Rebalancing with large 2° pillar

Investing / Portfolios
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Some of you already argued here that one should include the second pillar assets into the personal portfolio.
Let’s do so.

In the same post, someone said that therefore, they are more aggressive with stocks.

To me, however, money in 2° pillar lack a fundamental characteristic: I cannot sell second pillar assets to buy more stocks when they are cheap.
So, assume I want an 80% stocks portfolio, and that 2° pillar is already at 20%. Then I cannot rebalance, if I cannot simply buy more stocks.
But I really want to rebalance, so I should also hold cash and bonds in addition to 2° pillar.
But this will make the portfolio less risky (and profitable) than I’d really want.

My conclusion: if my second pillar is very large and I want to rebalance my portfolio, the only way to do so is to expand the fixed income section with cash/bonds. And possibly live with a lower risk and return than I’d want.

Do you agree? Is there any way out?

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A naive thought: Why not use small amount of leverage (10-20%) to rebalance into equity?
And keep cash/bonds when equity outperforms and exceeds your target?
Surely you can’t use/ withdraw second pillar, but you can increase equity percentage in your portfolio.

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The way I see it, if I would want to rebalance out of my second pillar, that means that I am already invested more conservatively than I would actually want, i.e.: I have to deal with not having access to that part of my portfolio and can invest the rest as agressively as I can (i.e.: 100% stocks).

covfefe’s alternative to keep a liquid interface by using margin would be a way to add back rebalancing into the mix if one really wanted to (to me, achieving my target allocation overwhelmingly trumps rebalancing for the sake of rebalancing so it isn’t an actual target).

Another way would be to short bonds and count that against our 2nd pillar allocation. The amount of shorting varying to allow us to follow our allocation (and therefor accounting for rebalancing). I don’t like that (and don’t do it) because bonds have a real impact on the economy and I hate to be part of the forces driving the economy down (no matter how small my impact may be).

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Besides having cash as dry-powder or going on margin, you could also rebalance over time by investing more. To a limited effect, maybe you can adapt your pillar 2 contribution once a year, like 2% more or less.

If it’s a purely mental exercise about asset allocation, you could decide to ignore your pillar 2, or reclassify it since it likely is invested in some 40-60% stocks

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I would also suggest not to think worry too much about rebalancing that you start thinking about shorting. As someone suggested , it’s a mental exercise. If it makes you think so much, perhaps just ignore 2nd pillar and go for 100% stocks in rest of the portfolio if you can stomach 30-40% drawdowns.

In the end, all of these guidelines are there to help people have a framework.

Last point, recently there is another article which talks about research which suggests that mix of domestic and international stocks is a better investment for retirement planning instead of inclusion of bonds. This is putting some of the life strategy funds under question which have tapered increase towards bonds as age increases

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