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Rebalancing portfolio vs only using "risk-off" in a crash?
Harry Gloom
Posted: 18 November 2024 07:34:57(UTC)
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Let's say you have portfolio held as 75/25 stocks/MMF leading into retirement.

What are the competing merits of these 2 approaches to consumption of the assets:

1) Annual rebalancing back to 75/25, so sell stocks when they are up, use cash/MMF to buy stocks when they are down at the end of each year.

2) Keep the 25% cash/MMF and only use it where there is a significant downturn.

I see the logic in both but Option 2 requires a determination (market timing) of when to turn off drawdown from stocks and use the cash/MMF and a 2nd determination when to revert back.
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ANDREW FOSTER on 18/11/2024(UTC)
Elspeth Beaton
Posted: 18 November 2024 10:06:10(UTC)
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What I did and do -over the last 21 years of retirement-worked for me -so far!
Your set Asset Allocation is the key
If you are happy with that Asset Allocation then your rebalancing is the necessary adjunct to your withdrawals
Make your withdrawals (I do once or twice yearly) but only so as to maintain your chosen Asset Allocation
Sometimes stocks,sometimes MMFs,sometimes a bit of both depending on the stockmarket values at the time of withdrawal
Market timing-might tend to make my yearly withdrawal when market is more up but don’t really pay much attention to this
That’s it
I have never rebalanced outside my withdrawals-being a conservative-stay the course investor
Simple cheap understandable system
I am stocks and bonds with a cash buffer of 2+ years of living expenses but the cash buffer is part of my set Asset Allocation
xxd09
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Chalky W on 18/11/2024(UTC), Brockend on 18/11/2024(UTC), Dexi on 18/11/2024(UTC), Jay P on 18/11/2024(UTC), Carl blue nose on 18/11/2024(UTC), Harry Gloom on 18/11/2024(UTC), Martina on 18/11/2024(UTC), Sheerman on 19/11/2024(UTC), Greylocks on 19/11/2024(UTC), AlanT on 20/11/2024(UTC), dlp6666 on 05/03/2025(UTC)
You have to change your life
Posted: 18 November 2024 15:12:00(UTC)
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The flaw behind all rebalancing is that it 100% relies on market timing.

Market timing that takes you back to the date of your entry point in the market .

Good luck with that because, to work, it basically relies on that date nailing the perfect proportions for your investment. What are the chances?
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Jay P on 18/11/2024(UTC), Sara G on 18/11/2024(UTC), dlp6666 on 05/03/2025(UTC)
Harry Gloom
Posted: 18 November 2024 15:21:14(UTC)
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You have to change your life;326090 wrote:
The flaw behind all rebalancing is that it 100% relies on market timing.

Market timing that takes you back to the date of your entry point in the market .

Good luck with that because, to work, it basically relies on that date nailing the perfect proportions for your investment. What are the chances?


But, if you keep the 25%, which equates to say 5 years of living expenses in reserve and don't use it until the market crashes, there is still market timing required, when do I switch, 20% down, 30% down?? and also at the other end of when to switch back, and then again when to refill the cash "bucket".

Annual rebalancing buys equities when they are down and sells when they are high.
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Guest on 17/12/2024(UTC)
Sara G
Posted: 18 November 2024 16:01:22(UTC)
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I take a different approach, although I have a DB pension kicking in down the line, and other savings which I can draw on, which may change things.

Rather than re-balancing, I categorise the SIPP holdings by approximate level of risk / growth potential, with the aim of leaving the things that are more likely to grow alone as far as possible. I expect equities and crypto to be the last assets to be sold. I have 1-2 years' worth of withdrawals in cash (Money Market fund), and this is boosted by the yield from the pf. The last time I raised more cash from selling was to close out an unsuccessful Yen trade, proceeds from which went to cash and infrastructure. So basically I'm cutting losses and running winners, which I suppose is the opposite of rebalancing.

When the DB / State pensions kick in, I will reduce the withdrawals.
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Helen L on 18/11/2024(UTC), Jay P on 18/11/2024(UTC), Martina on 18/11/2024(UTC), Sheerman on 19/11/2024(UTC), dlp6666 on 05/03/2025(UTC)
Jed Mires
Posted: 18 November 2024 19:45:46(UTC)
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I use rebalancing annually in my 60/40 portfolio. I rebalance in April/May back to 60/40 then spend from the fixed income for the rest of the year which means I am slightly overweight equities.
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Thrugelmir on 18/11/2024(UTC)
ANDREW FOSTER
Posted: 18 November 2024 19:56:05(UTC)
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Harry Gloom;326013 wrote:
Let's say you have portfolio held as 75/25 stocks/MMF leading into retirement.

