I’m confused on what I thought was one of the foundations of investing: Rebalancing. I’m hoping a discussion on this forum can help me (and other readers) understand better.
Until recently I thought it was advised to rebalance to harness the buy low/sell high. That is, the “rebalance bonus” (RB). So like stocks go way up, harness profit, sell some stocks into bonds, then when stocks tumble, buying back into stocks will harness the next rise in stocks.
But lately, due to much reading here and other places, I think that’s not it at all, and there is essentially NO bonus. Now I’m kind of confused on this seeming pillar of Bogle-headedness. To be clear, my question isn’t around rebalancing due to something like age change. My question revolves around something like I’m 60YO and I’m not changing my AA, but the markets shift dramatically and throw off my AA percents. Do I rebalance?
Here’s some BH analysis that gives a summary as to why the RB is not really “a thing” (there are 3 parts):
https://www.bogleheads.org/blog/2020/08 ... ---part-1/
To me, the analysis essentially says the RB is minimal at best, like almost “in the noise” type percent.
To quote near the end of part 2:
Why do you rebalance? Especially in later years, when de-cumulating, and the target AA is staying the same.
Forgive my kind of “dumb” question, but this seems to be a foundational idea I'm not fully understanding.
Until recently I thought it was advised to rebalance to harness the buy low/sell high. That is, the “rebalance bonus” (RB). So like stocks go way up, harness profit, sell some stocks into bonds, then when stocks tumble, buying back into stocks will harness the next rise in stocks.
But lately, due to much reading here and other places, I think that’s not it at all, and there is essentially NO bonus. Now I’m kind of confused on this seeming pillar of Bogle-headedness. To be clear, my question isn’t around rebalancing due to something like age change. My question revolves around something like I’m 60YO and I’m not changing my AA, but the markets shift dramatically and throw off my AA percents. Do I rebalance?
Here’s some BH analysis that gives a summary as to why the RB is not really “a thing” (there are 3 parts):
https://www.bogleheads.org/blog/2020/08 ... ---part-1/
To me, the analysis essentially says the RB is minimal at best, like almost “in the noise” type percent.
To quote near the end of part 2:
Also of particular interest is this phrase in the summary at the end of part 3:“...any perception of ‘selling high, buying low’ is mostly one’s intuition (behavioral biases included) playing games with one’s brain, while there is just little concrete reality to a ‘rebalancing bonus’ of sort, besides side-effects of the AA drifting away from its target.”
So my question is:“One-way rebalancing is just a bad idea.” One-way rebalancing is defined as: only rebalance out of stocks, never into stocks.
Why do you rebalance? Especially in later years, when de-cumulating, and the target AA is staying the same.
Forgive my kind of “dumb” question, but this seems to be a foundational idea I'm not fully understanding.
Statistics: Posted by MoneyIsTime — Wed Jan 15, 2025 2:20 pm — Replies 21 — Views 891