I'm going to confess that I've employed this strategy a couple of times. My notional plan was that I would push 1/3 of bonds into stocks after they fell 20%, another 1/3 at -35%, and the final 1/3 at -50%. Stocks go back to bonds at rebalance time after TSM is back to the previous ATH.It is well appreciated that falling market represents greater and greater opportunity to capitalize on cheaper valuations. So I'm thinking about something like this:
- Initial allocation 70/30 in favor of stocks but could be anything,
- When market falls 20%, shift to 80/20
- When market falls further 20%, shift to 90/10
- Similarly as market recovers, gradually scale back to original allocation (I'm thinking based on time passed since the bottom, e.g. 1 year, 2 years, etc.)
Transaction costs are an obvious downside. Anybody using something like this?
- During COVID, I transferred 1/3 of stocks on 3/12/20 when TSM was down about 27%. I moved those back to bonds on 12/14/20 when TSM had recovered to ~110% of its pre-COVID value for about a 50% gain on those funds.
- During the 2022 draw down, I moved about 1/3 of bonds to stocks on 6/17/22 when stocks were about 24% down from their previous ATH. I moved the stocks back to bonds on 1/2/24 with TSM at ~97% of it's previous ATH. This one wasn't as clear cut of a victory because bonds had lost a good bit when I traded them out too. I figure I made maybe 15% on this exchange.
Going forward, I probably won't employ this strategy again. In 2020, I felt like my job was secure, my portfolio was fairly small, and it felt like a good "swing for the fences moment." Now my portfolio is ~3X what it was before COVID and I'm starting to de-risk before I retire. The 2022-2024 round trip was also very "meh" so I'm less inspired to try again. Probably the most I would do at this point is to just rebalance bonds -> stocks to maintain my AA.
Overall, my feelings on the strategy are:
- I agree with others that simply having a higher AA in the first place will usually come out better. For example, I made an extra 50% in 2020, but if I had just kept the new higher AA going forward, those funds would be up about 150% today. That said, ...
- If you start with a higher AA, you're stuck with it when the downturn comes. For example, if I had felt like my job was at risk in March 2020, I wouldn't have shifted bonds to stocks. That's why it's a tactical asset allocation. You've bought insurance by having a higher percentage of bonds. Now you can swing for the fences if you feel comfortable, but if not you can preserve your bonds and live on them until stocks recover.
- Psychologically, it's a lot easier to do while your portfolio is relatively small. When you start moving around, say, 5+ years worth of living expenses then it's a lot more scary.
Statistics: Posted by Grogs — Thu Jul 04, 2024 8:44 am — Replies 44 — Views 3055