Rebalancing on the way up is more fun than the opposite

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djw
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Rebalancing on the way up is more fun than the opposite

Post by djw » Fri Apr 23, 2010 3:13 pm

I feel a sense of deja vu today.

Many of my Vanguard fund slices have been "climbing the wall of worry" as the commentator on CNBC described it moments ago, allowing me to rebalance out of several of them by selling some shares from my winners.

Back in the bad old days (1 - 2 years ago) I often rebalanced by watching the price movement of the ETF equivalents of my Vanguard mutual funds beginning around 3:00 pm each day. If there was a big price move (usually downwards in those dark days), I could enter an order before the closing bell at 4:00 and capture the closing price for my re-balancing trades.

Today I found myself doing that again, this time because several of my funds have been leaping upwards recently. Moments ago I sold some shares of:
VGENX (Energy, ETF-equivalent VDE),
VFSVX (Int'l Small Caps, ETF-equivalent VSS), and
VGPMX (Gold, Platinum & Mining, pseudo-ETF-equivalent VAW).

In the coming days, I'll probably redirect this money into:
VPACX (Pacific, ETF-equivalent VPL) and
VGHCX (Health care, ETF-equivalent VHT)
among other funds.

It sure is more fun rebalancing on the way up than it was on the way down!

In past years I'd often entered exchange orders late at night or on weekends with no real idea of what the prices would be when the trades executed at the next end-of-day closing price -- but not when the market is riding the roller coaster we've come to expect over the past two years.
Love many, trust few, and always paddle your own canoe

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jeffp
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Post by jeffp » Fri Apr 23, 2010 3:25 pm

Where do you have this account? I sure hope it's directly through Vanguard and you're not paying transactions fees on all these buys and sells.

You're right though, it is more fun rebalancing on the way up. It takes a disciplined investor to buy more of something after just seeing it take a big drop and have no emotional reaction whatsoever.
"Doubt is not a pleasant condition, but certainty is absurd." - Voltaire

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djw
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Post by djw » Fri Apr 23, 2010 4:14 pm

Yep, jeffp, the account is an IRA directly with Vanguard. I don't pay "transaction" fees, but some of these funds charge "redemption" fees for shares held for less than one year. Once you've been invested in the fund for a full year, you don't pay these fees anymore because you're always assumed to be selling the oldest shares that you've owned longer than one year (aka FIFO).
Love many, trust few, and always paddle your own canoe

livesoft
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Post by livesoft » Fri Apr 23, 2010 4:22 pm

Oh, I dunno. Small cap has done really well, so I had to exchange some for large cap. Since then, small cap has gone up about about twice as much as large cap. I feel like I lost some money by rebalancing too soon. :(
Last edited by livesoft on Fri Apr 23, 2010 4:26 pm, edited 1 time in total.

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White Coat Investor
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Post by White Coat Investor » Fri Apr 23, 2010 4:25 pm

I lost money by rebalancing too soon on the way down too. I've learned the Jedi virtue of patience.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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wbond
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Post by wbond » Fri Apr 23, 2010 4:53 pm

EmergDoc wrote:I lost money by rebalancing too soon on the way down too. I've learned the Jedi virtue of patience.
Didn't think you could time the bottom, did you (you'd need just the right amount of the force)?

This might be an interesting poll question, because my "fun" has been somewhat the opposite. I was much more excited to buy low in the end of 2008 than I am to sell (or buy less new) now. The current equity valuations make me a bit pessimistic if not a little nervous.

I suspect that I might have had a different response if I were retired already, rather than accumulating.

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Dan Moroboshi
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Post by Dan Moroboshi » Fri Apr 23, 2010 5:42 pm

livesoft wrote:Oh, I dunno. Small cap has done really well, so I had to exchange some for large cap. Since then, small cap has gone up about about twice as much as large cap. I feel like I lost some money by rebalancing too soon. :(
I felt terrible rebalancing into the declining markets of late 2008 and early 2009, only to watch what I'd just bought continue to decrease in value.

Now that I've hit the other end of the rebalancing bands, it doesn't feel much better to sell, and then watch what I've just sold continue to increase in value.

