Locking In The Losses

by Chris

I just saw this on Zero Hedge:

U.S. defined-benefit pensions will need to implement a “giant rebalancing out of bonds and into stocks”, with the bank estimating roughly $64 billion in equity purchases over the next 5 trading days.

Well, that’s just an upsetting idea right there…the idea being that because pensions are trying to mainatin a 55% equity weighting, and a 40% bond and 5% ‘other’ weighting, the fact that stocks have fallen a bunch compared to bonds then the solution is…wait for it! … sell what’s been working and buy more of what hasn’t.

First, pensions have no business being 60% exposed to high risk equity and ‘other.’

Second, I’m not sure of the math but consistently rebalancing away from winners and into the losers seems, inuitively, to be a very bad idea.  For example, if bonds get crushed, should the pensions reflexively sell their winning equities and get more bonds?  Then if bonds get even more crushed should they put even more ‘over there?’

However, I’d be open to seeing the backfitted models to show that this is the way to go.  I have my suspicions, however, that this is not a good strategy.  But I’d be interested to see the data.

More likely, this is a a brain-dead “strategy” that rests on a prior decision to hold a certain percentage in various asset classes and to rebalance on a regular schedule.  Sounds very formal and rule based and I doubt anyone would get fired (or sued) for following it.



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