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https://thefinancebuff.com/5-percent-rebalancing-band.html"The higher your stock allocation the more stocks have to drop to hit your 5% band. If your target is 90/10 and we assume bonds don’t change then to hit 85/15 your stocks would have to drop by 37%. To go from 75/25 to 70/30 the required drop is 22%, which is a pretty big correction. What really surprised me is that to go from 50/50 to 45/55 still requires stocks to drop 18%."
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Thanks for posting the article.
What you have read is just one person's take on a five percent rebalance threshold.
My take is somewhat different. And, I'll explain. Take a 50/50 portfolio with a total value of $100,000. This would equate to $50,000 in equity and $50,000 in fixed. 5% of $50,000 is $2,500. This puts the upper limit at $52,500 and the lower limit at $47,500 and if valuations for the respective area goes above (or below) a rebalance is warranted in this example. Natually, other factors might also be considered such as (but not limited to) seasonal strategies.
So, I purchased FCNTX and PIMIX , March 17, 2009; 50% of a total portfolio into each.
What would one do, especially after Feb. 2013 when Fido Contra really started to walk upward and away from PIMIX?
Would one sell pieces of FCNTX and buy more PIMIX to maintain this upper and lower limit ranges to attempt to maintain a 50/50 mix?
The last assumption is that I definitely want to keep both funds, as I had already been a long time investor and fan of management with FCNTX and am most pleased with PIMIX as a bond balance to a strong growth fund.
Assume all monies are IRA; so taxes are not part of the transactions.
http://stockcharts.com/freecharts/perf.php?FCNTX,PIMIX&n=2194&O=011000
Thanks,
Catch
OR ...
It depends on your goals and discipline and tenets. Are you a strict (re)balancer? Do you like / are you willing to let things that have done well run?
Most important, what are your needs and horizon? I mean, many of us run into this all the time. I myself would probably leave all alone if you do not need the money for several years. But that is the aggressive / greed of another speaking. Otoh, if you need some of this in less than, I dunno, 3-4-5y, then yeah, rebalance to Pimco. How important is 50-50 to you ?
Thanks for the question.
Q: What would I personally do?
A: Rebalance, if I wanted to follow the discipline. Beyond this, if I was in the accumulation phase of investing I'd widen the rebalance channel from 5% to 10% perhaps even 20%. If I was in the distribution phase of investing I'd rebalance and follow the strategy. Another thing one might consider is a lower limit rebalance at 5% and an upper limit rebalance at 10% (possibly 20%) on the equity side. In this way you buy the pullback and let the winners run longer than normal.
Currently, for me, within my own portfolio I an overweight equity based upon what my equity weighting matrix is calling for by about five percent. This is based mostly upon a seasonal investment strategy where I generally overweight equities during the fall and winter and begin to lighten up come spring (rebalance). During the summer I generally follow a neutral weighting position. The matrix is driven by my market barometer. In addition, my normal equity allocation ranges from 45% to 55%. Currently, I am at 51% to 52% range as determined by a recent Morningstar Instant Xray analysis putting me somewhere between a 4% to 5% overweight over the matrix's reccomended allocation.
In rebalancing, you are most likely booking profit making unrealized gains realized. In this way, they are less likely to get vaporized in severe market downdrafts. This raise the question. Would you rather pay taxes on your gains (if warranted) or see these unrealized gains get vaporized in severe market declines and downdrafts. I'm of the camp pay the tax (if necessary) and rebalance ... harvest some of the gains along the way and don't let them get vaporized in stock market downdrafts.
The barometer, which follows certain metrics of the S&P 500 Index, as of Friday December 1st market close scored the Index as overvalued and not far from an overbought reading.
In addition, I think @davidrmoran made some good comments about this as well (goals, greed, needs and risk tolerance).
Skeet
Great discussion, good points being made.
--- 3 active managed equity funds and.....
--- 3 active managed bond funds
; and I attempt to perform periodic re-balance among these funds, am I not "meddling" with the active management of the funds and perhaps defeating the purpose of why I chose these above average track record funds in the first place? I suppose one could sell away part of the winners and move to whatever else, to maintain a balance.
