Trying to "time the market" at annual rebalance ONLY?

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Alex GR
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Trying to "time the market" at annual rebalance ONLY?

Post by Alex GR » Mon Jul 08, 2019 7:16 am

Hi everyone,
So at this point I am fully convinced that the Boglehead philosophy is the way to go and I have a portfolio that mostly follows the BG philosophy. I say "mostly" 'cause I have some mutual funds in there from before I discovered BG but I've turned off reinvestment for those and eventually they'll become trivial.
I do "age minus 7 in bonds" (I'm 42 now) and I won't touch the portfolio until I am in my sixties. I am also fully on board with "don't time the market": I have mostly index funds that are all set to compound and I don't do any active trading at all.
However, my question is about annual rebalancing:
Do you find yourself *trading* or *trying to time the market* a bit when it's time to rebalance? For example, according to my plan it's time to rebalance in August. In May (a month ago) I put in two orders: SELL VBR @$130 and SELL VBR @$140. As you can probably guess, SELL VBR @$130 has recently executed. Yay! But unless VBR hits 140 (unlikely) before August, according to my plan I'll need to cancel that 2nd order and sell VBR at whatever it is at that time. Is this a bad approach? Wrong way of looking at it? Again, I am fully sold on "don't time the market" concept, this is only about strategy for annual rebalancing.

P.S. Yes, I know it's best to rebalance with "new money" and avoid selling anything altogether. Unfortunately, I am not contributing at this time. But the good news is that I don't draw anything either :happy :thumbsup

P.P.S. If anyone is wondering why I am talking about VBR: I intentionally chose to sell some VBR to reduce small cap exposure ('cause it gets hit the most in a crash). I hold VBR, VOE and VOO separately rather than VTI.
Thanks!

RadAudit
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Re: Trying to "time the market" at annual rebalance ONLY?

Post by RadAudit » Mon Jul 08, 2019 7:25 am

Alex GR wrote:
Mon Jul 08, 2019 7:16 am
my question is about annual rebalancing:
Do you find yourself *trading* or *trying to time the market* a bit when it's time to rebalance?
No.

I use to rebalance annually at the beginning of the year*. (Probably a bad time :oops: - but …) Others use a specific date - birthdays, etc. Now that I'm retired, I rebalance when the portfolio goes outside its rebalance bands of + / - 5% on the 50 / 50 asset allocation for stocks / bonds. I think it's approaching two years since I last rebalanced. (And, yes. I'm taking RMDs.)

*I also use to invest periodically throughout the year IAW my then asset allocations via payroll deductions.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

pyld76
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Re: Trying to "time the market" at annual rebalance ONLY?

Post by pyld76 » Mon Jul 08, 2019 7:29 am

Alex GR wrote:
Mon Jul 08, 2019 7:16 am
Hi everyone,
So at this point I am fully convinced that the Boglehead philosophy is the way to go and I have a portfolio that mostly follows the BG philosophy. I say "mostly" 'cause I have some mutual funds in there from before I discovered BG but I've turned off reinvestment for those and eventually they'll become trivial.
I do "age minus 7 in bonds" (I'm 42 now) and I won't touch the portfolio until I am in my sixties. I am also fully on board with "don't time the market": I have mostly index funds that are all set to compound and I don't do any active trading at all.
However, my question is about annual rebalancing:
Do you find yourself *trading* or *trying to time the market* a bit when it's time to rebalance? For example, according to my plan it's time to rebalance in August. In May (a month ago) I put in two orders: SELL VBR @$130 and SELL VBR @$140. As you can probably guess, SELL VBR @$130 has recently executed. Yay! But unless VBR hits 140 (unlikely) before August, according to my plan I'll need to cancel that 2nd order and sell VBR at whatever it is at that time. Is this a bad approach? Wrong way of looking at it? Again, I am fully sold on "don't time the market" concept, this is only about strategy for annual rebalancing.

P.S. Yes, I know it's best to rebalance with "new money" and avoid selling anything altogether. Unfortunately, I am not contributing at this time. But the good news is that I don't draw anything either :happy :thumbsup

P.P.S. If anyone is wondering why I am talking about VBR: I intentionally chose to sell some VBR to reduce small cap exposure ('cause it gets hit the most in a crash). I hold VBR, VOE and VOO separately rather than VTI.
Thanks!
So, I don't bother trying to time the market on rebalancing. If I knew how to do that, I'd time my all buys on only RBD in the first instance. However, you made the decision to "sell some VBR" because it "gets hit the most in a crash." Without trying to be ironic: is that also a timing decision, and, more saliently, when is the crash?

