Rebalancing and Timing

[stpeter]

No matter what bands you use, when you get close to a rebalancing point you need to decide when exactly to pull the trigger. Yet from one perspective this goes against the PP policy of not checking your portfolio all the time and not trying to time the markets. As an example, back in October I think my long-term bonds got down to 19.93% for a few days (I use 20-30 bands, not 15-35). Should I have rebalanced the moment I saw that happen? In hindsight I wish I had, but I didn't act fast enough and by the time I got serious TLT was back above 20% of my portfolio. Perhaps I was too compulsive about exact percentages, but in general I'm curious how folks here handle such situations.

[Smith1776]

I've run into this cognitive dilemma as well.

I try to console myself by realizing that rebalancing/not rebalancing when just on that threshold could work against me or help me, and there's really no way to know ahead of time. What happens if I rebalance and the asset continues to decline? Bummer. What if I didn't rebalance and it skyrockets? Also bummer. Who knows.

I just stick with the hard number I've chosen (like you, 20/30 bands), and just stick with it through thick and thin.

[flyingpylon]

I split the trigger into two zones: “can rebalance” and “must rebalance”.

Can rebalance is within around 1% of the must rebalance threshold. I allow myself to rebalance if I feel like it.

I do partial rebalances and I got tired of missing out on opportunities because I waited for that last 1% or so. This just works better for me.

[stpeter]

Thanks to you both for sharing your perspective. It's good to know I'm not the only one. :-)

[boglerdude]

In theory rebalance daily. If you want more growth rebalance less often as stocks will likely do better long term. When long bonds get down to 1% its another conversation.

[Kike Moreno]

To avoid this dilemma, I set a fixed day in the year in which I check the bands (20/30 in my case). If the portfolio has hit the bands at this specific date, I rebalance. The rest of the days I do nothing with it.
As you will only check (and maybe rebalance) once a year, you can use narrower rebalancing bands, for example 20/30 instead of 15/35.

[stpeter]

To avoid this dilemma, I set a fixed day in the year in which I check the bands (20/30 in my case). If the portfolio has hit the bands at this specific date, I rebalance. The rest of the days I do nothing with it.
As you will only check (and maybe rebalance) once a year, you can use narrower rebalancing bands, for example 20/30 instead of 15/35.

That's an interesting and low-stress approach. I usually check on things monthly (e.g., to convert interest and dividends from free-floating cash into short-term treasuries), but I could see changing that to quarterly.

On the other hand, I can see value in rebalancing when the blood is running in the streets. For instance, I rebalanced in April of 2020 after stocks had declined precipitously, and that worked out well for me.

[Matthew19]

I just did a pretty deep dive on this myself. There are a few studies showing checking every 10 days and rebalancing if needed had the highest returns. The practical way is to check when you know the markets have significantly moved, it usually makes the news.

Also, second point was ”tolerance bands” were acceptable to rebalance to. Those were defined as 50% return to the desired ratio - so basically halfway back eg 22.5% if you had a 20% rebalance band. This could be used to save taxes as well.