Author Topic: When to rebalance  (Read 2484 times)

COEE

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When to rebalance
« on: May 12, 2017, 02:58:17 PM »
My IPS states that I will rebalance whenever my stock/bond/international balance (60/20/20) diverge from nominal by more than 3%.  3% is pretty arbitrary on my part.  It's just a plan.  What counts as 3% is pretty arbitrary as well.  Do stocks need to be 63%?  Or does a 62/19/19% count, or is that 4%?  These are decisions that I need to make, but probably don't matter a whole hill of beans. 

Example: I need to go back and look at the numbers, but my stock/bond holdings may have diverted by more than 3% for a few days during the brexit thing a year or two ago when there were those two small market corrections.

Do any of you try to correct during these small corrections?  What about during 2008 and stocks were tanking... did you correct a lot?  How often did you check?  Weekly?  Monthly?  Daily?  Are there any calculators or studies that show what would have happened if you had rebalanced at 4%, 3%, 2.5%?

My intuition thinks that it probably doesn't matter a whole hill of beans on a big market correction like 08 and a monthly correction is probably adequate, but during the brexit thing, if i could have rebalanced during those times, I'd probably be further ahead today.

COEE

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Re: When to rebalance
« Reply #1 on: May 12, 2017, 03:05:53 PM »
Also, are you aware of any tools that will alert you when your proportions get out of whack and rebalance for you?

mxt0133

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Re: When to rebalance
« Reply #2 on: May 12, 2017, 03:20:55 PM »
My general strategy during the accumulation phase has been to use new contributions to get back to my desired target allocation.

For example the last few year international has under performed domestic equities so I put my 401k and after tax contributions to international I reached my target allocation.  Right now since international and domestic has done well I'm putting new money into bonds.

For me I just review every quarter and adjust that way.  Only if it really goes off by more than 5% would I just do a one time re-balance.

Once I'm done with accumulation I figure I would to it either quarterly or semi-annually.

dreadmoose

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Re: When to rebalance
« Reply #3 on: May 12, 2017, 04:15:11 PM »
While I am also in the boat of new money being enough to stay on my target allocation I plan to rebalance annually.

I have yet to read a study that shows re-balancing more often would better grow my stache, and outside of that it appears to approach close to market timing decisions if I'm choosing what percentages matter and when to redo it.

There are times I've toyed with the 5/25 rule as a re-balancing that sounds like it may solve your dilemma of the math itself. You can read about that here:

http://canadiancouchpotato.com/2011/02/24/how-often-should-you-rebalance/

Basically if you are 25% off your allocation percentage it has you rebalance, or if you are 5% off your bonds/equity ratio.

COEE

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Re: When to rebalance
« Reply #4 on: May 12, 2017, 05:00:16 PM »
I have yet to read a study that shows re-balancing more often would better grow my stache, and outside of that it appears to approach close to market timing decisions if I'm choosing what percentages matter and when to redo it.

I'm not sure if I agree with your market timing comment on this one.  How is it market timing if you get off by 3% and you sell some stock to buy bonds?  You're not trying to time the market, your trying to rebalance your funds in reflection of the market changes.  If the market had stayed stable you wouldn't have made any changes.  I mean the whole point of rebalancing is to sell good performing shares to buy more poor performing shares (esentially sell high, buy low).

As far as I can tell, all of my funds don't charge me to rebalance my funds, but a couple of them only allow me to rebalance up to 12 times a year.  I usually rebalance once a year or less.

dreadmoose

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Re: When to rebalance
« Reply #5 on: May 12, 2017, 05:05:48 PM »
I have yet to read a study that shows re-balancing more often would better grow my stache, and outside of that it appears to approach close to market timing decisions if I'm choosing what percentages matter and when to redo it.

I'm not sure if I agree with your market timing comment on this one.  How is it market timing if you get off by 3% and you sell some stock to buy bonds?  You're not trying to time the market, your trying to rebalance your funds in reflection of the market changes.  If the market had stayed stable you wouldn't have made any changes.  I mean the whole point of rebalancing is to sell good performing shares to buy more poor performing shares (esentially sell high, buy low).

As far as I can tell, all of my funds don't charge me to rebalance my funds, but a couple of them only allow me to rebalance up to 12 times a year.  I usually rebalance once a year or less.
Sorry, that definitely isn't clear to what I meant. I was trying to point out that if I didn't have a specific determination of what 3 percent off meant I would be deciding it without being emotionless (listening to market tips etc). Not the same thing I alluded to above.


COEE

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Re: When to rebalance
« Reply #6 on: May 12, 2017, 06:31:47 PM »
I have yet to read a study that shows re-balancing more often would better grow my stache, and outside of that it appears to approach close to market timing decisions if I'm choosing what percentages matter and when to redo it.

I'm not sure if I agree with your market timing comment on this one.  How is it market timing if you get off by 3% and you sell some stock to buy bonds?  You're not trying to time the market, your trying to rebalance your funds in reflection of the market changes.  If the market had stayed stable you wouldn't have made any changes.  I mean the whole point of rebalancing is to sell good performing shares to buy more poor performing shares (esentially sell high, buy low).

As far as I can tell, all of my funds don't charge me to rebalance my funds, but a couple of them only allow me to rebalance up to 12 times a year.  I usually rebalance once a year or less.
Sorry, that definitely isn't clear to what I meant. I was trying to point out that if I didn't have a specific determination of what 3 percent off meant I would be deciding it without being emotionless (listening to market tips etc). Not the same thing I alluded to above.

Ah - I got ya.  Thanks for the clarification.  I'm not sure how you count the 3% matters very much.  Heck - you could put in a correction order on a mutual fund and then by the next closing bell when the order is actually processed you might be within 3% again.  It's not perfect.  It's more the sentiment of putting the order in when you're about 3% off.

It's just that I'm starting to get curious if I should be doing something in minor market corrections.  Sounds like most here don't do anything.

Example:
                            stock/bond/intl/esop
On 8/17/2015:  59.16/19.49/19.81/1.54  => 1.54 point differential
On 8/24/2015:  57.51/21.19/19.74/1.56  => 3.94 point differential
On 8/25/2015:  57.96/20.69/19.81/1.54  => 2.92 point differential

In that one week my portfolio dropped 8.10% and between the stock and bonds combined, it deviated more than 3% of nominal assett allocation.  What is interesting though - if I did put in the order on 8/24, the market would have corrected slightly - and I wouldn't have had a 3% differential.  I'd be in the right ballpark though.

It's difficult to tell if I had put in the order on 8/24 if I'd be better off today, or not, because of transacction.  It is also interesting to note that during this dip - there was a inverse correction that would have happened in October meaning I may have needed to reallocate again to something closer to the previous allocation.

aetheldrea

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Re: When to rebalance
« Reply #7 on: May 12, 2017, 07:12:31 PM »
When I was looking into the issue of rebalancing a couple years ago, I believe I read that the studies showed that the best results came from annual rebalancing, anything more frequently led to worse outcomes. So stop trying to make your portfolio perfect all the time and you will make more money.

Goldielocks

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Re: When to rebalance
« Reply #8 on: May 13, 2017, 01:20:21 AM »
I rebalance annually, and whenever I need to roll over a large amount of money into the plan.  (e.g., tax refund time, closing out an account, etc).  So 3 times per year, on average.

As other said, I used to tweak where the new money was directed to, but after you get past a certain point, the new money is not enough on its own.

The key is to set up your target (write it out), then actually rebalance AT LEAST once per year.