Rebalancing for a loss??

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cholondo
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Rebalancing for a loss??

Post by cholondo » Thu Dec 07, 2017 8:53 am

I might be misunderstanding this but....

I have the majority of my retirement account in the TSP. If I rebalance when stocks are down, doesn't that "lock in" losses? Example: If all of my TSP funds are down 10% and I rebalance my entire account, aren't those 10% losses locked in because TSP will sale my shares in order to rebalance? I know that I will be buying some shares at a "discount", but why would I want to accept the 10% loss instead of just waiting? Am I completely misunderstanding how the TSP does a rebalance? I've tried to search around for this answer but had no luck... Thanks.

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BogleMelon
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Re: Rebalancing for a loss??

Post by BogleMelon » Thu Dec 07, 2017 9:32 am

Over 780 posts here and I don't know what TSP stands for! Excuse my ignorance! :oops:
But to rebalance it means you sell that asset class that went up and became more than your original desired asset allocation percentage, to buy that other asset class that went down. It is locking your gains actually. Selling high, buying low.
I don't know where you got that idea locking the losses from!
https://www.bogleheads.org/wiki/Rebalancing
Last edited by BogleMelon on Thu Dec 07, 2017 9:44 am, edited 1 time in total.
Excuse my English, it is my second language! | | "One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

rkhusky
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Re: Rebalancing for a loss??

Post by rkhusky » Thu Dec 07, 2017 9:36 am

cholondo wrote:
Thu Dec 07, 2017 8:53 am
I might be misunderstanding this but....

I have the majority of my retirement account in the TSP. If I rebalance when stocks are down, doesn't that "lock in" losses? Example: If all of my TSP funds are down 10% and I rebalance my entire account, aren't those 10% losses locked in because TSP will sale my shares in order to rebalance? I know that I will be buying some shares at a "discount", but why would I want to accept the 10% loss instead of just waiting? Am I completely misunderstanding how the TSP does a rebalance? I've tried to search around for this answer but had no luck... Thanks.
No. If stocks are down, in order to rebalance you will need to sell bonds and buy stocks. So, you are not locking in a loss.

If both stocks and bonds are down, but stocks are down more, then yes you are locking in bond losses, but also locking in a lower basis for your stocks that more than offsets the bond losses.

If stocks and bonds are down the same amount, there is no need to rebalance.

The only time you really need to think about locking in losses, is if you have to withdraw stocks when stocks are down, and spend the proceeds.

Some people turn lemons into lemonade when they have losses in their taxable account by tax loss harvesting the losses (sell the losers and buy something similar, but not substantially identical).

TSP = Thrift Savings Plan (the Fed Gov't 401k equivalent)

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BogleMelon
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Re: Rebalancing for a loss??

Post by BogleMelon » Thu Dec 07, 2017 9:42 am

cholondo wrote:
Thu Dec 07, 2017 8:53 am
Example: If all of my TSP funds are down 10% and I rebalance my entire account, aren't those 10% losses locked in because TSP will sale my shares in order to rebalance?
Now that I learned what TSP is. It is just an account and the funds in that account could be anything. It could be bonds, it could be stocks "of any kind" or you could have a mixed portfolio of stocks and bonds.
So let me ask you, what do you mean by your TSP funds are down 10%? Is your whole account balance is down? Or what funds are down and what funds are up? If your whole balance is down (which is weird because the market has been in a rally for a while), then how would you "rebalance" exactly? I hope you didn't mean to convert to a cash fund!!
Excuse my English, it is my second language! | | "One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

dbr
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Re: Rebalancing for a loss??

Post by dbr » Thu Dec 07, 2017 9:46 am

cholondo wrote:
Thu Dec 07, 2017 8:53 am
I might be misunderstanding this but....

I have the majority of my retirement account in the TSP. If I rebalance when stocks are down, doesn't that "lock in" losses? Example: If all of my TSP funds are down 10% and I rebalance my entire account, aren't those 10% losses locked in because TSP will sale my shares in order to rebalance? I know that I will be buying some shares at a "discount", but why would I want to accept the 10% loss instead of just waiting? Am I completely misunderstanding how the TSP does a rebalance? I've tried to search around for this answer but had no luck... Thanks.
Not to pile on to the previous post, but you are misunderstanding reblancing. When stocks are down you buy stocks not sell them.

I am repeating this comment because one hears this more often than just once and I don't know where the idea comes from that when stocks are down someone has to sell them.

The way this can happen is that one holds 100% stocks and takes a withdrawal. Of course, there is no rebalancing of a 100% stock portfolio. The way things work out the increased expected return from lots of stocks pretty nearly offsets the possible damage of having to sell when stocks are down if the withdrawal rate is reasonable.

cholondo
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Re: Rebalancing for a loss??

