How do you rebalance your portfolio?

[Beppington]

Traditionally, I have chosen to rebalance my portfolio by redirecting new money going in. If large company stocks were overweighted, for example, I put new contributions toward small company stocks or foreign stocks or whatever segment needed to be brought back up. As our portfolio gets larger, though, that is getting harder and harder to do because the amount needed to rebalance by that method gets higher and higher.

I'm in the midst of reviewing all the year-end stuff and rebalancing, especially with the huge run up in stocks this year which has really thrown off some of the allocation beyond the point that I can rebalance with new money.

My question is this: When you are actually selling assets in one class in order to rebalance, do you sell all at once and buy the lacking class all at once? Do you sell all at once, park the money in a money market and dollar cost average into the other class? Do you sell off gradually and buy in gradually? Or some other method.

I also re-balance by directing new money to the laggards.

However ... Also, rather than doing the "auto-reinvest" of distributions from my index funds, I have the distributions sent as cash to my Vanguard money market, & then I manually distrubute them to the laggards.

This has kept my portfolio pretty close to balanced.

However, the book I base my portfolio on also recommends only re-balancing no more often than every 2 years.

So far I've never sold any shares in order to re-balance, & I'm not sure I ever will: Which is worse, being somewhat out-of-balance, or paying the tax consequences of selling to re-balance?

[Beppington]

That's the part I'm wondering about. Do you sell and buy all at once? Let's assume we are talking about a retirement account so taxes aren't an issue.

Let's say I need to increase my international equity position by $10,000. Do I put 10K in all at once or do I park part of the money in my MMF and feed in say 2K/month for 5 months? Not sure which would be best.

All of this is probably still mostly hypothetical but I see where this will become a problem as the portfolio grows.

Here's the thing: If you believe the markets are only going higher over the long run, & if like me you don't think you can predict when they're going higher ... I think you want your money in as soon as possible.

[Beppington]

Jim, what if you multiply that portfolio 10-fold (not that I'm there, but just speaking hypothetically). Now you've got a 2M portfolio and the most in one place is 900K. Rebalancing starts dealing with much larger numbers.

To me, if you're sure about what you're doing, a large amount shouldn't be a concern.

And, if you're not sure about it, maybe you should re-consider (or re-confirm) no matter what the amount is.

(All this is easy for me to say, since it's not my money!)

[Beppington]

Here's the thing: If you believe the markets are only going higher over the long run, & if like me you don't think you can predict when they're going higher ... I think you want your money in as soon as possible.

OK, I put my money where my mouth is today: From my final '09 paycheck, bonus & year-end dividends paid by my index funds, I distributed $26,336.95 amongst 7 of my 8 Vanguard index funds (the 8th has risen above my target %).

What made this a tiny bit difficult is seeing Jim Cramer on TV the last two nights bashing people who invest in index funds, & telling us how absolutely positive he is that we can beat the markets, & that there is absolutely no reason whatsoever to hold index funds that hold 100 "bad companies."

I like to listen to Jim a lot because he's energetic, entertaining & I sort of keep waiting for something to click where I go, "OK, he's lost his mind. No way can that be true" or "Holy cow, he's right! I gotta dump all my index funds ASAP & get with the Jim Cramer program!"

If I thought there was a way to include all of Jim's advice & "rules" into a spreadsheet where I could simply update the data & it would calculate my next move (which is what my index fund spreadsheet does), & I'd beat my index fund portfolio, I'd do it. But, I'm afraid Jim's confidence that he's beating the markets & so can everybody else is either simply not true, or it requires some level of intuition, educated guessing, hunches, etc. that I wouldn't have when needed in order to make the best decision.

So my question for Jim: If someone were to memorize & adhere to every one of your Rules, & do your prescribed amount of "homework", how much (if any) intuition or guessing is still involved in making decisions on stock picking/ buying/ selling/ holding/ trading/ backin' up the truck, etc.?

[feh]

I'm probably just over-thinking this. I was just curious how others go about rebalancing. I'll keep doing the new money thing. If I get to a point where that isn't enough, then I'll just rebalance more frequently.

I just sell and buy. No DCA.

[asdf32]

So there are a few reasons that I think suggest you don't need to DCA here.

The main reason to DCA is to avoid unknowingly buying a big chunk of stock at a peak or selling in a trough. It makes the most sense when moving big chunks of cash in or out of the market because by averaging out some of the volatility it leaves your future fortune less up to chance.

