Author Topic: is rebalancing your portfolio akin to market timing?  (Read 1688 times)

kenmoremmm

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is rebalancing your portfolio akin to market timing?
« on: January 10, 2018, 09:41:02 PM »
just something that's been passing through my head of late. curious on folk's input and how it jives with their 'never time the market' principals.

for example, if invest at 85/15 (S/B), but then your assets over time go to 90/10, by rebalancing back to 85/15, isn't that similar to saying you want to go to 40/60 b/c you think the market's about to take a dive?

bacchi

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Re: is rebalancing your portfolio akin to market timing?
« Reply #1 on: January 10, 2018, 10:03:21 PM »
In a way, sure, but the first is following your plan (aka, the IPS) while the second is following your probably irrational, emotional, feelings because, ya know, the market is too hot.

Because you're following a plan created in the past, you're not predicting per se what's going to happen. You're not using technical analysis or looking at what the fed said last week. It can be done by an algorithm: sell X, buy Y, in order to meet 85/15 again.

https://www.investopedia.com/terms/m/markettiming.asp
« Last Edit: January 10, 2018, 10:06:00 PM by bacchi »

Eucalyptus

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Re: is rebalancing your portfolio akin to market timing?
« Reply #2 on: January 11, 2018, 02:25:55 AM »
Concur. As long as you are following a plan, its actually enforces a way of buying low, and selling high, taking the human instinct and emotion out of it.

sea_saw

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Re: is rebalancing your portfolio akin to market timing?
« Reply #3 on: January 11, 2018, 03:54:22 AM »
Market timing = rejigging your portfolio based on what you think the market will do next.

Rebalancing = restoring your original/planned asset allocation when your portfolio has strayed too far from it over the course of time.

If you've decided an 85/15 split suits your risk tolerance, and over time that becomes a 90/10 split, rebalancing back to 85/15 isn't changing course to time the market, it's getting back into your comfort zone, which you presumably carefully picked for good reason. The idea is you're not going 'well since the stocks are growing so much faster, why not let them keep at it and keep giving me these delicious delicious high returns' until you're at 99% right before a crash and THEN you panic and sell some to buy more of your suddenly more attractive bonds and oh look you have done this All Wrong.

Deciding to go for 40/60 because you think the market is about to crash is definitely market timing and history shows you're more likely to be wrong than right. Even if you were right and experience a crash soonish, you're likely to miss out on some gainz along the way up to it, and you're unlikely to time your re-entry into shares accurately either.

You're correct that rebalancing does provide a mechanism for, broadly speaking, buying low and selling high. It's inherent in the system, whereby the parts of your portfolio that are growing fast at any given time get pruned and fed to the classes that aren't doing as well. It doesn't do so as accurately as if you were a hindsight-level perfect market timer, but it also doesn't do so as badly as if you TRIED to be a perfect market timer and to guess when something is a high or a low while in the thick of it.

It might seem like the difference is meaningless since it's all about your plans and intentions (you can't look at a trade out of context and see if it's a foolhardy attempt to time or a planned rebalancing) but it's actually essential because it dictates your behaviour, and you're the one in the best position to fuck things up for yourself.

YoungInvestor

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Re: is rebalancing your portfolio akin to market timing?
« Reply #4 on: January 11, 2018, 05:10:40 AM »
I'm actually working on an asset allocation that is dependant on the long term P/E ratio of the market and the yield to maturity of my bond fund.

That would be further along the market running curve, but that's just me.

MustacheAndaHalf

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Re: is rebalancing your portfolio akin to market timing?
« Reply #5 on: January 11, 2018, 09:31:00 AM »
Most people rebalance once a year, regardless of the market conditions.  Others have bands they use to avoid drifting too far away from their desired allocations. 

But rebalancing isn't about market performance so much as keeping the same allocation.  It's more about reducing the risk that your stocks take a dive, rather than trying to buy low and sell high.  If your 60/40 portfolio drifts to 70/30, you aren't really in control of your allocation.  Re-balancing puts you back in charge of the percentages of your portfolio.

Travis

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Re: is rebalancing your portfolio akin to market timing?
« Reply #6 on: January 11, 2018, 09:49:25 AM »
Most people rebalance once a year, regardless of the market conditions. 


And this is why it is not market timing.

toganet

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Re: is rebalancing your portfolio akin to market timing?
« Reply #7 on: January 11, 2018, 10:49:26 AM »
I used to hold a crazy-complicated mix of ETF's and rebalanced very often.  This led me to try to time my rebalancing a little buy waiting to sell until X was up and Y was in a dip or whatever.

This was dumb.

Over the past year I have been moving all my investments into as small as set of funds as makes sense for my IPS, and decreasing my rebalance frequency and widening my associated out-of-balance % trigger.  By the end of this month I should be able to ignore the market for the most part until my scheduled rebalance dates.  (Not sure I'll be able to ignore it, but that's what my "play money" account is for).

Following the advice found here has helped me have my best return year so far, and gain a better understanding for my own risk tolerance.

thenextguy

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Re: is rebalancing your portfolio akin to market timing?
« Reply #8 on: January 11, 2018, 11:26:44 AM »
Rebalancing is about (or it's supposed to be about) reducing risk when your allocation strays from targets. It is not intended to be a way to maximize returns, although it may or may not do that.

Indexer

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Re: is rebalancing your portfolio akin to market timing?
« Reply #9 on: January 12, 2018, 03:16:53 PM »
Market timing = trying to guess the future.

Rebalancing =  admitting you can't guess the future.

Finances_With_Purpose

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Re: is rebalancing your portfolio akin to market timing?
« Reply #10 on: January 12, 2018, 07:58:24 PM »
No.

UNLESS you do it based upon market fears - e.g., wait to buy bonds until you think the market is high.  Then, YES.  You aren't sticking with your original risk profile and plan. 

If you find yourself adjusting your risk profile based upon market swings, that's also market timing. 

gerardc

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Re: is rebalancing your portfolio akin to market timing?
« Reply #11 on: January 12, 2018, 08:25:58 PM »
It is, it's just the only form that has been somewhat proven effective by backtesting, so you get a free pass.

Because you're following a plan created in the past, you're not predicting per se what's going to happen. You're not using technical analysis or looking at what the fed said last week. It can be done by an algorithm: sell X, buy Y, in order to meet 85/15 again.

Market timing has nothing to do with emotions, trying to predict the future, sticking to a plan, etc. You can formulate an algorithm like "if market climbs more than X%, top is in, sell until the next Y% dip" and execute that plan ruthlessly and it would still be market timing (this one is ineffective from backtesting).

Livingthedream55

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Re: is rebalancing your portfolio akin to market timing?
« Reply #12 on: January 16, 2018, 10:38:49 AM »
Most people rebalance once a year, regardless of the market conditions. 


And this is why it is not market timing.

+1  And by having a predetermined schedule, i.e. I rebalance every year the first week of January - it takes "me" and my emotions (fear vs. greed) out of the mix.

According to Vanguard, there is no universally agreed upon asset allocation. Nor is there data to recommend rebalancing more frequently than annually.  https://www.vanguard.com/pdf/icrpr.pdf


« Last Edit: January 16, 2018, 10:46:56 AM by Livingthedream55 »