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Rebalance Regularly, Even During Periods Of Volatility
FYI: It seems like at the beginning of each year, market pundits predict that equity markets will generate positive returns in the year ahead, with the majority of the predictions landing between 0% and 10%. Ironically, the broad U.S. equity market has finished outside of that range in 77 of the past 90 years, with annual returns ranging from +54% to -43%. Regards, Ted http://www.forbes.com/sites/jamescahn/2016/02/25/rebalance-regularly-even-during-periods-of-volatility/print/
He's filling space with this piece - nothing new unless you've just fallen off the turnip truck: "It is my belief that once you design and implement a portfolio to match your long-term investment goals and risk tolerance, you should preserve its structural integrity. And the best way to preserve your ideal asset allocation is to rebalance regularly, even when markets are volatile." -
There's good arguments on both sides and many different ways to approach rebalancing. Some are repulsed at the thought of selling a winner and buying a loser. Others see regular rebalancing as a way to lock-in gains on a regular basis.
One approach I use is to set broad percentage ranges for different categories in advance, much as asset allocation funds do. Keep hands-off unless a range is breached either on the upside or downside. Another common way is to rebalance back to norm on a chosen date each year. Some people use their birthday. If you're already in the draw-down stage, taking distributions from your winners is a natural way to rebalance.
A few chosen funds I exclude from rebalancing for a variety of reasons - small speculative positions in OPGSX and PRLAX for example. These are long-term bets in highly volatile areas and I'm willing to let them run for now in hopes of outsized gains. Neither has disappointed since purchase.
I usually rebalance the major areas (cash, bonds, stocks & other assets) of my portfolio when one of them gets to be plus or minus five percent form it's target with the exception being cash.
Example. My current target allocation to equities is 50%. With this, should equities rise to above 52.5% (105% of it's target) during a normal market cycle then I'll trim equities. However, if we are in a seasonal trend then I'll, at times, delay the rebalance towards the end of the seasonal cycle usually following some technicals looking for a breakdown in the trend. With this, I can either rebalance by the calendar or anytime by a break down in the trend. Should equities reach their upper limit within their asset allocation (currently set at 55%) then this requires a rebalance back to at least the 52.5% level and when the seasonal strategy concludes I'll generally rebalance back to the traget allocation of 50% unless equities are selling at a low price to earnings multiple and I'll position towards their mid to high allocation range for me.
Generally, if stocks are selling at a high price to earnings ratio valuation then I'll position towards the low end of my allocation range (45%) and if they are selling at a low price to earnings ratio valuation then I'll position towards my high allocation range (55%).
I am thinking there are many triggers that can warrant a rebalance incuding a need for cash. The above are just a couple of the things that can trigger a rebalance for me with most of them being driven by both stock and bond market valuations. In addition, I'll generally buy major downdrafts in the stock market and sell some equities off as the market recovers keeping within my allowable asset allocation range.
I call this working within one's asset allocation and somewhat follows Biblical beliefs in there is a time to plant and a time to harvest. Through the years this strategy has worked well for me.
Below is a description of my sleeve management system along with my portfolio's configuration. Note, there has been some recent fund movement within the sleeves.
Old_Skeet's Sleeve Management System (02/26/2016)
Here is a brief description of my sleeve system which I organized to help better manage the investments that were held in five accounts along with my current positioning. The accounts consist of a taxable account, a self directed ira account, a 401k account, a profit sharing account and a health savings account plus two bank accounts. With this I came up with four investment areas. They are a cash area which consist of two sleeves … an investment cash sleeve and a demand cash sleeve. The next area is the income area which consists of two sleeves. … a fixed income sleeve and a hybrid income sleeve. Then there is the growth & income area which has more risk associated with it than the income area and it consist of four sleeves … a global equity sleeve, a global hybrid sleeve, a domestic equity sleeve and a domestic hybrid sleeve. An finally there is the growth area, where the most risk in the portfolio is found and it consist of five sleeves … a global sleeve, a large/mid cap sleeve, a small/mid cap sleeve, a specialty & theme sleeve along with a ballast & spiff investment sleeve. Each sleeve consists of three to six funds (in most cases) with the size and the weight of each sleeve can easily be adjusted, from time-to-time, by adjusting the number of funds and amounts held. By using the sleeve system one can get a better picture of their overall investment picture and weightings by sleeve and area. In addition, I have found it beneficial to xray each fund, each sleeve, each investment area, and the portfolio as a whole quarterly. Again, weightings can be adjusted form time-to-time as to how I might be reading the markets and wish to weight accordingly. All funds pay their distributions to the cash area of the portfolio with the exception being those in my 401k, profit sharing, and health savings accounts where reinvestment occurs. With the other accounts paying to the cash area builds the cash area of the portfolio to meet the portfolio’s monthly cash disbursement amount with the residual being left for new investment opportunity. In addition, most all buy/sell trades settle from or to the cash area with some nav exchanges between funds taking place.
