# Is anyone rebalancing and selling some stocks?



## james4beach (Nov 15, 2012)

This rally in stocks has been pretty crazy. I'm curious if anyone here is rebalancing, meaning selling [some] stocks and buying bonds/GICs, to get back to their target weights?

I normally rebalance once a year but am starting to think I should do it sooner rather than later.

Rebalancing is a risk-control measure. Notice that Vanguard's VBAL is 60.5% stocks and 39.5% bonds, which shows that they *have* been selling stocks during this rally.


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## james4beach (Nov 15, 2012)

I ran a "what-if" scenario of a 10% stock market decline.

If I leave my portfolio alone and don't rebalance, I would see a 3.3% drop.
If I rebalance my portfolio back to target asset weights, I would see a 3.0% drop.

An imperceptible difference in my case. So I don't think I should bother rebalancing; I'll stick with my regular schedule. You might be interested @hfp75 @librahall


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## Thal81 (Sep 5, 2017)

Yeah, I've been asking myself the same thing for a while. I've resisted rebalancing so far because I came to the same conclusion as you: it won't make much of a difference. I have however been delaying new buys in my index funds (bonds too), which is very unusual for me. So cash is piling up, which is inherently reducing my risk exposure. But I will probably lose out to inflation... or will I?

Sigh. I believe there is no such thing as "normal times" in the market, and that's usually enough to make me avoid market timing, but man we are in strange times.


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## james4beach (Nov 15, 2012)

Thal81 said:


> So cash is piling up, which is inherently reducing my risk exposure. But I will probably lose out to inflation... or will I?


My approach to this has simply been to keep investing the money (when it's available) in the way that best satisfies my asset allocation targets. As a result, I have mainly bought bonds and GICs throughout this year since I'm consistently overweight stocks. So it's rebalancing through new purchases.

Any reason you wouldn't buy GICs with that spare cash?


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## MrMatt (Dec 21, 2011)

Yes.
Not right now because oddly my positions aren't too out of whack, but a bit of pruning does make sense when they're way off.


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## MrMatt (Dec 21, 2011)

Thal81 said:


> Yeah, I've been asking myself the same thing for a while. I've resisted rebalancing so far because I came to the same conclusion as you: it won't make much of a difference. I have however been delaying new buys in my index funds (bonds too), which is very unusual for me. So cash is piling up, which is inherently reducing my risk exposure. But I will probably lose out to inflation... or will I?
> 
> Sigh. I believe there is no such thing as "normal times" in the market, and that's usually enough to make me avoid market timing, but man we are in strange *times*.


If there are no "normal times", then aren't the "strange times" == "normal times".

Honestly, what is your plan?
Best advice is make a plan, stick to your plan.


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## Thal81 (Sep 5, 2017)

james4beach said:


> Any reason you wouldn't buy GICs with that spare cash?


Can't bring myself to lock money... If I'd do it, it would be short term, and the returns are not much different than just holding the cash in HISA. I'd rather keep the flexibility, at some point I'll just say enough is enough, and continue my buys


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## Spudd (Oct 11, 2011)

I follow a 20% rebalancing band strategy. Right now my worst (bonds) is out of balance by 8% only, so no need to rebalance. I have been rebalancing kind of automatically when withdrawing by withdrawing from whatever was most over its desired allocation.


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## Thal81 (Sep 5, 2017)

MrMatt said:


> Honestly, what is your plan?
> Best advice is make a plan, stick to your plan.


Early retirement is my plan, and I'm close to the end. Maybe that's why I'm more cautious than usual...


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## MrMatt (Dec 21, 2011)

Thal81 said:


> Early retirement is my plan, and I'm close to the end. Maybe that's why I'm more cautious than usual...


If you're moving into retirement and need that money, move an appropriate amount into cash/fixed income.
Around 2008, I had a coworker moving into retirement, and his plan was to sell off in March.
He did some, but he was holding on for "a little bit more"

Fortunately he was quite wealthy, but that ended up about as wrong as you can be.
That was a great lesson to follow your plan.


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## james4beach (Nov 15, 2012)

Thal81 said:


> Can't bring myself to lock money... If I'd do it, it would be short term, and the returns are not much different than just holding the cash in HISA.


If locking in money is the issue, then you could add shorter term bonds (XSB) to your portfolio. Then at least when you add money to "bonds" you know it's appropriate for your shorter time horizon.

Also keep in mind that anyone with imminent retirement should have a significant fixed income portion in their asset allocation plan. I'm 50% fixed income (bonds & GICs)


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## cainvest (May 1, 2013)

james4beach said:


> Also keep in mind that anyone with imminent retirement should have a significant fixed income portion in their asset allocation plan. I'm 50% fixed income (bonds & GICs)


Of course the amount of fixed income can vary a fair bit from person to person. Some may like 70% FI while others would be comfortable with only 30% FI.


