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May 14, 2011


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I don't endorse the idea of selling in May and staying away because it does not make sense to me. I think the support cited in support of this concept is just data-mining.

Nor do I endorse the idea of rebalancing. Rebalancing is the opposite of data-mining; it's doing what the data says never works. The data says that valuations affect long-term returns and so we all should be adjusting our stock allocations as needed to keep our risk profiles roughly constant.

Those advocating that we always go with high stock allocations too often make timing look bad by setting up straw-man crazy ways to time the market. Why not time the market in a sensible way by going with a high stock allocation when stocks are selling at prices where they are sure to provide a strong long-term return and with a low stock allocation when stocks are selling at prices where they are sure to provide a poor long-term return? That's the emotionally balanced way to invest in stocks, in my assessment.

Thanks for providing a forum where people with different viewpoints (I think it would be fair to say that mine is as different as you can get nowadays!) can share their thoughts with those interested in hearing them, FMF.


Rebalanceing is a hard comcept to understand and I always try to learn more about it. If I were to rebalance during the free fall of 2 1/2 years ago I wonder if I were to be worse off. Conversly now that more conservative investments like bonds could be not doing as well and the stocks are rallying when is the best time to rebalance. I guess it is like timing the market. You just can't do it. Earlier this year my allocation was a little to weighted on the conservative side but now it is just about right with the rally of stocks and the asset allocation of where I want to be.

Always to strive to learn more and make your decisions with what you learn.

I don't believe in rebalancing as described, but then I am not your average investor reading FMF.
I am 76, am not trying to make capital gains, have a portfolio that's plenty large enough already, and bringing in a large amount of income that is either tas deferred or tax exempt.

45% is in Muni Bonds yielding 4.85% - I do nothing but reinvest all the interest every month and reinvest all the proceeds if one matures.
20% is in CDs yielding 4.93% - I do nothing but reinvest all the interest every month and reinvest all the proceeds if one matures.
35% is in High Income mutual funds yielding 7.8% - I time these by selling them and buying back in when they penetrate their 50 day exponential moving averages.

What could be simpler? We have no volatile stocks to worry about, no worrisome rental properties to manage - our time is our own, our income taxes are minimized and we make 5.9%/year.
Every 5 years, rain or shine, our portfolio increases by 33% while we live, debt free and very comfortably on 2 nice pensions and our SS checks.
If we need to withdraw any principal we can do it out of the annual Mandatory Required Distributions from our IRAs. I make all of our investment decisions myself.

Rob, "rebalancing" is just the halfhearted version of your "valuation" strategy for people who don't have the time/experience/desire to figure out valuations in detail. Stuff that's appreciated the most is the most likely to be overvalued, while stuff that's lagged is the most likely to be undervalued, so if you use naive rebalancing you'll capture some (but not all) of the same effects that a more sophisticated valuation-based strategy would give you.

Phrased another way, your strategy might be phrased as "over-rebalancing". Instead of setting a target allocation and rebalancing to it to get a little more into currently undervalued markets, you overshoot the naive allocation to get a *lot* into those undervalued markets. Yours is a better implementation, but they're both based on the same basic idea.

Old Limey,

As rates have fallen on muni's and CD's, are you still able to invest the new proceeds in things that return 5% yet still have limited risk in falling in value?

There are still some muni bonds available below par value with 4% coupons but CDs are far to low to be of any interest to me. I hold the munis until maturity so their fluctuations in price are not an issue. Currently my munis are showing a total capital gain of $229K but that will have shrunk to $37K by the time the last one matures in 2023. In our IRAs I now use High Yield bond funds instead of CDs and the beauty of them is that they are so easily timed using moving averages because of their very low volatility.

Here are the annual percentage rates of return results for "Buy & Hold" and "Timed with a 50 day MA" for the two funds I have the most money in. The advantages of timing is that your overall returns are higher and that you don't have to suffer the large drawdowns of years like 2008. These returns are based upon switching into a MMF on sell signals, though you could use an ultra short term bond fund instead if it was advantageous. Obviously neither of the funds have short term redemption fees.