I'll get blasted for this, but if this kind of "around the edges" stuff appeals to you, drop VG and go buy DFA products. They intentionally tilt. They "opportunistically time" buying and selling. They are likely better at it than you or I are, and probably better enough so to overcome the "advisor drag" you'd have to pay to access the products.

An an aside: the boglehead thing to do is to have both your rebalancing bands and the process defined in your IPS. I suspect you'll get all manner of answers to this, but I choose to believe that my human capital is best spent doing this once a year at a fixed time and doing productive things that I do for a living which earn a greater rate of return than trying to time the market (even for a rebalance). (this blanket philosophy is called out in my IPS, inclusive of and thus lacking the specific statement about rebalancing). YMMV, and such.

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Sandtrap
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Re: Trying to "time the market" at annual rebalance ONLY?

Post by Sandtrap » Mon Jul 08, 2019 8:44 am

If it feels good timing your fund movements when you have to rebalance, then why not?
Whether you do this or just do it routinely will not effect much in the long term.

You might find that when doing this, about half the time it will seem like you've made a move resultant in a gain, and about half the time. . . not so.

Try it a couple times and see.

j
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chevca
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Re: Trying to "time the market" at annual rebalance ONLY?

Post by chevca » Mon Jul 08, 2019 8:56 am

If you're not contributing or withdrawing from the portfolio, shouldn't rebalancing in August mean just let it sit there until August and move things around if the AA is out of whack? If not out of whack, just let it keep sitting there?

MotoTrojan
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Re: Trying to "time the market" at annual rebalance ONLY?

Post by MotoTrojan » Mon Jul 08, 2019 9:01 am

You may want to be careful making sweeping generalizations like VBR gets hit the most in a crash. Small value did much better than large cap (Total US, S&P500) during the early 2000’s tech and 9/11 declines.

I believe everyone should rebalance based on market/portfolio conditions by using a rules based system (5/25 absolute/relative for example). The advantage of annual rebalancing though is the ability to only look at your portfolio once a year but you’re putting in limit orders which means you’re more involved.

Topic Author
Alex GR
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Re: Trying to "time the market" at annual rebalance ONLY?

Post by Alex GR » Mon Jul 08, 2019 10:50 am

chevca wrote:
Mon Jul 08, 2019 8:56 am
If you're not contributing or withdrawing from the portfolio, shouldn't rebalancing in August mean just let it sit there until August and move things around if the AA is out of whack? If not out of whack, just let it keep sitting there?
Yes, absolutely. But since I do "age minus 7 in bonds", what I'd have to do in August is sell 1% stock and buy 1% bond (and repeat every year).
This is going to be my first time rebalancing and I found myself putting in high orders in advance hoping some(or all) would execute :D this made me wonder what ya'll do in terms of this strategy

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Alex GR
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Re: Trying to "time the market" at annual rebalance ONLY?

Post by Alex GR » Mon Jul 08, 2019 10:57 am

MotoTrojan wrote:
Mon Jul 08, 2019 9:01 am
You may want to be careful making sweeping generalizations like VBR gets hit the most in a crash. Small value did much better than large cap (Total US, S&P500) during the early 2000’s tech and 9/11 declines.

I believe everyone should rebalance based on market/portfolio conditions by using a rules based system (5/25 absolute/relative for example). The advantage of annual rebalancing though is the ability to only look at your portfolio once a year but you’re putting in limit orders which means you’re more involved.
Sorry, you're absolutely right. I should have said "I believe it would get hit the most in a crash". It sure plummeted in Dec 2018 so I decided to reduce small cap exposure this time around. Thanks!

MotoTrojan
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Re: Trying to "time the market" at annual rebalance ONLY?

Post by MotoTrojan » Mon Jul 08, 2019 11:06 am

Alex GR wrote:
Mon Jul 08, 2019 10:57 am
MotoTrojan wrote:
Mon Jul 08, 2019 9:01 am
You may want to be careful making sweeping generalizations like VBR gets hit the most in a crash. Small value did much better than large cap (Total US, S&P500) during the early 2000’s tech and 9/11 declines.

