Author Topic: When to rebalance in a down market?  (Read 1622 times)

Mooseman2000

  • 5 O'Clock Shadow
  • *
  • Posts: 3
When to rebalance in a down market?
« on: December 24, 2018, 01:47:01 PM »
This may be an obvious question, but itís giving me some trouble, so I figured Iíd ask the board.

Up until now Iíve been fully invested in SP500 index funds and my company stock. I know, not a great allocation... Iíve paid the price for that in the last few months.

I have about 550k in stocks and about 300k in home equity.

I have about 2/3 of my stash in retirement accounts and 1/3 in taxable accounts. My taxable accounts are heavily leaning toward my company stock, which has been doing very well until this recent slide.

Iíd really like to get more bonds into my portfolio, but what is the most strategic way to go about doing that given where Iím at with my allocation?

1. Sell some of my index funds and company stock and trade them for bonds?
Seems like Iíd be selling low here to pick up assets that gain at a lower rate? Wise to sell the stock / funds that Iíve taken a loss on before the new year? 

2. Overbuy on bonds with my upcoming contributions to balance quicker?
I feel like Iíd be giving up the opportunity to buy stocks on the cheap in this scenario.

3. Just refactor all future contributions to be more 70/30?
In this option, Iíd leave all of my current investments alone and just look to the future.

4. A mix of the above or something Iím not considering?

I was on track to FIRE in about 4 years, but Iíve known I needed to rebalance things for awhile and havenít really known the best way to do it. Any help would be super helpful!

jacoavluha

  • Bristles
  • ***
  • Posts: 266
Re: When to rebalance in a down market?
« Reply #1 on: December 24, 2018, 01:55:38 PM »
Rebalance to what? What is your overall goal for stock:bond allocation?

TheHardenedInvestor

  • Stubble
  • **
  • Posts: 104
Re: When to rebalance in a down market?
« Reply #2 on: December 24, 2018, 02:00:45 PM »
This is the time to allocate more to stocks, as they are falling. I’m putting more weight towards S&P index now and less to bonds (ie rebalancing from bonds to S&P). I would just keep buying the index full throttle and when the market rebounds eventually, then get “better” allocated (ie whatever makes you sleep better).

HBFIRE

  • Pencil Stache
  • ****
  • Posts: 950
  • Age: 41
  • Location: Huntington Beach, CA
Re: When to rebalance in a down market?
« Reply #3 on: December 24, 2018, 02:02:38 PM »
All of my retirement funds are in Vanguard Life Strategy, so it rebalances automatically.  I like this as I prefer my retirement accounts to be totally hands off.  For my brokerage account, I simply rebalance every time I buy, which is about once a quarter (just made a 20 K purchase today in fact).  This works well as I prefer not selling anything to rebalance.  My brokerage allocation is 60% VTSAX and 40% VTIAX. 

You should have an allocation plan you're comfortable with and stick with it, no matter what the market is doing, otherwise you're just market timing. Sometimes it takes a downturn to determine what you're actually comfortable with, and that's fine. 
« Last Edit: December 24, 2018, 02:08:16 PM by dustinst22 »

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1559
  • Location: San Francisco
Re: When to rebalance in a down market?
« Reply #4 on: December 24, 2018, 02:06:45 PM »
There is no one way to do it. Why do you want to rebalance all of a sudden is it because this is the first correction you are going through?  Did your plans change or circumstances change?  Why do you want bonds now?  They might not be as volatile as stocks but they can still go down.

To answer your question directly my ISP states, to rebalance once a year if it goes of by more than 5%.  If it is off by only a few points then I let new contributions try to bring it back up to my desired allocation.  If I do decide to change the actual allocation I adjust new contributions to move to the new target allocation and do the EOY adjustment if it is still off.  That way I discourage market timing. 

Depending on how deep this correction goes. I might go from 10% bonds to 5%.  I also have a clause that I can deviate up to 5% to allow for market timing. 😁


TheHardenedInvestor

  • Stubble
  • **
  • Posts: 104
Re: When to rebalance in a down market?
« Reply #5 on: December 24, 2018, 03:03:50 PM »
Depending on how deep this correction goes. I might go from 10% bonds to 5%.  I also have a clause that I can deviate up to 5% to allow for market timing.

Makes sense to me. Such a stigma around the phrase “market timing” on these intro to investing boards. But it would be silly not to allocate more to stocks in any sort of 20%-50% correction. If the market drops 30%+ you can guarantee I will allocate larger amounts of my fixed accounts (bonds, CD’s) to stocks. The “bad” around market timing is really only around those who try to dance in and out of the market. That’s not a good idea at all, but recognizing a downtrend and making larger purchases of stocks is nothing of the sort.

Mighty-Dollar

  • Bristles
  • ***
  • Posts: 377
Re: When to rebalance in a down market?
« Reply #6 on: December 24, 2018, 03:27:52 PM »
Treat your investments as being SEPARATE from your house. You should be in stocks AND bonds. Percentage rebalance. There should be NO emotions involved (eg. "The headlines are scaring me"). At times like this you move bond money into stocks.