Here is how I have my asset allocation broken out in percent ranges, by area. My current target allocations are cash 20%, income 30%, growth & income 35%, and growth 15%. I do an Instant Xray analysis on the portfolio quarterly (sometimes monthly) and make asset weighting adjustments as I feel warranted based upon my assessment of the market, my risk tolerance, cash needs, etc. Currently, I am about 20% in the cash area, 30% in the income area, 35% in the growth & income area and 15% in the growth area. When a rebalance is warranted I'll trim first from the ballast & spiff sleeve.
Cash Area (Weighting Range 15% to 25% with target being 20%) Demand Cash Sleeve… (Cash Distribution Accrual & Future Investment Accrual) Investment Cash Sleeve … (Savings & Time Deposits)
Income Area (Weighting Range 25% to 35% with target being 30%) Fixed Income Sleeve: GIFAX, LALDX, THIFX, LBNDX, NEFZX & TSIAX Hybrid Income Sleeve: CAPAX, CTFAX, FKINX, ISFAX, JNBAX & PGBAX
Growth & Income Area (Weighting Range 30% to 40% with target being 35%) Global Equity Sleeve: CWGIX, DEQAX & EADIX Global Hybrid Sleeve: BAICX, CAIBX & TIBAX Domestic Equity Sleeve: ANCFX, FDSAX, INUTX, NBHAX, SPQAX & SVAAX Domestic Hybrid Sleeve: ABALX, AMECX, DDIAX, FRINX, HWIAX & LABFX
Growth Area (Weighting Range 10% to 20% with target being 15%) Global Sleeve: ANWPX, PGROX & THOAX Large/Mid Cap Sleeve: AGTHX, IACLX & SPECX Small/Mid Cap Sleeve: AJVAX, PCVAX & PMDAX Specialty & Theme Sleeve: LPEFX, PGUAX, TOLLX, NEWFX & THDAX Ballast & Spiff Sleeve: FISCX, VADAX & VNVAX
@Old_Skeet I have a question about your approach. Do you care about portfolio allocation in each of your brokerage accounts or only for the total portfolio?
I do care about portfolio allocation in each account that makes up the master portfolio that I have detailed above. Naturally, the asset allocation does varry from account-to-account along with the holdings. For example, in my health savings account about one third is currently invested in only one fund (American Balanced Fund) and the other two thirds is currently held in cash which is much more than I need from an annual health care perspective. It is one of the accounts that I throttle form time-to-time by adjusting it's allocation as how I am reading the markets. Currently, with high equity valuations and anticipated interest rate increases I have rolled back my exposure to both stocks & bonds not only in this account but in all of my accounts. All the accounts get throttled from time-to-time but not all get throttled at the same time as I make changes (rebalance) over time. For example, I have been raising my cash allocation and lowering my allocation to both stocks and bonds for the past couple of years due to higher than normal price to earnings ratios for stocks and anticipated rising interest rates which will effect most bond valuations.
Generally, when I make a buy, I buy with the intent to hold the asset for at least a year. When selling something, in my taxable account, I generally take profits form long term positions while letting the shorter term positions ride until their profits (or losses) will be taxed as long term capital gains (or losses). For me, investing centers more around time in the markets over timing the markets. Trading centers around timing the markets. Generally, I hold more equities (towards the high range of my allowable allocation) when they have become oversold and their valuations are reasonable ... and, I'll hold less when their valuations have increase with higher than normal price to earnings ratios thus becoming overbought.
