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Do you have a "bear market rebalancing clause" in your IPS?

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  • Do you have a "bear market rebalancing clause" in your IPS?

    I'm assuming most of us are dollar-cost averaging and have some sort of incremental (ex: annual) asset allocation rebalancing in their investment policy statement. Does anyone have an additional "bear market rebalancing clause" in their IPS for rebalancing? For example, do you have anything like "if the market drops X% from a previous high, I will rebalance."?

    I don't see this as market timing, as there's no guess work or emotion in the decision, and no money is being left on the sideline in the interim.

  • #2
    Mine is based on asset allocation percentage.

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    • #3
      Rebalance to your target asset allocation. Rebalance in bear markets, rebalance in bull markets.

      Ideally you can rebalance with contributions alone during the accumulation phase and with living expenses alone in retirement. Don’t pass up opportunities to tax loss harvest, but rebalance as needed.

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      • #4
        Originally posted by Hank View Post
        Rebalance to your target asset allocation. Rebalance in bear markets, rebalance in bull markets.
        I get it, but I guess I’m asking if you check your asset allocation ratios (for potential rebalancing) earlier than your predetermined timeframe if there is significant movement in the market (either up or down)?

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        • #5
          Rebalancing occurs based on percentages. Time has nothing to do with mine.

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          • #6
            I re-balance by putting money into the allocations that are falling behind. I have yet to sell something to rebalance outside of TLH. Some people use a timeframe but a lot of people use percentage bands as when to rebalance.

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            • #7
              What percentages are reasonable? 5% off your target allocation? With respect to that category, or entire portfolio? Likely the former, or for small holdings ~15%, 5% of your total portfolio would be 33% of that category.

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              • #8
                Some will set a +/- 5% target band so if the allocation deviates by >5% their IPS calls for a rebalance. Rebalances should be happening in both a Bull and a Bear.

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                • #9
                  impo, the value of the market does not impact the need to rebalance, just when you are outside of your target allocation by a specified %. That can be caused by bull, bear, or deviation over time (most likely). We rebalance annually to take care of deviation over time. To me, you need to choose one method or another - periodically rebalancing according to a pre-determined interval or rebalancing when out of tolerance by a pre-determined %. I would hesitate to combine both, gets too confusing and is (IMPO) unnecessary. Both methods eliminate the emotion, which is what matters.
                  Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                  • #10
                    I suspect I am a bit of an outlier among this group in that, while I understand the value of written IPS, I don’t use one. Instead, I use age appropriate Vanguard Target Date Retirement funds to set an allocation and forget it. Of course, my taxable accounts skew that if I am not careful, but easy enough to manage by checking the allocation and performance graphics. Hence, I knew an inheritance that we placed in bonds had caused us to be off my target about 5% and I used the market drop to adjust. So, no IPS per se, but I do use bear/ down markets to my advantage.

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                    • #11
                      Yes. In Jan we decreased our AA to 65:35 and added this to IPS based on s and p 500:
                      PLAN modified on Jan 21, 2019:
                      10% drop: Invest 25% of cash reserves (or bonds if in IRA)

                      20% drop: 50% ( could be incremental)
                      30% drop: 75%
                      40% drop: All in
                      All in means getting AA back up to 85:15 then after market recovers we go back to 70:30. 70:30 is our long term goal.
                      this is of course “market timing” and many here think I am foolish, so take it with grain of salt.

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                      • #12
                        Originally posted by Tangler View Post
                        Yes. In Jan we decreased our AA to 65:35 and added this to IPS based on s and p 500:
                        PLAN modified on Jan 21, 2019:
                        10% drop: Invest 25% of cash reserves (or bonds if in IRA)

                        20% drop: 50% ( could be incremental)
                        30% drop: 75%
                        40% drop: All in
                        All in means getting AA back up to 85:15 then after market recovers we go back to 70:30. 70:30 is our long term goal.
                        this is of course “market timing” and many here think I am foolish, so take it with grain of salt.
                        I do not see this as timing at all, but a logical method to take advantage of an opportunity and quite precise. Again, no emotional element, just data-driven. One thing I am unclear about, though, is that, when you say ”Invest 25% of cash reserves...”, I don’t see any clarification on what to invest in. Perhaps this is articulated elsewhere.

                        fwiw, one of the principles we (aspire to) abide by in our office is that any person working on a client should document so that a complete newbie could come in to work with the client and not have to chase down others who have been involved to pick up the work.
                        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                        • #13
                          Originally posted by Tangler View Post
                          Yes. In Jan we decreased our AA to 65:35 and added this to IPS based on s and p 500:
                          PLAN modified on Jan 21, 2019:
                          10% drop: Invest 25% of cash reserves (or bonds if in IRA)

                          20% drop: 50% ( could be incremental)
                          30% drop: 75%
                          40% drop: All in
                          All in means getting AA back up to 85:15 then after market recovers we go back to 70:30. 70:30 is our long term goal.
                          this is of course “market timing” and many here think I am foolish, so take it with grain of salt.
                          So you change your baseline aa 70:30 (moderate) in a preset drop to move into a more aggressive index based stance of : 85:15 over a 40% drop in total market.

                          -In current scenario then; you've move to a 80:20 mix?
                          -Where are you in the road to retirement? Early /mid/late?

                          We typically rebalance at year's end but was lazy this year and delayed it until the correction started happening. Moved to a very conservative 50:50 ratio as we're FI and don't need to deal with volatility---so why subject ourselves to it. With a pension and real estate -- this puts us in the very conservative funding at the moment; but we're good with that.

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                          • #14
                            Originally posted by jfoxcpacfp View Post

                            I do not see this as timing at all, but a logical method to take advantage of an opportunity and quite precise. Again, no emotional element, just data-driven. One thing I am unclear about, though, is that, when you say ”Invest 25% of cash reserves...”, I don’t see any clarification on what to invest in. Perhaps this is articulated elsewhere.
                            agreed, probably fixed income -> equities = some variation of 3 fund portfolio
                            IPS rebalancing in correction or bear = sell bonds (assuming prices are rising and yields crashing; unlike last thurs and fri when liquidity bombed and fed dove in) and/or sell MMF if fed drops rates to near zero (coming soon!) and buy equities
                            IPS should at the very least be beating inflation averaged over time

                            It's psychosomatic. You need a lobotomy, I'll get a saw.

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