What are the competing merits of these 2 approaches to consumption of the assets:

1) Annual rebalancing back to 75/25, so sell stocks when they are up, use cash/MMF to buy stocks when they are down at the end of each year.

2) Keep the 25% cash/MMF and only use it where there is a significant downturn.

I see the logic in both but Option 2 requires a determination (market timing) of when to turn off drawdown from stocks and use the cash/MMF and a 2nd determination when to revert back.


Great question and nnot dissimilar to the situation I am in, albeit in different proportions.

I think the question olnly arises as long as we are in relatively high interest rates. When MMF/Fixed Interest is returning 5-6% and equities look shakey I'd just be moving the bar accordingly. Especially if inflation bites back and rates rise again.

So I guess my answer is don't be wedded to some fixed ratio, just try to with the flow, or at least stay a bit ahead of it. You usually have a few months between inflation figures and changes in base rates, though equities seem to react much quicker.

But be resigned to the fact that no one is going to make the calls correctly all the time. But you only have to get it right 51% of the time to outperform

For the record I'm currently close to a 33/33/33 Passives/Dividend payers/(Fixed income,corporate bonds) layout.
3 users thanked ANDREW FOSTER for this post.
Harry Gloom on 18/11/2024(UTC), Martina on 18/11/2024(UTC), Sheerman on 19/11/2024(UTC)
ben ski
Posted: 18 November 2024 20:00:08(UTC)
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Harry Gloom;326013 wrote:
1) Annual rebalancing back to 75/25, so sell stocks when they are up, use cash/MMF to buy stocks when they are down at the end of each year.

2) Keep the 25% cash/MMF and only use it where there is a significant downturn.

I see the logic in both but Option 2 requires a determination (market timing) of when to turn off drawdown from stocks and use the cash/MMF and a 2nd determination when to revert back.


I think option 2 has too many inconsistencies with how it would play out.

The main reason for regular rebalancing is to avoid *style drift*. So if stocks were up 1,000%, your cash wouldn't be 25% anymore. It would be closer to 2.5%. So it wouldn't be much use to buy the dip with.

It also wouldn't be logically consistent, as the point you get into the market is arbitrary – stocks have already gone up >1,000% before you started investing ... So if 25% cash made sense when you started, it should still make sense 20 years later.

There have been lots of attempts to improve periodic rebalancing – like rebalance bands, etc. But they're usually just the result of back-fitting. There's really nothing you can do to improve a simple, periodic approach unless you're adding information to the market.

My favourite approaches:

1) Volatility harvesting – this is what the Yale model does. They'd have more asset classes with low correlations, so they'll rebalance between these sometimes multiple times a day. The theory is that short-term share price fluctuations are an anomaly – they're larger than they should be. IT discounts may be an opportunity. You make very small daily profits which add to the absolute return nature of a portfolio.

2) Timed rebalancing – you can use any algorithmic, macro or trend strategy to try and time when markets are about to turn, and rebalance then. The advantage is that it doesn't really matter if you get it right or not – all you're doing is maintaining the risk profile of your portfolio.

In long-term backtests, rebalancing every 19 months tends to be about optimal.
3 users thanked ben ski for this post.
Harry Gloom on 18/11/2024(UTC), Guest on 18/11/2024(UTC), InvestmentIdiot on 18/11/2024(UTC)
You have to change your life
Posted: 18 November 2024 20:16:13(UTC)
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ben ski;326117 wrote:

The main reason for regular rebalancing is to avoid *style drift*. So if stocks were up 1,000%, your cash wouldn't be 25% anymore. It would be closer to 2.5%. So it wouldn't be much use to buy the dip with.

Which is to say: You don't know why things have changed, so double down on things going back to a familiar pattern.



In long-term backtests, rebalancing every 19 months tends to be about optimal.


Oh yeah, that will work.
ben ski
Posted: 18 November 2024 20:58:15(UTC)
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You have to change your life;326118 wrote:
ben ski;326117 wrote:

The main reason for regular rebalancing is to avoid *style drift*. So if stocks were up 1,000%, your cash wouldn't be 25% anymore. It would be closer to 2.5%. So it wouldn't be much use to buy the dip with.

Which is to say: You don't know why things have changed, so double down on things going back to a familiar pattern.



In long-term backtests, rebalancing every 19 months tends to be about optimal.


Oh yeah, that will work.


If you can't be bothered to explain what you mean.

2 users thanked ben ski for this post.
SF100 on 18/11/2024(UTC), Guest on 18/11/2024(UTC)
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