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## AltaRed (Jun 8, 2009)

james4beach said:


> Also keep in mind that anyone with imminent retirement should have a significant fixed income portion in their asset allocation plan. I'm 50% fixed income (bonds & GICs)


Maybe. I don't work with a percentage and I am not so sure that methodology shouldn't be a 'check and balance' against the conventional "100-age" or "110-age" rule of thumb near, or into, retirement. I work with what I need to bridge a multi-year equity swoon. 

If you use the conventional rules of thumb, I'd suggest you might be too conservative (depending on what your FI bridge needs to be).


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## james4beach (Nov 15, 2012)

AltaRed said:


> If you use the conventional rules of thumb, I'd suggest you might be too conservative (depending on what your FI bridge needs to be).


I do realize my asset allocation may be too conservative, but I'm definitely not going to change that while stocks shooting to the moon. I've been very comfortable with the risk level of my current portfolio ... it was OK during the 2020 crash, and it's been OK through this insane rally as well. So I think my asset allocation is about right for me.

At some point, if stocks become hated and scary again, that's when I would consider revising my asset allocation plan to be higher % stocks.


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## Thal81 (Sep 5, 2017)

james4beach said:


> If locking in money is the issue, then you could add shorter term bonds (XSB) to your portfolio.


I've actually considered XSB for a small portion of my bonds. It could be a good way to have something liquid for short term needs that's is not as vulnerable to changes in interest rates as XBB.


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## hfp75 (Mar 15, 2018)

This year (no mortgage) we have been really saving. Its very rewarding watching the numbers. Excel updates my unit values & based on targets it tells me where I am out of balance. Add in cash and it readjusts, I have been buying to maintain targets. This includes everything, but obviously more where values are down. Its a thing of beauty. Pre-computer era, this would have been a whole night of math and now with 1 click of the mouse, in 5 seconds its all up to date. Easy-peasy, buy this much $ of this which at current prices is this many units ... tells me me how much to sell and buy... saves me doing math.... Gotta love it. Build the Excel file right at the beginning and then it just works.....

As a point of reference, in the past I have always purchased RRSPs in the spring at tax time. This year over the summer I bought them for next year to get ahead of the curve as it would be. All accounts that I have been adding to are pretty balanced / on target. I do have a pair of LIRA accts that are a bit out of whack.... since its a LIRA there just isnt $ flow going into it to. So, I am watching the imbalance to try and decide when to 'fix' it..... maybe in the winter....


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## hfp75 (Mar 15, 2018)

Delete.... figured it out...


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> I normally rebalance once a year but am starting to think I should do it sooner rather than later.


That would be timing the market. If your plan is to rebalance every year, do it every year, same date. If your plan is to rebalance based on bands, wait until those bands are reached.


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## james4beach (Nov 15, 2012)

MrBlackhill said:


> That would be timing the market. If your plan is to rebalance every year, do it every year, same date.


That's a very good point. I should stick to my existing methodology, which is to rebalance each year in December.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> That's a very good point. I should stick to my existing methodology, which is to rebalance each year in December.


Yup. So if the equity market continues its run, you'll be happy. If not, well, you'll have followed your plan, which makes sense over multiple years and averages the different outcomes.


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## james4beach (Nov 15, 2012)

MrBlackhill said:


> Yup. So if the equity market continues its run, you'll be happy. If not, well, you'll have followed your plan, which makes sense over multiple years and averages the different outcomes.


Fair enough. I also did not rebalance during the covid crash. I just left the portfolio alone, as per my plan.

In hindsight, since we know it was a very brief crash and fast recovery, rebalancing would have boosted returns. OTOH if the bear market had been very long, or if this had been the start of a Depression, leaving it alone would have been the right thing to do.


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## librahall (Apr 11, 2020)

james4beach said:


> I ran a "what-if" scenario of a 10% stock market decline.
> 
> If I leave my portfolio alone and don't rebalance, I would see a 3.3% drop.
> If I rebalance my portfolio back to target asset weights, I would see a 3.0% drop.
> ...


Frankly speaking, I have mixed feelings about rebalancing.

If you take capital gain tax into account, the difference may be more imperceptible. However, if you convert to bonds, they will be able to offset some of the declines in stocks. If you convert to GICs, you can buy stocks at lower prices in the future.

If you run a “what-if" scenario of a 20% stock market decline, the result would be more(2x) favorable to rebalance. 

This year I have taken too much profit from stocks/cryptos so I don't think I would bother rebalancing. Maybe next year...

At last, I am wondering what is the science behind the *exactly equal* allocation of stock/equity/bond/cash in PP?


