Greater, later fool theory applies. I can get in late and stupid as long as there’s somebody else later and stupider who comes along before the cops raid this crooked dice game.
yeah, but before the switch it was well on its way to going bankrupt (it still might) and the stock is still way way down from its all time high of over $300. This was a weird blip, but still a blip
I’m pretty sure you guys are aware of this but with the whole rebalancing scheme your structurally punishing over performing asset classes and promoting underperforming asset classes.
I just thought I throw that into the discussion.
Overperforming and underperforming with respect to what baseline?
ETA: Adding in case that is too vague… higher risk asset classes will always (or at least should always) over perform less risky asset classes. That risk premium is why we do risk-based allocation at all.
No, not always. If that were the case, they wouldn’t be risky and they woudn’t overperform. That’s a logical contradiction.
They only overperform (so far, and in particular in the US markets) on the long enough time frame.
Yes, that is a very important clarification (depending on what you mean by “over perform”). The average, or expected, result over any given timeframe would be that the riskier (read: higher volatility) assets in your basket would have higher returns than the safer ones. In any given individual time frame that obviously might not be the case. But we can only quantify the riskiness of an asset class post-hoc, I suppose - we think that US Bonds are less risky than Developing Country’s stocks because historically that’s what has happened.
I guess my point is just that you can’t really claim over-performance without setting a baseline. If your allocation calls for 80/20 stocks/bonds, for example, and market returns are such that you end up at 90/10 after a year, that could be pretty much as expected. I don’t think you would say that rebalancing to 80/20 means you are selling over-performing assets to buy under-performing ones - just that you are resetting your portfolio to match your risk tolerance based on your expectation of the risk association with various asset classes.
Conversely if your allocation drops to 70/30 that probably means the stock market took a tumble. Rebalancing back to 80/20 is likely (again, over a long enough time horizon) to be better than riding it out.
All of that said, I think the benefits of rebalancing are pretty limited and even if you just allocate new contributions according to your risk profile you are probably fine.
Until they don’t.
And when they don’t, they will lose value more quickly than less risky investments.
This is another great point, and a strong indicator that once approaching retirement one should definitely reconsider their asset allocation. Sequence of returns can be a bitch if you are heavily invested in risky assets right when you stop accumulating and start drawing down.
Take risks in line with your ability and need to take them. And don’t take uncompensated risks (like trying to pick individual stocks).
Yes. Exactly so. By design. Forced discipline to not get greedy.
The main rationale is, of course, as described above: each investor has their own tolerance for risk/volatility and “riskier”/more volatile classes tend to overperform. Without rebalancing most years will have creep towards higher risk position.
The other aspect though is that it is exactly when when a class that longer term is likely to over perform is having a drop that I want to buy more of it And the class not dropping is where I have that available to to that buying low with. And it is there because one sold when it was relatively high
Otherwise one chases high performance. Which maybe works too?
In general investment news today, the DJIA is up over 1000 points, which is over 2%. It’s not far from its record high, set in February.
S&P is up about 1.5%. It has set record highs the last two days, and is well on its way to another record.
Price of crude is down 12% today, at around $83 a barrel.
So you’re saying it’s time this afternoon for the criminal regime & their insiders to short the stock narket & buy oil futures, then announce a renewed offensive tomorrow.
Exactly. Because the current rise in the DJIA and S&P is because Iran announced that they are reopening the Strait of Hormuz. The criminal regime does not have control of the situation, the manipulation is now in the hands of the Iranian regime. That will not do.
So I guess they will indeed do something about that, something very stupid, as soon as they have placed their buying and selling orders. Markets are closed in Europe now (quarter past seven in the afternoon, they closed over an hour ago), at what time do you close in the USA?
Wall Street closes at 4:00 pm Eastern time. Not quite 3 hours from now.
Let’s wait and see what they are capable of in such short notice. If they can’t come up with anything fast they will have to wait until monday.
They won’t like it. Usually it is them that impose on others when things happen.
I don’t agree with this statement. As I already noted, the S&P has set record levels the past two days, and the Dow has similarly skyrocketed this week. Well before this announcement.
The thread was explicitly bumped precisely because I was so baffled by that, the disconnect between events and market direction.
My sense of it has become that the market assumed Trump will back down from a precipice (TACO) and now that Bibi is backing down too the confidence is greater yet. Totally discounting the longer term impacts just like the market has on tariffs.
Which isn’t to say that there is not manipulation being attempted. Just that manipulating the irrational beast is not straightforward.
The concept here is perhaps worth discussing beyond the relatively passive rebalancing approach: if one was to be more active, which is the preferred strategy, putting money into a segment that has been “overperformimg” or one that has been “underperforming”? Consider within equities to make it simple and look at growth vs value or large vs small to medium cap.
I tend to the contrarian side myself. To the limited degree I do more than a simple basket of index funds.
a few thoughts:
- there seems tobe an underlying hypothesis (up for debate IMHO) … that everything that overperforms NOW will underperform in the future to come back to its “historic avg-performance”. I am not sure this is necesariliy true, just as I see e.g. crude-oil not coming back to its historic 1945-73 - 25+ years average … → Just look at stuff like global-GDP since WWII … there might be ups and downs but there is no way to talk away a positive-inclination curve
- the time-horizon is of course of essence here (e.g. crude-price from 1945-73 or tokyo stock exchange performance since 1990.
- I think it is good to be aware of the fact that there are different asset classes (AC) with different risk profiles - and maybe defining a “corridor” than a mechanistic 60:30:10 ratio might be a better way to address this.
- there is obv. the inherent meta-risk of complacency creeping in in your asset distribution and an emotional drift towards “better performing” ACs … one thing is: you see readily and evidently the profitability (hey just this week I got $1000 richer!!!), but you dont see the inherent risk in stocks.
- Meta-risk-shifts: stuff like Idiots setting the planet on fire … which might shift the risk exposure curve (as opposed to move on the risk-reward gradient of same curve)
I am not making that assumption and don’t read it from anyone else.
First not even looking at its own historic average performance at least as some annual return number, so much as its performance relative to other classes.
Second, and more critical, is that a decision is based on the lower bar of whether or not it is true more often than not.
And that is I think a very difficult question to answer, likely varying by time scales and exact periods being looked at.
FWIW asking Claude to run the numbers specifically for the growth v value all in v rebalancing question gives this as the lede:
The Headline Answer
Over the very long run (century+), pure value wins on annualized return. Over the last 35 years, pure growth wins. Rebalancing between the two never produces the single highest return in any given period — but it consistently avoids the worst outcomes and beats both styles on a risk-adjusted basis.
FWIW though … my suspicion is that any advantage that rebalancing growth and value funds may have over just owning a lowest cost S&P index is offset by the higher cost of even low cost style funds.
Still at this point in time I suspect the overall index is very heavily weighted in growth AI tech. Which is performing very well. And may continue to do so. But moving a bit more to have some extra value oriented for balance seems prudent to me.