Andy R

  • Bristles
  • ***
  • Posts: 288
Re: When to rebalance in a down market?
« Reply #7 on: December 24, 2018, 07:20:36 PM »
To quote some others

https://www.bogleheads.org/forum/viewtopic.php?f=1&t=267463
Quote
Regarding your fears for the markets, donít take any action. One of the biggest mistakes investors can make is selling stocks AFTER stocks have dropped, permanently locking in the loss. You need to ride it out at this time. This is not to say that a more income-focused portfolio may make sense going forward, but this is not the time to make changes, this is the time to ďstay the courseĒ.

https://www.bogleheads.org/forum/viewtopic.php?f=1&t=267462
Quote
Buy low sell high. Does now feel like one of those times?
Quote
Selling all your stock holdings when you are 20% down is a guaranteed way to lose 20%.
Quote
Don't keep switching. That is a sure way to lose.

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=267492
Quote
Isnt the point of investing that one buys low and sells high? If we are down 20% isnt it a better time to buy than 2 months ago, since you get more for your money?

BicycleB

  • Handlebar Stache
  • *****
  • Posts: 1783
  • Location: Live Music Capital of the World
  • Older than the internet, but not wiser... yet
Re: When to rebalance in a down market?
« Reply #8 on: December 24, 2018, 11:12:06 PM »
Hi, @Mooseman2000. Fwiw, the question may be obvious, but i'm not the sure the answer is!  ;)

Joking aside, all these answers already are giving really good points. Choosing when to invest based on market prices is difficult.

Bonds are a fine way to have a portfolio that dips less in bad times though it rises less in good times, at least where "good times" are defined as "times when the stock market rises." So having some bonds as part of your allocation is great if you want less volatility, more knowledge that tomorrow's portfolio value is similar to today's.

But if you are 100% stocks to date, the question of when to add bonds is trickier. Doing it when stock prices are high is obviously better than when prices are low, so a few months ago is better than now, if you have access to a time machine.

IMHO the best thing to do is ask yourself when you expect to spend the money you're investing. If it's more than 5 years from now (in other words, you're in the accumulation phase, not yet close to FI) my suggestion would be to buy stocks when stock prices are lower than today, and bonds when stock prices are higher than today, until you reach your chosen %.

There's no perfect formula. Most people buy high and sell low. They buy bonds when stocks are falling, the exact opposite of what produces high returns. If you add bonds now, you are moving in the typical direction. My suggestion above is designed to counter that common response, while giving a concrete path to getting bonds eventually.

I'm in FIRE myself and am about 30% bonds vs 70% stock (to be fair, that's half the portfolio; the other half is real estate equity). Even if I was 100% stock, I wouldn't buy bonds now. I may soon sell bonds and buy stock!!

If you'll be investing for several more years, falling stock markets and a still-strong job market make this look like a great time to invest in equity. No one can predict the future, but if you have the Intestinal Fortitude, see if you can hold off on the bonds for now. Anyway, good luck.

One way to get the bonds in while wisely ignoring market prices would be to estimate your years to retirement, choose the bond % you want in retirement, and move there in steady increments. For example, if you guess you're 10 years from retirement and want a 30% bond allocation, add 3% bonds per year.

PS. One really common solution to the "when to rebalance" question is "every year, on the date I chose when I set my plan." Obviously you can set such a plan for the future. Once you have it, rebalance at that time to reach your desired % bonds vs % stocks. Doing this mechanically eliminates emotion-driven decisions, which are usually mistakes when it comes to investing.
« Last Edit: December 24, 2018, 11:22:24 PM by BicycleB »

Geographer

  • Stubble
  • **
  • Posts: 149
  • Age: 29
  • Location: Italy
Re: When to rebalance in a down market?
« Reply #9 on: December 26, 2018, 05:07:20 PM »
I had a rebalance fail today. My AA was off by 5% (the threshold where I consider it worthwhile), so last night I initiated a 5% bonds to stocks rebalance. Vanguard takes a full trading day to execute the trade... and now today I see that the stocks went UP BY 5% IN ONE DAY! So essentially now I just sold bonds (which went down today) to purchase the stocks at their new sky high price...

BicycleB

  • Handlebar Stache
  • *****
  • Posts: 1783
  • Location: Live Music Capital of the World
  • Older than the internet, but not wiser... yet
Re: When to rebalance in a down market?
« Reply #10 on: December 26, 2018, 08:08:40 PM »
I had a rebalance fail today. My AA was off by 5% (the threshold where I consider it worthwhile), so last night I initiated a 5% bonds to stocks rebalance. Vanguard takes a full trading day to execute the trade... and now today I see that the stocks went UP BY 5% IN ONE DAY! So essentially now I just sold bonds (which went down today) to purchase the stocks at their new sky high price...

Somewhere I read about a study that claimed the most successful time to rebalance was on a quarterly to annual schedule. More often would suffer these short swings, I guess.