.................... B&H .......50 Day MA
3 Years .... 11.34 ....... 21.28
5 Years ...... 8.63 ....... 16.29
10 Years .... 7.54 ....... 12.37

.................... B&H .......50 Day MA
3 Years .... 13.37 ....... 21.49
5 Years ...... 9.77 ....... 15.38
8 Years ...... 9.66 ....... 12.97

@Old Limey,

Would you be willing to list the Muni funds and High Yield Bond funds you hold and time. I am sure you are loath to suggest anyone buy a fund simply because you hold it and that is not what I am suggesting.

I would like to see an example of the exact funds you do your investing with to get an idea of your strategy and examine the exact types of products you use.


My municipal bond investments are not mutual funds, they consist of 2,765 individual municipal bonds with maturities ranging between 11/15/2011 and 12/1/2023, the majority were purchased between 10/15/08 and 12/15/08 when municipal bonds were at a low point. A few were new issues, most were from the secondary market. I selected them using Fidelity's fixed income offerings.

I own 3 mutual funds in our IRAs, the two in my post are SSHYX and MWHYX and I also hold KIFYX.
I select funds using the proprietary database and software to which I have subscribed since retiring. I first rank all candidates in the fund category of interest in order of decreasing "Max Drawdown" over various ranking periods. I then go down the ranked list looking for the ones with the best annual rates of return. Finally I examine the fees, composition, restrictions, and other information on Fidelity's website before making my selections. It only takes a couple of hours to do a very thorough job.

One comment I have about owning lots of rental properties, apart from the work, and sometimes aggravation, of managing them is that when they are all fully depreciated and have increased in value substantially over 27.5 years or so is that you are faced with huge tax consequences if you sell any of them because the depreciation has to be recaptured in addition the appreciation in value. Of course you could enjoy the income from them during your lifetime and leave them to your children in your will, in which case I believe they will receive a new cost basis.

@Old Limey,

Thanks for those details on your mutual funds.

Regarding recaptured depreciation you are quite correct. You are also correct about the new cost basis upon inheritance but that is only true in the current law. Estate tax law is constantly tinkered with so who knows what it will look like later. For instance in the repealed Estate tax that existed for 2010 only there was no stepped up basis.

There is another option as well which is to 1031 exchange the properties into like kind investments which will transfer the cost basis with no tax consequences. This could include transferring into large managed complexes, tenancy in common investments and perhaps even REITs. Personally, if the Estate tax law doesn't change, I like the inheritance option with a stepped up basis. I plan to eventually have enough to hire my own staff to run the business or my kids can if they want to. Either way, I definitely plan to be removed from dealing directly with tenants long before I reach retirement.

When my son moved from Southern California to Northern California he did a 1031 exchange from his ski condo at Mammoth Lakes to a nicer one at Kirkwood near Lake Tahoe. It was the only way to go because he had doubled his investment in 4-5 years and obviously didn't want a big tax bill. The sale went smoothly but there was a delay in closing on the purchase that threatened to end the transaction but I quickly took out a margin loan, did a wire transfer to close the deal, and he paid me back as soon as it closed - that's what Dads are for.

A good article overall, particularly the talking points on asset allocation. Maybe I'm missing the point of re-balancing, which i thought was an investment strategy to avoid trying to time the market or try to figure out " where the market is going" , and instead just focus on the asset allocation that seems to make the best sense for you as an investor.I would agree with the articles statement that " re-balancing is a wise idea and setting a target asset allocation is the most critical part of investment management", but I'm not quite sure what is meant by " adjust an asset allocation recommendation based on market conditions," since that would entail trying to guess what adjustments to make based on guessing "where the market is heading." I'm also not sure about picking May or any other month do do the re-balancing, other than making a cute rhyming jingle. I re balance when my desired allocation gets out of whack by over 10 % .

Time to diversify..Keep gold in your portfolio though ..

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