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Personal Investments • Tactical Asset Allocation - shift to stocks when market falls a certain amount

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?
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.

- 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



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