Strong 2009 Market Returns So Far: Time To Rebalance?

If you haven’t noticed already through your portfolio statements – the stock markets are doing well in 2009. The broad US stock market and the broad developed international markets are up 22% and 29%, respectively. Some funds are doing especially well, such as the Vanguard Emerging Markets Stock Index Fund (VEIEX) which is up +62.6% year-to-date.

Vanguard recently sent me a newsletter with a link to an article titled Strong 2009 performance warrants yellow flag, which states in part:

While it may be gratifying to see these robust gains lift the balances of your funds, the markets have “come a long way in a hurry,” as the saying goes. At this point, it may be wise to ensure that your asset allocation is in line with your long-term goals.

A discussion thread on this article at Bogleheads had member Robert T pointing out the following comparisons in 2008 and 2009 YTD performance data:

Many of the asset classes that got hit the worst in 2008, have made the largest comebacks. Of course, we can’t know for sure if this surge will continue or if we’re headed back down again. But I think Vanguard’s advice is sound, to make sure our asset allocations are on target. If you had the guts to rebalance at the end of 2008, then buying more stocks “low” would have paid off nicely. Right now, you’ll want to make sure you’re not overweight in stocks.

I have been using my ongoing investments to balance out my asset allocation through the year, but as my latest portfolio snapshot shows, I am still overweight in Emerging Markets and underweight in bonds.

Is your asset allocation where you want it to be?

Comments

  1. Rebalancing based on anything other than your pre-determined rebalance schedule is engaging in market timing. (Rebalance schedule is usually something like end of year-at which point its not time to rebalance, or at a certain % of variance from target allocation – but I’m sure we’ve already crossed that more than once this year for the folks that use that guage and they would have been getting out of stocks months ago).

    I’m not saying its foolish to try to time the market, but for the people who do, realize this what you are doing.

  2. I don’t think you should stick with a once a year, pre-determined schedule for re-balancing. The whole point of asset allocation is managing risk, so when an asset class goes up, it gets more and more expensive and more risky. Therefore, the re-balancing schedule should be whenever an asset is off certain percent of your target. If I remember correctly, David Swensen of Yale university says his group does daily rebalancing of their asset in the book Unconventional Success. And his endowment fund is returning 20% over the past 20 years or so.

  3. I’m in my late twenties, and mostly stocks, (well, index fund). I’m not rebalancing as I believe my allocation is in agreement with my time horizon.

    Below is my allocation:

    70% FUSEX –Tracks SP500
    20% FLATX — Latin America Emerging markets
    5% FSBIX — Short term bonds index
    5% -FIBIX — Intermediate term bonds index

  4. If retirement investing is based on a “buy and hold” theory, following the idea that the market will rise in the long term (multiple decades), and asset allocation is based on risk appetite over that term, then shouldn’t rebalancing only happen when there is a change in the desired asset allocation (once a decade perhaps, or at significant changes in circumstance?), and be carried out using newly invested funds wherever possible? Otherwise you will only have to balance back again when the short term blip has corrected itself.
    If you are rebalancing to compensate for short term fluctuations (1-2 years) then maybe your risk appetite does not match your allocation.

  5. That’s cool about VEIEX. I happen to own some in my ROTH IRA. I rebalance whenever I put money in, which is generally in one or two large-sums per year since I have an irregular income. Since I don’t have the cash to put in right now, I don’t rebalance.

  6. Percentage gains and losses can deceive the casual observer. While a YTD gain of 80% sounds like a lot, $100 invested in, say, the MSCI BRIC Index in January 2008 would have fallen to approximately $40 (a loss of 59.4%) in December 2008, and would be up to about $73 today, still 27% down with respect to the basis.

    Most stock funds have still not erased all of their losses from last year, so unless someone purchased a significant amount during the lean period, they probably don’t have to rebalance right now due to the surge in stock indices (unless they are still bond-heavy).

  7. I just noticed that my point has been made by others in the linked Bogleheads discussion.

  8. You’re not including the nearly 1/3 of your portfolio you have sitting in cash. I know, I know, emergency fund, but:

    I think it should be in your portfolio because 1) that money will most likely be used in the same way as other funds in your portfolio, i.e. retirement and such, since it is unlikely it will actually be spent on a $100K emergency and 2) in terms of calculating your actual return on your money, I don’t think you should ignore the 1/3 of your portfolio earning 1.5% in cash or cash equivalents.

    Parking all that money in cash is your decision, but I don’t think you should try to hide from analyzing the effects of that decision on your portfolio.

  9. Right now the biggest fear in the market is the inflation. When that occurs, fed will fight it by increasing the interest rate.
    Isn’t it bond prices move inversely to interest rates?

  10. Interesting how you always advocate Buy and Hold strategies, but when the market drops you buy more stocks and when it goes higher you shift asset allocations. Shouldn’t these changes in stock prices not affect you if you are following Buy and Hold?

    I have argued in the past that Buy and Hold has lost people money over the last decade and it is not a good idea. You will probably say again that you’re all for Buy and Hold, but your actions say otherwise. The people that stand to make the most money from Buy and Hold are the brokerage firms since they always get a percentage.

  11. I would say my strategy is always Buy/Hold/Rebalance rather than just Buy/Hold. If stocks outperform bonds over the long run, everyone would just end up with 99% one day if you strictly buy/hold. By rebalancing, for example to maintain 60% stocks/40% bonds or similar, you maintain the risk/return profile that you wish to maintain.

  12. I buy/hold/rebalance, also. To me, it makes perfect sense. I can’t imagine where I would be today if I hadn’t rebalanced multiple times in 2008, because some of my funds returned so much, my asset allocation just got way out of whack. Glad I didn’t wait until the end of the year!

    This year I haven’t rebalanced, BUT I have been contributing more and balancing everything out with my contributions, as others have said. Last year I Wasn’t contributing much, so I rebalanced more.

    I am not sure what the point of asset allocation is, if you don’t maintain it.

  13. Sticking to schedule is market timing too, just market timing via fixed schedule. There’s no reason a fixed schedule should be better than a variable schedule. If you don’t believe in market timing which is more than a fair by that logic it doesn’t matter when you rebalance only in so much as it increases transaction costs.

  14. Lots of people also rebalance based on “bands”, for example if one asset class is off by 5% or more, or even just an absolute number like $5,000. I don’t see anything wrong with that either. In such a case, this would just serve as a reminder to check your bands.

  15. Just a word of advice if you have a Vanguard account, make sure you are aware of their “Frequent Trading Policy” which prevents you from contributing back into certain funds that you have rebalanced for 60days. You can however, send in payments via “snail mail” to get around it.

  16. Rebalancing does get complicated when you have multiple types of accounts. I have some tax-deferred accounts that automatically rebalance every month/quarter against their own internal fund choices. Which means I usually wait for these to kick in first and then evaluate how the rest of my portfolio stacks up against those automated changes. I usually end up making moves in my self-directed IRA to counterbalance the changes and avoid touching taxable. I’ll draw down taxable though when I actually need the money.

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    Strong 2009 Market Returns So Far: Time To Rebalance?…

    If you haven’t noticed already through your portfolio statements – the stock markets are doing well in 2009. The broad US stock market and the broad developed international markets are up 22% and 29%, respectively. Some funds are doing especially well,…

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