I believe everyone should rebalance based on market/portfolio conditions by using a rules based system (5/25 absolute/relative for example). The advantage of annual rebalancing though is the ability to only look at your portfolio once a year but you’re putting in limit orders which means you’re more involved.
Sorry, you're absolutely right. I should have said "I believe it would get hit the most in a crash". It sure plummeted in Dec 2018 so I decided to reduce small cap exposure this time around. Thanks!
It sure rocket-shipped in 2016 too.

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Alex GR
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Re: Trying to "time the market" at annual rebalance ONLY?

Post by Alex GR » Wed Jul 10, 2019 11:12 am

RadAudit wrote:
Mon Jul 08, 2019 7:25 am
Alex GR wrote:
Mon Jul 08, 2019 7:16 am
my question is about annual rebalancing:
Do you find yourself *trading* or *trying to time the market* a bit when it's time to rebalance?
No.

I use to rebalance annually at the beginning of the year*. (Probably a bad time :oops: - but …) Others use a specific date - birthdays, etc. Now that I'm retired, I rebalance when the portfolio goes outside its rebalance bands of + / - 5% on the 50 / 50 asset allocation for stocks / bonds. I think it's approaching two years since I last rebalanced. (And, yes. I'm taking RMDs.)

*I also use to invest periodically throughout the year IAW my then asset allocations via payroll deductions.
Hi RadAudit,
Thanks for your reply.
So what I do according to IPS (the need for which BTW I learned from this forum, thanks a lot! :sharebeer :thumbsup) is "age minus 7 in bonds" and annual rebalance on my B-day. So since I turn 43 a month from now, I need to change 65/35 to 64/36, reducing the equity potion by 1% (and repeat every year).
Are you saying that a different approach should be used? I am not familiar with the concept you described
rebalance bands of + / - 5% on the 50 / 50 asset allocation for stocks / bonds
Could you elaborate or give an example? Thanks!

MathWizard
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Re: Trying to "time the market" at annual rebalance ONLY?

Post by MathWizard » Wed Jul 10, 2019 11:28 am

Only two behaviors that might be called timing the market:

1) I typically put the max into ROTH (now $7K each for my wife and I) for the previous year right after I fill out taxes for the previous year.
If there is a very large drop, and then it starts back up again, (2001,2003,2009) I'll make the contribution in the current year.

2) Similar to your rebalancing timing, I will over-rebalance when I hit the bands, either more bonds than I need, or more equities to get
back to my AA, but still staying within my bands. This is somewhat contrarian behavior, going against the crowd. (Pushing more into equities when people are moving out of them, and vice versa.)

I have also pulled back from equities based on age, being close to retirement, and to me having equities being overvalued from the long bull run.

This satisfies my itch to tinker. Nothing too wild, no individual stock, no gold, no bitcoin.

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Re: Trying to "time the market" at annual rebalance ONLY?

Post by RadAudit » Wed Jul 10, 2019 11:55 am

Alex GR wrote:
Wed Jul 10, 2019 11:12 am
So since I turn 43 a month from now, I need to change 65/35 to 64/36, reducing the equity potion by 1% (and repeat every year).
Are you saying that a different approach should be used?

I am not familiar with the concept you described rebalance bands of + / - 5% on the 50 / 50 asset allocation for stocks / bonds

Could you elaborate or give an example? Thanks!
Oh, Heavens! I'll give it a shot; but, I'm not the best one to try - so you've been warned.

I'll agree your AA is right for you. (After all, it's yours.) Now say for an example that right after your annual rebalance, the stock market takes off like a rabbit and all of sudden your portfolio asset allocation is 75 / 25 (and or vice versa). Do you wait until next year to rebalance? May be not. According to some IPS, you sell some stock and purchase some bonds to get back to your target AA.

Now to a much lesser extent, this sort of thing happens every day all day long. Stocks go up and down. So do bonds. But when do you rebalance? Is it random variation? In which case, it may self correct. Plus rebalancing costs money. So how to decide to rebalance or not? That's where the rebalance bands come in, for me. On my AA of 50 / 50, equities would have to go a ways for me to rebalance. On a 5% band, the portfolio would have to be 55 /45. I'm a little shaky on the numbers but equities might have to go up more than 20% to get to a portfolio of 55/ 45. (Someone will be along to correct the math.)* Bands are just a rule to balance cost to rebalance vs. the benefit of maintaining a targeted level of risk / return in the portfolio. Your bands on a 65/ 35 may be in the range of 70 / 30 or 60 / 40 - you get to decide.

