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Given that we seem to be entering “interesting” times, I’m revisiting my rebalancing strategy
to ensure my approach remains calm and rational.
I’ve generally got a vanilla approach with a 60% stock and 40% bond and cash mix with low-cost index funds and 3-5 years of cash/cash equivalents worth set aside for living expenses.
My re-balancing strategy is generally “Do it once a year or if any one major category drifts more than 5% from it’s target.” I primarily conduct rebalancing within my IRAs to minimize tax liabilities.
Overall, I plan to remain committed to my original strategy. It seems to keep me calm.
Hyper-inflation, defaults, or wars could ruin my day, but I can’t control those.
I am considering adjusting the reevaluation and rebalancing schedule to every three to six months to better maintain my desired allocation during periods of increased volatility.
Thoughts? What’s your approach in “interesting” times?
I’m an annual re-balance person, now I’ve seen research that it’s likely more efficient to use out of balance triggers and making those triggers somewhat harder to reach.
Sort of like how lump sum investing tends to outperform dollar cost averaging.
“What’s your approach in “interesting” times?” Our approach is to have a long term safety first strategy with diversification and downside, inflation and longevity protection and an all-weather portfolio focused on preservation rather than performance in retirement so we can maintain a steady course, interesting times come as they may. Rebalancing plays a small part in the strategy and we use guardrails as a trigger to consider rebalancing and then are tactical about implementation. Also, because a key part of our strategy is timely replenishment of a 10-year rolling TIPs ladder, sometimes the rebalancing occurs at the same time.
When I was younger, still working, and purposefully accumulating in my IRA or 401(k) accounts for future retirement, I was focused and damn-near anal retentive about keeping a strictly maintained asset allocation. In retirement I’ve become much more laissez-faire. I look occasionally (maybe every quarter) to see how close I am to my preferred goals. As Jonathan said earlier, sometimes it’s best to leave an imbalance the way it is to let your portfolio rebalance on its own.
As time goes by I’ve been more inclined to put my portfolio on “auto-pilot”. I’m retired and so I do play “wealth defense”. As a consequence, my portfolio today is less aggressive. With that shift the need for frequent re-balancing was reduced.
I really haven’t made any changes since 2021 and sometimes I don’t look at our investments for months. In my first year of cancer treatment, I don’t think I looked at all. Our statements are electronic and so it is very easy to ignore them.
I think it is about one’s time horizon, goals and the willingness to act to achieve those goals with conviction.
I have a healthy cash stash, intended to reduce any requirement to sell equities in a market decline. The equity portion of my portfolio is about 25% foreign companies. It is also about 60% large companies and the balance mid- and small- caps. Only 5% would be defined as “aggressive”. Dividends contribute significantly to my annual withdrawals. Some goes toward automatic stock purchase and some goes to cash. I do own a sector ETF and a few individual stocks.
I’ve avoided bond funds, because I concluded a few years ago that I wasn’t being sufficiently rewarded for the risk I was taking, no matter how slight. This proved to be realistic when bond funds tanked a few years ago. Nevertheless, I do own some TIPS ETFs and an Income Fund. These have been my top losers! But in terms of actual impact, the loses have reduced the value of the portfolio by 0.3%.
I’ve preferred to hold cash in high yield money market accounts and I-Bonds and other treasury bonds which if held to maturity will return full face value. Recent improvement in MMF yields have made cash more palatable.
From 2014-2022 I went into a gradual, phased retirement. Over that period, I made my portfolio less aggressive and increased cash and cash equivalents. That was really about preparing for taking annual withdrawals and I wanted my portfolio to become more on “auto-pilot”, but with better returns than some of the indexes at lower risk. I’ve been wary of the percentage of the “magnificent seven” in the indexes. My spouse’s portfolio includes a healthy dose of target-date funds initially purchased via dollar cost averaging in 2004, so she can ignore them.
I use a variety of tools to peak under the hood of our portfolios, both mine and my spouse’s. That information has influenced some decisions and is largely responsible for recent decisions to “do nothing”. I do attempt to balance short-term and long-term gains, and risks.
Norm
I rebalance when I take my RMD, only if I am out of balance by at least 3%. If there is a significant market drop I might rebalance when I’m off by more than 5%, although I never did so in the past. My asset allocation is 50% stocks, and I could probably stand to be a little more aggressive.
I don’t think there’s an optimal rebalancing strategy. Instead, I believe it’s more art than science. My general approach: Do little or no rebalancing during the first few years of a market recovery, when market momentum is your friend, while being prepared to rebalance at short notice if stocks drop sharply.
My AA has drifted from my target 70:30 to more like 80:20, so it’s past time to re-balance, but I’ve been feeling a bit paralyzed. Over at the Bogelheads Forum I learned about having an investment policy statement (IPS) as guidance and I really see its value – it’s helping me take the emotion out deciding what to do. Mine says to re-balance quarterly (which I’ve ignored recently), so at the end of the month I’m going to do see where things stand and re-balance accordingly. Of course, if things continue as they are going, my need to re-balance might be taken care of…
I used to automatically rebalance every quarter to my allocation even if it was a few thousand dollars. Now check my allocation quarterly, but only rebalance if the allocation is off by 5%. I’d recommend picking a percentage rather than a timeframe and write it into you investment policy statement.
I have a similar band threshhold, but I try not to be a market timer. Rather, since retrement, I pull spending from portfolios to maintain my designed asset allocation. Recent market movements have indeed thrown my AA off. However, I was due for a Roth conversion (which I do after compiling my tax returns), and thus took advantage of the opportunity to rebalance via conversions.