Most of these accounts have been in place for a good number of years as I am now retired and began investing when I was a teenager in FKINX (which was my first mutual fund purchased and still remains my largest single position at about six percent of my portfolio). Interestingly, form my late fifties, up to my full retirement at age 67, I made more from my investing endeavors than I made from working.
Thanks again for the question. I hope the above provides you with some insight as how I govern my portfolio and answers your question.
Comments
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There's good arguments on both sides and many different ways to approach rebalancing. Some are repulsed at the thought of selling a winner and buying a loser. Others see regular rebalancing as a way to lock-in gains on a regular basis.
One approach I use is to set broad percentage ranges for different categories in advance, much as asset allocation funds do. Keep hands-off unless a range is breached either on the upside or downside. Another common way is to rebalance back to norm on a chosen date each year. Some people use their birthday. If you're already in the draw-down stage, taking distributions from your winners is a natural way to rebalance.
A few chosen funds I exclude from rebalancing for a variety of reasons - small speculative positions in OPGSX and PRLAX for example. These are long-term bets in highly volatile areas and I'm willing to let them run for now in hopes of outsized gains. Neither has disappointed since purchase.
Example. My current target allocation to equities is 50%. With this, should equities rise to above 52.5% (105% of it's target) during a normal market cycle then I'll trim equities. However, if we are in a seasonal trend then I'll, at times, delay the rebalance towards the end of the seasonal cycle usually following some technicals looking for a breakdown in the trend. With this, I can either rebalance by the calendar or anytime by a break down in the trend. Should equities reach their upper limit within their asset allocation (currently set at 55%) then this requires a rebalance back to at least the 52.5% level and when the seasonal strategy concludes I'll generally rebalance back to the traget allocation of 50% unless equities are selling at a low price to earnings multiple and I'll position towards their mid to high allocation range for me.
Generally, if stocks are selling at a high price to earnings ratio valuation then I'll position towards the low end of my allocation range (45%) and if they are selling at a low price to earnings ratio valuation then I'll position towards my high allocation range (55%).
I am thinking there are many triggers that can warrant a rebalance incuding a need for cash. The above are just a couple of the things that can trigger a rebalance for me with most of them being driven by both stock and bond market valuations. In addition, I'll generally buy major downdrafts in the stock market and sell some equities off as the market recovers keeping within my allowable asset allocation range.
I call this working within one's asset allocation and somewhat follows Biblical beliefs in there is a time to plant and a time to harvest. Through the years this strategy has worked well for me.
Below is a description of my sleeve management system along with my portfolio's configuration. Note, there has been some recent fund movement within the sleeves.
Old_Skeet's Sleeve Management System (02/26/2016)
Here is a brief description of my sleeve system which I organized to help better manage the investments that were held in five accounts along with my current positioning. The accounts consist of a taxable account, a self directed ira account, a 401k account, a profit sharing account and a health savings account plus two bank accounts. With this I came up with four investment areas. They are a cash area which consist of two sleeves … an investment cash sleeve and a demand cash sleeve. The next area is the income area which consists of two sleeves. … a fixed income sleeve and a hybrid income sleeve. Then there is the growth & income area which has more risk associated with it than the income area and it consist of four sleeves … a global equity sleeve, a global hybrid sleeve, a domestic equity sleeve and a domestic hybrid sleeve. An finally there is the growth area, where the most risk in the portfolio is found and it consist of five sleeves … a global sleeve, a large/mid cap sleeve, a small/mid cap sleeve, a specialty & theme sleeve along with a ballast & spiff investment sleeve. Each sleeve consists of three to six funds (in most cases) with the size and the weight of each sleeve can easily be adjusted, from time-to-time, by adjusting the number of funds and amounts held. By using the sleeve system one can get a better picture of their overall investment picture and weightings by sleeve and area. In addition, I have found it beneficial to xray each fund, each sleeve, each investment area, and the portfolio as a whole quarterly. Again, weightings can be adjusted form time-to-time as to how I might be reading the markets and wish to weight accordingly. All funds pay their distributions to the cash area of the portfolio with the exception being those in my 401k, profit sharing, and health savings accounts where reinvestment occurs. With the other accounts paying to the cash area builds the cash area of the portfolio to meet the portfolio’s monthly cash disbursement amount with the residual being left for new investment opportunity. In addition, most all buy/sell trades settle from or to the cash area with some nav exchanges between funds taking place.