*Lets say I had a portfolio of $100. $50 stocks. $50 bonds. Stocks go up 20%. The portfolio is now $60 stocks. $50 bonds. The asset allocation is now 54.55% (60/110) and 45.45% (50/110).

Edit 1: I am shaky on the math. Changed delta %
Edit 2: Added portfolio dollar numbers
Last edited by RadAudit on Wed Jul 10, 2019 2:33 pm, edited 2 times in total.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

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Re: Trying to "time the market" at annual rebalance ONLY?

Post by CalculatedRisk » Wed Jul 10, 2019 2:03 pm

RadAudit wrote:
Mon Jul 08, 2019 7:25 am
I use to rebalance annually at the beginning of the year*. (Probably a bad time :oops: - but …)
Can you please explain why beginning of the year is a bad time to rebalance? Is it right before dividends are issued or something else?

RadAudit
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Re: Trying to "time the market" at annual rebalance ONLY?

Post by RadAudit » Wed Jul 10, 2019 2:44 pm

CalculatedRisk wrote:
Wed Jul 10, 2019 2:03 pm
RadAudit wrote:
Mon Jul 08, 2019 7:25 am
I use to rebalance annually at the beginning of the year*. (Probably a bad time :oops: - but …)
Can you please explain why beginning of the year is a bad time to rebalance? Is it right before dividends are issued or something else?
Scuttlebutt. I think dividends and interest are paid to accounts prior to year end. However, some people offer the opinion that this money is then put back in to the market after the new year. If that is correct, rebalancing at that time may be distorted by as much as percent or so as you're rebalancing, if the rebalancing isn't instantaneous. (My rebalancing takes a few days due to rules on transfers among funds.) Total WAG. I don't know how much truth there is to that idea.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

dayzero
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Re: Trying to "time the market" at annual rebalance ONLY?

Post by dayzero » Wed Jul 10, 2019 2:51 pm

I am surprised you need to rebalance at all if you are 20 years away from retirement. You should just be adjusting your target allocation when the year rolls over and directing new contributions to the right place to get you to that target. You don't need to physically trade 1% of your current stocks into bonds (chances are you'll just be buying them right back again as you contribute new funds).

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Re: Trying to "time the market" at annual rebalance ONLY?

Post by SuzBanyan » Wed Jul 10, 2019 4:52 pm

dayzero wrote:
Wed Jul 10, 2019 2:51 pm
I am surprised you need to rebalance at all if you are 20 years away from retirement. You should just be adjusting your target allocation when the year rolls over and directing new contributions to the right place to get you to that target. You don't need to physically trade 1% of your current stocks into bonds (chances are you'll just be buying them right back again as you contribute new funds).
OP has said he is not currently making any new contributions.

Although, of course, he is as long as he is automatically reinvesting dividends. I would suggest that he turn off the auto-reinvest and use the dividends as paid to buy bonds to nudge towards the next years higher target % for bonds. When August comes around, he may not need to do anything except update his IPS.

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Re: Trying to "time the market" at annual rebalance ONLY?

Post by HawaiiBrewer » Wed Jul 10, 2019 5:55 pm

As has been said before, at your "young" age, leaving it go is not a bad idea. I discovered the BH Forum and loved its "keep it simple stupid" (kiss)
approach to financial security. One can easily micro-manage one's portfolio, but I'm loving the fact that I can check my investments no more than quarterly...usually end up twice a year, and spend the rest of my time with my hobbies and sleeping well at night. I rebalance if I go outside my established IPS ranges, which has happened twice since I became a Boglehead in 2013, the same year I jettisoned my full service walls street manager.
I'm 68, wife is 65, both retired

Here is how simple my review is.....but I have gone a bit above the 3 Fund porfolio, so maybe I'm micro managing more than I need to:

..............Target..... Range
US Equities..25%.........20-30
Int'l Equities 10%....... 7.5-12.5
Bonds.........29%.........24-34
CD's,MMrkt...30%.........25-35
REIT............5%.........3.8-6.3
Cash...........1%.........enough for 1 year living expenses

A quick scan tells me if I need to spend more than my 10 min/quarter review. KISS

Aloha
If you don't know where you are going, any road will get you there

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