12 am
andrew99999 wrote:
Thu Mar 26, 2020 11:26 pm
galeno wrote:
Thu Mar 26, 2020 11:04 am
With 80% stocks you dont need a bond fund.
What did you mean by this? What do you use for your other 20%?
I think Galeno meant that owning bonds when your stock allocation is over 80% doesnt make sense. But maybe my understanding is wrong.
So cash instead? Wouldn't bonds still be better than cash?
If your goal is to have "dry powder" during a crash high yield savings/cd's may be better because you don't run into volatility risks in the bond market when you need to rebalance. Pick your favorite bond fund and look at the chart over the past month when you may have needed to rebalance versus holding something more stable. Long term buy and hold bond fund yields will likely be better. A lot of people here seem to split that portion into bond funds and cash like vehicles. Something I've been considering as my portfolio has grown and bond funds have been at all time highs.

livesoft
Posts: 70275
Joined: Thu Mar 01, 2007 8:00 pm

Re: Over rebalancing

Post by livesoft » Sat Mar 28, 2020 9:19 am

galeno wrote:
Thu Mar 12, 2020 12:25 pm
Good idea? Or bad?
Jonathan Clements does something like this. And so does James B. Stewart. Here's the thread on them with links to their recently published articles on what they are doing: viewtopic.php?f=10&t=309737
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
Topic Author
galeno
Posts: 1640
Joined: Fri Dec 21, 2007 12:06 pm

Re: Over rebalancing

Post by galeno » Sat Mar 28, 2020 9:55 am

We start the year with 5% of port in CASH.

Our 60% FI allocation is up 2.8% YTD.

Our 40% equity allocation is down 23.4%.

Port is down 9.6% YTD.

If we'd used only VDTY (Int trm US Treas) plus CASH instead of combining it with VDCP (US corps) and IDTP (TIPS) plus CASH our FI would have increased by 7.4%.

Sometimes I think the only bond ETF worth holding is VDTY. But I like the extra yield and unexpected inflation protection of the other two bond ETFs we hold.

Ben1337
Posts: 4
Joined: Sat Mar 28, 2020 10:01 am

Re: Over rebalancing

Post by Ben1337 » Sat Mar 28, 2020 10:08 am

galeno wrote:
Sat Mar 28, 2020 9:55 am
We start the year with 5% of port in CASH.

Our 60% FI allocation is up 2.8% YTD.

Our 40% equity allocation is down 23.4%.

Port is down 9.6% YTD.

If we'd used only VDTY (Int trm US Treas) plus CASH instead of combining it with VDCP (US corps) and IDTP (TIPS) plus CASH our FI would have increased by 7.4%.

Sometimes I think the only bond ETF worth holding is VDTY. But I like the extra yield and unexpected inflation protection of the other two bond ETFs we hold.
Look, you are always smarter in hindsight. I typically preferred IGLO/IGLA or US treasuries over AGG due to the behavior of Corp bonds in a downturn.
However, we are in a bit of a dilemma now as rates on the 10y are close to zero, they still provide stability to the portfolio but no yield.
I changed my 60/40 to a 90/60 by using partially futures. If we drop a lot further I would reduce bonds further and use REITS, solid div payers to spike bond yields and get upside.

User avatar
Topic Author
galeno
Posts: 1640
Joined: Fri Dec 21, 2007 12:06 pm

Re: Over rebalancing

Post by galeno » Sat Mar 28, 2020 11:11 am

Whoa Ben. That's pretty aggressive no?

I hope you don't get whipsawed.

We use 3 bond ETFs plus CASH for our FI allocation and 2 soon to be 3 for our equities. So a 6 ETF port.

Sometimes I think that the "KISS" 2 ETF port of 60% VWRD + 35% VDTY + 5% CASH is the optimum port for us.
Last edited by galeno on Sat Mar 28, 2020 12:41 pm, edited 1 time in total.

Ben1337
Posts: 4
Joined: Sat Mar 28, 2020 10:01 am

Re: Over rebalancing

Post by Ben1337 » Sat Mar 28, 2020 11:41 am

galeno wrote:
Sat Mar 28, 2020 11:11 am
Whoa Ben. That's pretty aggressive no?

I hope you don't get whipsawed.

We use 3 bond ETFs plus CASH for our FI allocation and 2 soon to be 3 for our equities. So a 6 ETF port.

Sometimes I think that the "KISS" 2 ETF port of 60% VWRD + 35% VDTY + 5% CASH is the optimum port for US.
Agree, I’m using 60 VWRD plus treasury futures like https://www.wisdomtree.com/etfs/asset-allocation/ntsx
Just VWRD instead of S&P components. It saved me a lot on the way down. Should be ok unless rates go up..

Thanks for your points on thread, very helpful...

User avatar
Topic Author
galeno
Posts: 1640
Joined: Fri Dec 21, 2007 12:06 pm

Re: Over rebalancing

Post by galeno » Tue Mar 31, 2020 9:12 am

Well I did it. Stocks went from 40% of port to 35%. I over rebalanced equities from 35% to 45%.

Post Reply