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## wayward__son (Nov 20, 2017)

cursory flip through this forum shows speculation about overheated public equity markets is a frequent activity going back a decade plus now, with only a few brief interludes -- covid, Q4 2018 basically -- and lots of people thinking they want to countertrade the shoeshine boy. mean reversionist would say the party has to end sometime, but so far rebalancing out of equities has not been a good trade.


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## MrBlackhill (Jun 10, 2020)

librahall said:


> At last, I am wondering what is the science behind the *exactly equal* allocation of stock/equity/bond/cash in PP?


Why *exactly equal*? I believe there's no science, just historical observations that it was the best risk-adjusted returns over the long run. Same goes for any classic portfolio like the 60/40. Why those weights? Best risk-adjusted returns for most of the population. That's just my belief.


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## james4beach (Nov 15, 2012)

librahall said:


> At last, I am wondering what is the science behind the *exactly equal* allocation of stock/equity/bond/cash in PP?


It's just the diversification idea. You have 4 assets which have different characteristics. The only question is how to combine them. Equal weightings is a reasonable default, and that's the Permanent Portfolio.

You can certainly modify that with slightly different weightings, it really makes no difference... you just need to decide on something and stick with it.

The PP is 25% stocks, but I use 30%
The PP is 25% gold, but I use 20%

There isn't much science to any of this, since economics and finance isn't really a science. It's a "social science" at best, really a pseudoscience. Lots of PhD academic people who think linear regression is neat, coming up with all kinds of plausible stories, but with _a lot_ of nonsense and statistical uncertainty. Nobody really has idea what's going to happen in the market.

Just take some good assets and throw them together, and stick with it, and that's the best anyone can do.


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## peterk (May 16, 2010)

Has anyone ever - sorry for the slight threadjacking - done or heard of a rebalancing that is done at unequal intervals whether moving out of bonds or out of stocks? Is that a thing that's been looked at?

Following the logic of "buy the dip opportunities are frequent" and "market crashes happen fast" as well as "market recoveries climb a wall of fear" --- Would it make sense to have a plan that rebalances out of bonds into stocks on a quarterly or semi-annual basis, and rebalances out of stocks on an annual or biennial basis?


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## MrMatt (Dec 21, 2011)

peterk said:


> Has anyone ever - sorry for the slight threadjacking - done or heard of a rebalancing that is done at unequal intervals whether moving out of bonds or out of stocks? Is that a thing that's been looked at?
> 
> Following the logic of "buy the dip opportunities are frequent" and "market crashes happen fast" as well as "market recoveries climb a wall of fear" --- Would it make sense to have a plan that rebalances out of bonds into stocks on a quarterly or semi-annual basis, and rebalances out of stocks on an annual or biennial basis?


Yes.
Rebalance whenever you want, but I'd suggest setting criteria. Maybe when the rebalancing transaction is $xxxx. Like if it's a $5k move, then rebalance.
What you do NOT want to do is rebalance early/late because you're timing the market.

Also remember there are funds/ETFs that balance pretty much continuously.


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## Thal81 (Sep 5, 2017)

Today I was weak and I rebalanced back to my target allocations.


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## Covariance (Oct 20, 2020)

MrMatt said:


> Yes.
> Rebalance whenever you want, but I'd suggest setting criteria. Maybe when the rebalancing transaction is $xxxx. Like if it's a $5k move, then rebalance.
> What you do NOT want to do is rebalance early/late because you're timing the market.
> 
> Also remember there are funds/ETFs that balance pretty much continuously.


I do something similar to this. For each asset/asset class there is target weight, upper limit, lower limit. A range is much more manageable and realistic.


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## james4beach (Nov 15, 2012)

Thal81 said:


> Today I was weak and I rebalanced back to my target allocations.


No harm in doing so. I keep wondering if I should, at least in my RRSP where there's no tax consequence.

It's just that a stock correction would have to be pretty severe, > 20% for it to really make a difference, and that seems unlikely.

Famous last words perhaps.


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## Thal81 (Sep 5, 2017)

Thal81 said:


> Today I was weak and I rebalanced back to my target allocations.


Suddenly I feel smart (lucky) for doing that rebalance two weeks ago.


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## MrBlackhill (Jun 10, 2020)

Thal81 said:


> Suddenly I feel smart (lucky) for doing that rebalance two weeks ago.


Lucky, yes. Hindsight. Or maybe it's just September. That's why I was happy to have some cash ready to deploy for September.

Suddenly I'm so happy to buy today.


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## agent99 (Sep 11, 2013)

If you are rebalancing and the whole markets is down, today would be as good a day as any!

I used the little cash we had to buy a few shares of a dividend ETF.


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## james4beach (Nov 15, 2012)

I didn't touch anything. I try to avoid placing trades during high volatility.


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