I believe the equity market can act as its own re-balancing mechanism. Market price conditions change "moment by moment". When you are in the accumulation stage of life you might dollar cost average (dca) into these price conditions and in a sense your "dca" helps you re-balance into the market's price. Dca into investments over a long time horizons (many overbought and oversold changes) usually provide a positive return on investment. This might be considered a component of a re-balancing growth strategy.
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 a
gainst 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.
