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Hi folks,

Let's say that 10% of my portfolio is allocated to large cap value funds. With this objective, I bought fund X which met this goal. The market crashed and fund X was down 40% at rebalance time. At this rebalance time, I found fund Y which also met the goal of "large cap value", but fund Y was down only 20%. Which of the below scenarios should I (or a professional) do?

1_ Sell fund X and buy fund Y, and also take some from the other portions of the portfolio to buy more fund Y to get back to the 10% allocation.

2_ Leave fund X as is, and take some from the other portions of the portfolio to buy fund Y, so X+Y constitute the 10% allocation.

3_ Take some from the other portions of the portfolio to buy more fund X to get back to the 10% allocation

Many thanks.
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I think I would look at fund X to see if the reasons I bought it originally were still true and appropriate. If they were I would hold my nose and do option 3. If on the other hand there was an error in my original reason I would perhaps go with option 1.

Bob
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I think your question is not really about rebalancing.

If the other stocks in the 90% of your portfolio are also down 40%, fund x is still 10% of your portfolio. So rebalancing is not required.

If on the other hand others holdings are not down, then rebalancing tells you to sell some of the others to bring them down to their specified percentage and reinvest the proceeds in the large cap value funds category.

As to whether fund x or fund y, that is not part of rebalancing. You must decide that on your own as CABob suggests.

Rebalancing is merely a reminder to sell your over valued investments and to invest in undervalued categories when they are down. It is a mechanical device that tells you when to consider changes. But it does not specify exactly what to do.
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I am not sure you have provided enough information. That said, I have two comments:

#1 Why are you rebalancing? How frequently? Are you acting because it is recommended by "experts"? I suggest you look up for data, not "theory" but data on rebalancing. I am sure there are other sets of data, but the only set I am aware of says decreasing the frequency of rebalancing increases the portfolio's return, with the maximum return at over 6 years. This is William Bengen's data.

#2 Instead of selling and buying, there is another option - put new funds in a specific allocation or if you are withdrawing funds, withdraw from a specific allocation.
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First, you would be negligent if you allowed a fund to go down 40%. Unless it happened all in one day (unlikely), you should have sold it much earlier. So resolve to pay attention and not let this happen. Look at the 21 day moving average for guidance.

Second, there are times (not now) when it is a good thing to be out of the market entirely. Take a look at timing cube (http://www.timingcube.com/app/html?page=home) for an example. But it is relatively easy to do your own timing.

Finally, asset allocation is bunk. Instead of being in a bit of everything, be in the sectors of the market that are moving up. Then dump those sectors when something else looks better. There are people who have done quite well trading sector funds - moving into the ones that are performing well, and then trading them for others if those sectors begin to falter.

So do not rebalance. Trade intelligently.
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