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tony

New Research Casts Doubt On Rebalancing

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I don't know how we got off on returns. I still think the original article is crap because he is indirectly sending a message that rebalancing is not in your best interests, and he never said what to do. The wrong message is to focus on returns and not on what is the prudent thing to do.

A strategy that decreases risk as one gets older is never harmful one's portfolio. The only exception is for those fortunate retirees who don't need their investments for financial support, heck, those folks can invest in 100% stocks, and let their beneficiaries worry about it. I have 70% in bonds for years and rebalanced because for the last few years my stock allocation would slowly increase, and that's is harmful to my plan. Not saying its for everybody but for me and my risk tolerance, I am happy. 

That's what most Target Retirement funds do, and the powerhouse Vanguard Wellington and Wellesley. 

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10 hours ago, sschullo said:

he is indirectly sending a message that rebalancing is not in your best interests

I don’t think this is fair and I don’t think it is the author’s intent. The article was pretty explicit about two things

1) There is evidence that rebalancing between stocks and bonds reduces returns because it reduces risk.

2) The trade off between risk/returns means the decision to rebalance is appropriate for a subset of investors.

They seem to suggest that choosing not to rebalance is appropriate for a subset of people. I’d argue if you have the risk appetite for that then you should choose a higher stock allocation from the beginning. I don’t think allowing asset allocation drift is ideal for anybody.

10 hours ago, sschullo said:

A strategy that decreases risk as one gets older is never harmful one's portfolio

I don’t know how you define harm. I define harm as decreasing the odds my portfolio will sustain my retirement, which is closely tied to decreasing expected returns. Shifting my portfolio to be more conservative would do just that.

As I’ve said if I were to reduce the aggressiveness of my portfolio then it would require some combination of:

1) Working much longer to build up a much larger portfolio that can sustain the lower returns a conservative portfolio will generate.

2) Reduce my standard of living to a much lower level to get by with a lower performing portfolio.

Both of those are huge harms. If I wasn’t willing to accept one or both of them then I’d have to accept the much greater harm that is the risk of running out of money before I die.

10 hours ago, sschullo said:

The only exception is for those fortunate retirees who don't need their investments for financial support

That isn’t true. I’m not one of those people and going more conservative would harm me as described above. 

 

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1 hour ago, EdLaFave said:

I don’t think this is fair and I don’t think it is the author’s intent. The article was pretty explicit about two things

1) There is evidence that rebalancing between stocks and bonds reduces returns because it reduces risk.

2) The trade off between risk/returns means the decision to rebalance is appropriate for a subset of investors.

They seem to suggest that choosing not to rebalance is appropriate for a subset of people. I’d argue if you have the risk appetite for that then you should choose a higher stock allocation from the beginning. I don’t think allowing asset allocation drift is ideal for anybody.

I don’t know how you define harm. I define harm as decreasing the odds my portfolio will sustain my retirement, which is closely tied to decreasing expected returns. Shifting my portfolio to be more conservative would do just that.

As I’ve said if I were to reduce the aggressiveness of my portfolio then it would require some combination of:

1) Working much longer to build up a much larger portfolio that can sustain the lower returns a conservative portfolio will generate.

2) Reduce my standard of living to a much lower level to get by with a lower performing portfolio.

Both of those are huge harms. If I wasn’t willing to accept one or both of them then I’d have to accept the much greater harm that is the risk of running out of money before I die.

That isn’t true. I’m not one of those people and going more conservative would harm me as described above. 

 

Ed,

Your points are well thought out and accurate logically. You are an important and sophisticated, savvy investor who knows the data. Your comments reflect the science of investing. 

I am taking a more emotional POV on the article, as well as many of the topics here. I will never like it, its crap. It's too negative and manipulative. I feel it. I am not incorrect for my feelings or for my opinions. There needs to be more discussion on the emotional side of investing because at the end of the day, emotions rule over data--big time. 

I said that three times now that I don't like it. It says the obvious. So what else is new? Your logic will not change my mind, and I believe you know that. I will continue to rebalance because it is the prudent thing to do for me. I NEVER want my portfolio to drift into a more aggressive allocation. I have already lived that nightmare. I am too old to lose 70% of my portfolio, (yes that has happened and wrote my book about it). 

Have a great day, 

Steve

 

 

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I read an interesting post on Bogleheads the other day.  The poster was early 50's with a 50/50 allocation.  He said that he only rebalanced one way, meaning that when stocks appreciated and hit his band, he would sell and buy bonds to get back to 50/50.  But if stocks dropped, he wouldn't sell bonds to buy stocks. He just left it alone and continued to make his regular contributions as normal.  I believe he had something like 20 years of minimal spending needs in fixed income, and wanted to keep it at that level.

 

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