1st in your case the amount that you want to trade is probably a small portion of your portfolio so that makes the risk pretty low. Also, re-balancing is something you may be doing every year going forward so over time your re-balances will average out anyway.

2nd it sounds like what you're buying and selling may just be two different stock sectors. In that case their correlation is probably pretty high anyway and if if they are largely riding the same peaks and troughs the amount thats left to chance is lower. The key need for DCAing is when moving from two assets that have low correlation (I.E. Cash and stock) and a higher chance of being at bad positions relatively.

Lastly, the need to re-balancing itself suggests that what you're selling is at a peak and what you're buying is at a trough.


But if it's still an amount that concerns you the best option would be to balance out with several simultaneous buy/sell transactions over the year. That would meet the same goal without requiring you to hold cash.

[MonkeyMama]

So there are a few reasons that I think suggest you don't need to DCA here.

The main reason to DCA is to avoid unknowingly buying a big chunk of stock at a peak or selling in a trough. It makes the most sense when moving big chunks of cash in or out of the market because by averaging out some of the volatility it leaves your future fortune less up to chance.

1st in your case the amount that you want to trade is probably a small portion of your portfolio so that makes the risk pretty low. Also, re-balancing is something you may be doing every year going forward so over time your re-balances will average out anyway.

2nd it sounds like what you're buying and selling may just be two different stock sectors. In that case their correlation is probably pretty high anyway and if if they are largely riding the same peaks and troughs the amount thats left to chance is lower. The key need for DCAing is when moving from two assets that have low correlation (I.E. Cash and stock) and a higher chance of being at bad positions relatively.

Lastly, the need to re-balancing itself suggests that what you're selling is at a peak and what you're buying is at a trough.


But if it's still an amount that concerns you the best option would be to balance out with several simultaneous buy/sell transactions over the year. That would meet the same goal without requiring you to hold cash.

Agreed.

There is NO WAY I Would take money out of the market, into cash, to rebalance. If my money is in the market - I want it to stay in the market.

I think the post above says it well - and offers another alternative (last paragraph).

For me, I just rebalance in one fell swoop. Of course, as someone else mentioned, depends on the taxes, etc. My investments are 100% ROTH right now - so no tax concerns for me.

[jasonnoguchi]

What you guys are talking about is simply a "Re-allocating" of assets in order lean your portfolio in a certain way. Investors reallocate in an out of the cash and equities market in order to manage risk exposure under different market conditions. That's not rebalancing. "Rebalancing" is a more professional procedure where a market neutral / delta neutral portfolio or a fixed mandate type of portfolio is adjusted to maintain its market / delta neutrality or % exposure to different asset classes from time to time.

An example of rebalancing in a stock portfolio could be a mandate of 30% exposure to penny stocks and 70% to index stocks but a good year in penny stocks brought the value of those penny stocks in your portfolio up to take up maybe 40% of your portfolio by end year. A rebalancing would be to sell off part of the penny stocks and buy index stocks with the money in order to maintain the 70/30 mandate. That's rebalancing.

Thinking that the year ahead is going to be bullish for equities and then moving from cash market into equities due to that is not rebalancing. Its just a reallocation. Even literally, where's the "balance" that you are "rebalancing", see?

[disneysteve]

What you guys are talking about is simply a "Re-allocating" of assets in order lean your portfolio in a certain way.

No, that isn't what I'm talking about at all. I'm talking about rebalancing to get my portfolio back to my desired asset allocation. If I started 2009 with 70% stocks and 30% bonds and my stocks shot up dramatically, I may have ended the year with 76% stocks and 24% bonds. Rebalancing would sell off some stocks and buy some bonds to put it back to 70/30.

[Beppington]

No, that isn't what I'm talking about at all. I'm talking about rebalancing to get my portfolio back to my desired asset allocation. If I started 2009 with 70% stocks and 30% bonds and my stocks shot up dramatically, I may have ended the year with 76% stocks and 24% bonds. Rebalancing would sell off some stocks and buy some bonds to put it back to 70/30.

... or putting new money into your bonds to increase its percentage.

[sandrark]

For me, I do it all at once.

My belief is that BARRIERS are problems that delay or prevent me from acting. If I felt the need to DCA my portfolio positions in order to rebalance, it would be more complicated, more overwhelming, and more time-consuming.

Therefore, I do it all at once and get it DONE. As I did yesterday.

YMMV.

Sandi