Post by cholondo » Thu Dec 07, 2017 10:49 am

I think my confusion is in not understanding how the TSP (Government Thrift Savings Plan) actually carries out a rebalance... some have said that they sell ALL of your shares of everything and then rebalances.... you can't just use your money in bonds to buy stocks... if that's the case, it seems that you just sold everything when it was down in order to rebalance... The 10% I mentioned was just an example.

livesoft
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Re: Rebalancing for a loss??

Post by livesoft » Thu Dec 07, 2017 11:00 am

Since selling in a TSP has no tax consequences, I don't think it matters if they sell everything and buy it back. Here's an example:

Sell 200.123 shares of C and buy back 213.094 shares of C at the same price.
Sell 144.842 shares of G and buy back 134.112 shares of G at the same price.

What is the NET effect?


I doubt that's what they do though.

Now here's the cool thing: Suppose BOTH stocks and bonds have dropped in value and you have losses in both stocks and bonds and then you do rebalancing. Isn't that neat? If you can't stomach that, then you have to read some books on Behavioral Finance to try to cure your stomach ache.
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BolderBoy
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Re: Rebalancing for a loss??

Post by BolderBoy » Thu Dec 07, 2017 12:03 pm

cholondo wrote:
Thu Dec 07, 2017 8:53 am
I might be misunderstanding this but....

I have the majority of my retirement account in the TSP. If I rebalance when stocks are down, doesn't that "lock in" losses? Example: If all of my TSP funds are down 10% and I rebalance my entire account, aren't those 10% losses locked in because TSP will sale my shares in order to rebalance? I know that I will be buying some shares at a "discount", but why would I want to accept the 10% loss instead of just waiting? Am I completely misunderstanding how the TSP does a rebalance? I've tried to search around for this answer but had no luck... Thanks.
Does what you wrote make sense? The idea behind rebalancing is that you sell your winners to buy more of your losers. In other words, if you want your AA to be 50/50 and it has drifted to 40/60, then you'd sell bonds to buy stocks (bonds = winners, stocks = losers). By what you wrote above, you'd be selling your losers ("locking in the losses") to buy more winners. That is the opposite of what you want to do.
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cholondo
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Re: Rebalancing for a loss??

Post by cholondo » Thu Dec 07, 2017 1:09 pm

livesoft wrote:
Thu Dec 07, 2017 11:00 am
Since selling in a TSP has no tax consequences, I don't think it matters if they sell everything and buy it back. Here's an example:

Sell 200.123 shares of C and buy back 213.094 shares of C at the same price.
Sell 144.842 shares of G and buy back 134.112 shares of G at the same price.

What is the NET effect?


I doubt that's what they do though.

Now here's the cool thing: Suppose BOTH stocks and bonds have dropped in value and you have losses in both stocks and bonds and then you do rebalancing. Isn't that neat? If you can't stomach that, then you have to read some books on Behavioral Finance to try to cure your stomach ache.
Best answer for me to understand it... Thank you.

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oldcomputerguy
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Re: Rebalancing for a loss??

Post by oldcomputerguy » Thu Dec 07, 2017 2:00 pm

Your portfolio began at a certain proportion of stocks to bonds (say, 60/40). Over time, as the market shifts, that proportion may drift away from the target, for example it might drift to 50/50. Rebalancing is the act of bringing your portfolio back to the target allocation. So in this example, you would sell enough bonds (the gainer) and buy enough stocks (the loser) to bring your portfolio back to 60/40. So you’re not locking in losses in this case.

In a bad downturn when you have losses in both stocks and bonds, likely the bonds will lose less than the stocks, in that case you sell bonds and buy stocks to get back to your allocation. Yes, you may sell bonds at a loss in that case, but you buy stocks “on sale,” which makes up for it in the long run.
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grabiner
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Re: Rebalancing for a loss??

Post by grabiner » Fri Dec 08, 2017 11:15 pm

cholondo wrote:
Thu Dec 07, 2017 8:53 am
I have the majority of my retirement account in the TSP. If I rebalance when stocks are down, doesn't that "lock in" losses? Example: If all of my TSP funds are down 10% and I rebalance my entire account, aren't those 10% losses locked in because TSP will sale my shares in order to rebalance?
Rebalancing is the process of moving your allocation back to the target if it has drifted away.

If all your shares are down 10%, you don't need to rebalance, because your allocation hasn't changed.

If your stock is down 10% and your bonds haven't changed, you will rebalance by buying more stock, not selling stock. (If you hold an L fund, this happens automatically; the L fund will buy more stock after the stock market declines, so that it keeps the same stock allocation.)
David Grabiner

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