Oh, well. I suppose that's why we have IPSs - to take the emotional component out of our decisions, right?
EmergDoc wrote:I lost money by rebalancing too soon on the way down too. I've learned the Jedi virtue of patience.
A few Star Wars quotes come to mind:

"I've got a bad feeling about this."

"Stay on target... Stay on target..."

Imperial Officer: "We've analyzed their attack, sir, and there is a danger. Should I have your ship standing by?"
Grand Moff Tarkin: "Evacuate? In our moment of triumph? I think you overestimate their chances!"

Easy Rhino
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Post by Easy Rhino » Fri Apr 23, 2010 5:50 pm

I also enjoy balancing on the way up, since it's generally a sell of stocks and a buy of bonds.

"yay I'm reducing risk slightly!"

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AzRunner
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Post by AzRunner » Fri Apr 23, 2010 5:58 pm

I'm trying to follow the William Bernstein advice of infrequent rebalancing. This does mean potentially taking on greater risk. OTOH, there does seem to be a momentum aspect to markets that flies in the face of frequent rebalancing.

Norm

matt
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Post by matt » Sat Apr 24, 2010 10:58 am

djw wrote:
It sure is more fun rebalancing on the way up than it was on the way down!
I very much disagree. Rebalancing on the way down increases your expected rate of return. Rebalancing on the way up decreases your expected rate of return.

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Boglenaut
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Re: Rebalancing on the way up is more fun than the opposite

Post by Boglenaut » Sat Apr 24, 2010 11:03 am

djw wrote:
It sure is more fun rebalancing on the way up than it was on the way down!
I just did some rebalancing today buying bonds.

I always like it more on the way down..feel like I am buying stuff on sale.

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tetractys
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Re: Rebalancing on the way up is more fun than the opposite

Post by tetractys » Sat Apr 24, 2010 11:33 am

djw wrote:It sure is more fun rebalancing on the way up than it was on the way down!
In the long run pro-activity is just as fun no matter where the markets are headed. -- Tet
RESISTANCE IS FRUITFUL

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jeffyscott
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Post by jeffyscott » Sat Apr 24, 2010 2:20 pm

It always has felt better to me to sell some stocks and lock in gains. But for almost the entire time I have been investing, it has been at what seems like relatively high valuations...so it is always kind of a relief to move some assets from risky stocks to less risky bonds.

For the first time, I recently felt some regrets over forgone gains. I have been gradually reducing our allocation to small and mid caps, but they keep going up and up. Maybe sensing some pain from this is a sign they are (finally) getting a top :) .
press on, regardless - John C. Bogle

learning_head
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Post by learning_head » Sat Apr 24, 2010 2:48 pm

Rebalancing is just another form of market timing. Based on performance of your invesments over your chosen last period, you sell and buy some of them. Sort of like technical analysis - based on the history of the investments you are deciding on your buy and sell decisions. Analogous strategy could be, if stock / stock index falls by X% from its peak, I buy and if it gains X%, I sell. Or if stock / stock index exceeds N-day moving average, I do one thing and if it drops below, then another. These are all variations of same scheme...

I am not saying whether it's bad or good. Just observing what it is fundamentally... :wink:

So, feeling bad about foregoing some returns is the same feeling you would get when timing markets and market slices not at the very tops or bottoms.

VennData
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Post by VennData » Sun Apr 25, 2010 4:37 pm

Half the time I rebalance, the rebalanced assets going up continue, the rebalanced assets going down continue... half the time the rebalanced assets going up go down, and the rebalanced assets going down go up.

Beagler
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Post by Beagler » Sun Apr 25, 2010 4:50 pm

Easy Rhino wrote:I also enjoy balancing on the way up, since it's generally a sell of stocks and a buy of bonds.
I'm with you.

YTD performance:
TSM.....VTSMX....11.23%
SCV....VISVX....21.18%
MVC....VMVIX....17.68%
REIT...VGSIX....18.98%

So it's been fun rebalancing out of REIT, MCV and SCV. I included TSM's YTD performance for comparison.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

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johncgay
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Post by johncgay » Sun Apr 25, 2010 9:17 pm

matt wrote:
I very much disagree. Rebalancing on the way down increases your expected rate of return. Rebalancing on the way up decreases your expected rate of return.
Rebalancing on the way up or on the way down keeps your risk-adjusted expected rate of return (approximately) steady.

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