Take Money Off the Table After a Good Run

Almost three years ago, when the stock market entered a bear market, I devised a plan for overbalancing, which called for increasing the percentage of my portfolio invested in stocks as the market goes lower.

Stock Market Allocation to Stocks
-5% 60%
-10% 60%
-15% 60%
-20% 65%
-25% 65%
-30% 70%
-35% 70%
-40% 75%
-45% 80%
-50% or more 85%

Back then, many readers asked how I would go about unwinding it. I said I would let the percentage of stocks come down gradually, with a delay, as the stock market climbs out of a bottom. As the stock market has now come close to a full recovery, I ended overbalancing and returned to the normal portfolio allocation of roughly 60% in stocks, 40% in bonds.

In retrospect, overbalancing worked well for me, although it was difficult to carry out. Buying more as the market goes down is harder to execute than it sounds. At the early stage of the recovery (August 2009), I even doubted whether it worked at all. I didn’t know it would take another year and a half to see the real effect.

I learned some good lessons in this experience. I learned that the true test for risk tolerance happens when the loss is relatively large to your income. If you have $50k in investments and you earn $100k a year, a 30% loss in your investments can be well tolerated because it’s only a couple of months worth of salary. If you have $1 million in investments, a 30% loss means losing three years of salary. How do you feel then?

I learned it’s very easy to ignore risk when prices are going up. After the market bottomed, I had no difficulty in carrying a higher stock allocation because I only see their values going up and up. There were some hiccups, all very small.

I also learned luck plays a bigger role than most think. My overbalancing worked out well because the stock market decline stopped right at the 50% off mark and recovered quickly. I was lucky. It probably won’t work this way next time. I shouldn’t push my luck too much.

This is also why I’m ending my overbalancing now. I’m not calling a market top. Now that I reduced my investments in stocks, the market will probably go up some more. I’m OK with it. My purchases weren’t at the bottom. I don’t have to sell at the top either. After all, I still have 60% invested in stocks. At the current low interest rates, the upside to bonds is limited. I want the stock market to go up.

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  1. Mike Holman says

    Interesting. I’ve been wondering recently about trying to come up with some sort of tactical asset allocation management model. Not easy to do however.

    As to your last sentence – If you are in the accumulation phase, you should be wishing for the market to go down so you can buy more stocks with your money. 🙂

  2. Harry Sit says

    Mike – re: wishing for the market to go down. I used to think that way. Now I realize the recovery is far from certain. Buying low works only if the market recovers. Investors in Japanese stock market have been buying low for 20 years and it’s still low.

  3. Adam Okhai says

    “Overbalancing” article” Interesting thoughts clearly expressed. In a period like this, if one is 60% invested, where do you park cash where it can earn a rate that covers inflation and a bit for whatever the risk might be? For example it seems very difficult at present to know where to place funds until the day when one is ready to invest . 1 or 2 % in some savings account won’t do. And bonds seem risky …. because prime cannot stay where it for much longer.
    ‘Anyone have ideas?

  4. Monevator says

    Great work on a clear strategy, well executed.

    I’m the only person I know who prefers buying in a falling market — it’s a very useful habit to train yourself into. 😉

  5. Kathryn C says

    Exceedingly disciplined, I love it. To help us understand how well your strategy worked, I am curious what your portfolio return has been from when you started aggressively overbalancing to current, vs had you not aggressively overbalanced.

    The majority of the population is in the latter camp so it would be interesting to see how much money you would’ve left on the table had you not been so disciplined (and a good lesson for all of us).

    It would be hard to overbalance as much as you did, that takes guts, but I think getting most people to the middle ground is a good goal.

    I wasn’t as disciplined with rebalancing, and am regretting big time, I learned my lesson for the next round of this, one day.

  6. Adam Okhai says

    @TFB : Thank you for referring me to the article you had already written. It addressed my enquiry v-well. I am looking at some Municipal bonds. While browsing Muni Bonds for safety and yield, I noted that some commentators , e.g. Meredith Whitney (MW Group/ Macro Mavens) wonders or believes that over 50 municipalities or States are likely to default on some bonds. As you have pointed out , one has to check first. (btw: I found a couple of Canadian REITs that have done well. Can’t say whether they will do as well in future but its an area some may want to look into, although risk is higher— the risk-reward equation seems to be the only constant)

  7. Ted says

    Thanks for the update on this. I recall asking about how you were going to unwind this back when. I am very glad it worked out for you!

  8. Ted says


    Did you determine what your overbalancing bonus was vs. keeping your AA?

    I realize this may be difficult given that you were probably making new contributions the past couple years.

    I compared Vanguard’s Balanced Index (VBAIX) with the Vanguard 2025 Retirement Fund (VTTVX) and getting a nice bonus vs. getting no or negative bonus seems to hinge on timing. The 60/40 prior to Oct 10, 2008 seems to win over 75/25. If you switched after 10/10/08 the bonus looks rather sweet.


  9. Louis says

    Interesting, but I have a question. Does not the act of annual rebalancing itself cause you to buy low and sell high? If stocks dropped during the last 12 month period they then become a smaller percentage relative to your fixed allocation at the time of annual rebalancing, so you would sell bonds and buy stocks. Of course it works in reverse when markets go up. I think changing allocations based on’market levels’ means you are market timing. All I can say about that is “Good Luck!”

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