Our house always strives for total return. I don't care about what a yield might be at a given time frame and perhaps no yield. I want to know the investment was chosen for the proper reasons.
If I had 6 etf's evenly split between equity styles and bond styles; I could readily re-balance and play with these; more so.*****
***** More so, being that one is able to view an etf portfolio in real time for the most part; whereas every 3 months for holdings of an active managed fund.
If 1 of my 3 equity funds is FCNTX, I expect and understand the basic model of this fund into the growth area. I don't expect the fund is going to act like an "alt/long-short" equity fund if the broad equity market goes into a funk.
This brings to the point of one owning an alt. equity fund. Is one going to re-balance this type of fund? The name implies hired management to perform the needed re-balance and not for me to guess otherwise, yes?
Last note: What if one's equity fund has or is already moving more to cash? Is not this a re-balance being performed for the investor?
Well, I hope you all get the drift of my thinking here; of how and when to discover whether one is meddling with active managed funds by re-balancing to whatever threshold might be used.
K. Gotta run. Away I must be to a funeral.
Take care of yourselves,
Catch
When you move from the Accumulation (growth) Stage to the Distribution Stage, re-balancing is often impacted by the spending ("distribution of cash") of your portfolio. Re-balancing as a result of spending comes in many forms - retirement income, RMDs, one time tuition payments, wedding costs, house buying, and divorce to name a few. Most of these involve raising cash from your invested investments.
Raising cash in a portfolio is somewhat a kin to running a farm. Equities are the cows, the hens, the crops. The bonds are the working capital needed to run the farm- the fertilizers, the machinery, the outbuilding, the land, the service costs, etc. Think of cash as the profits from the corn, the hay, the eggs the milk. When a cow needs to be milked...milk it. When the field needs to be hayed, "make hay when the sun shines". Harvesting is part of farm's life and I believe it should also be a dynamic part of a portfolio's inner workings with respect to the cash needs (financial goals) of the portfolio.
Another take on re-balancing:
Using @Catch22 portfolio (50% FCNTX and 50% PIMIX) this farm has hired hands (Danoff and Ivascyn) who help manage the production and the operation of the farm separately. You need to roll up your sleeves and coordinate how these two managers are "running" your farm and "re-balance" their efforts. If your are young and your goal is long term growth, buy more FCNTX, but remember that you may need more land, more equipment, more fertilizer...so also buy some PIMIX. In a growth portfolio (with no need for short term cash) I would own enough PIMIX to cover the downside risks (Maximum Draw Down or MAXDD) of FCNTX. So every dollar you spend for future growth of FCNTX, an additional amount (in MAXDD percent) should be directed at PIMIX to hedge FCNTX's MaxDD risk. This will allow you to not sell FCNTX at the wrong time (in case you did need cash), but might even provide an opportunity to buy more FCNTX during oversold times.
For me, I gauge "overbought and oversold" using my portfolios holdings. I use PIMIX as my "risk off" portfolio indicator comparing it to my "risk on" investments, in this case FCNTX. "Overbought and oversold" conditions of FCNTX are compared against the performance of PIMIX dynamically. . In other words I use PIMIX to tell me when FCNTX is over or under performing PIMIX. Also, using @Old_Skeet's upper bands as a re-balancing trigger (+20% gain on the upside for FCNTX compared to PIMIX) - sell FCNTX and move proceeds (re-balance back into) PIMIX. Conversely, a (-10 percent loss of FCNTX compared to PIMIX) - sell PIMIX and buy (re-balance) into FCNTX
We can hire a manager to do this for us with hybrid/allocation/glide path retirement funds or we can "farm" a portfolio ourselves with individual securities (stocks or bonds) or with additional hired hands (stock or bond mutual fund managers). Either way, we still need to identify a strategy to deal with the spending dynamic and determine how that spending impacts portfolio re-balancing as we move through the distribution stage of life.
Regards,
Ted
Abbott & Costello: Who's On First ?:
+1
What I do w DSE_X and PONDX, though rather less methodically.
Thank you for the nice summary.
Regards,
Catch