Here is how I have my asset allocation broken out in percent ranges, by area. My current target allocations are cash 20%, income 30%, growth & income 35%, and growth 15%. I do an Instant Xray analysis on the portfolio quarterly (sometimes monthly) and make asset weighting adjustments as I feel warranted based upon my assessment of the market, my risk tolerance, cash needs, etc. Currently, I am about 20% in the cash area, 30% in the income area, 35% in the growth & income area and 15% in the growth area. When a rebalance is warranted I'll trim first from the ballast & spiff sleeve.
Cash Area (Weighting Range 15% to 25% with target being 20%)
Demand Cash Sleeve… (Cash Distribution Accrual & Future Investment Accrual)
Investment Cash Sleeve … (Savings & Time Deposits)
Income Area (Weighting Range 25% to 35% with target being 30%)
Fixed Income Sleeve: GIFAX, LALDX, THIFX, LBNDX, NEFZX & TSIAX
Hybrid Income Sleeve: CAPAX, CTFAX, FKINX, ISFAX, JNBAX & PGBAX
Growth & Income Area (Weighting Range 30% to 40% with target being 35%)
Global Equity Sleeve: CWGIX, DEQAX & EADIX
Global Hybrid Sleeve: BAICX, CAIBX & TIBAX
Domestic Equity Sleeve: ANCFX, FDSAX, INUTX, NBHAX, SPQAX & SVAAX
Domestic Hybrid Sleeve: ABALX, AMECX, DDIAX, FRINX, HWIAX & LABFX
Growth Area (Weighting Range 10% to 20% with target being 15%)
Global Sleeve: ANWPX, PGROX & THOAX
Large/Mid Cap Sleeve: AGTHX, IACLX & SPECX
Small/Mid Cap Sleeve: AJVAX, PCVAX & PMDAX
Specialty & Theme Sleeve: LPEFX, PGUAX, TOLLX, NEWFX & THDAX
Ballast & Spiff Sleeve: FISCX, VADAX & VNVAX
Total Number of Mutual Fund Positions = 47
Thank you for your question.
I do care about portfolio allocation in each account that makes up the master portfolio that I have detailed above. Naturally, the asset allocation does varry from account-to-account along with the holdings. For example, in my health savings account about one third is currently invested in only one fund (American Balanced Fund) and the other two thirds is currently held in cash which is much more than I need from an annual health care perspective. It is one of the accounts that I throttle form time-to-time by adjusting it's allocation as how I am reading the markets. Currently, with high equity valuations and anticipated interest rate increases I have rolled back my exposure to both stocks & bonds not only in this account but in all of my accounts. All the accounts get throttled from time-to-time but not all get throttled at the same time as I make changes (rebalance) over time. For example, I have been raising my cash allocation and lowering my allocation to both stocks and bonds for the past couple of years due to higher than normal price to earnings ratios for stocks and anticipated rising interest rates which will effect most bond valuations.
Generally, when I make a buy, I buy with the intent to hold the asset for at least a year. When selling something, in my taxable account, I generally take profits form long term positions while letting the shorter term positions ride until their profits (or losses) will be taxed as long term capital gains (or losses). For me, investing centers more around time in the markets over timing the markets. Trading centers around timing the markets. Generally, I hold more equities (towards the high range of my allowable allocation) when they have become oversold and their valuations are reasonable ... and, I'll hold less when their valuations have increase with higher than normal price to earnings ratios thus becoming overbought.
Most of these accounts have been in place for a good number of years as I am now retired and began investing when I was a teenager in FKINX (which was my first mutual fund purchased and still remains my largest single position at about six percent of my portfolio). Interestingly, form my late fifties, up to my full retirement at age 67, I made more from my investing endeavors than I made from working.
Thanks again for the question. I hope the above provides you with some insight as how I govern my portfolio and answers your question.