Asset Allocation advice & rebalancing a bit

[tominboise]

So I did some rudimentary analytics on some (about 2/3) of our portfolio. We are currently sitting at:

65% in Stock funds
14% in individual stocks
13% in Bond funds
8% in MMF

These are all held at either Vanguard or Fidelity. Since I am sitting at 79% in stock, I think I would like to rebalance closer to 65% and 27% bonds. I should add that 40% of the stock funds are actually "life cycle funds" with target dates of 2020 (40%), 2025 (16%) and 2030 (44%), so they have some % of bond mix inherent in them, (so my AA is not entirely accurate).

From the face of it, easiest to do would be to sell the entire portfolio of individual securities and reinvest in bond funds. I am just not sure that is the smartest approach, as we have made good gains on all the stocks.

 

[braumeister]

40% of the stock funds are actually "life cycle funds" with target dates of 2020 (40%), 2025 (16%) and 2030 (44%), so they have some % of bond mix inherent in them, (so my AA is not entirely accurate).

"some % of bond mix" is very understated. You most likely have quite a bit more in your bond allocation than you realize.

It should be easy to go online and get the actual percentages. Why not just do that and come up with your real AA, then figure out whether you need to do anything at all?

 

[copyright1997reloaded]

As braaumeister states, you need to better understand the asset allocation mix of the target funds to see what your true asset allocation is.

In addition, it would be helpful to know whether the assets are held in tax advantaged accounts and whether the individual stocks are short term or long term and what your basis is.

That is, if the account is tax advantaged (IRA, 401k, 403B, Roth, ...) then you can sell stock holdings there without a tax consequence. In addition, since money from traditional (non-roth) tax deferred accounts when withdrawn is considered ordinary income (and thus not eligible for lower long term capital gains rates), it might make more sense to keep bond/fixed holdings in those accounts (and also mutual funds where you can't control the capital gains distribution timing).

Outside of the scope of your question..but one of the reasons I like to have some of my assets in individual securities in non-tax deferred accounts is that I have better control on when the profit/loss gets realized. For example, I hold some AAPL (Apple) with a cost basis of $1.40. [This is not always true, e.g. I've had securities that have been bought out (taken over) for cash or almost all cash deals that I had hoped to keep until I am gone from this life so that my child would receive a step up in basis on a highly appreciated asset).

 

[bw5972]

"some % of bond mix" is very understated. You most likely have quite a bit more in your bond allocation than you realize.

It should be easy to go online and get the actual percentages. Why not just do that and come up with your real AA, then figure out whether you need to do anything at all?

+1

For example:

FFFDX Fidelity Freedom® 2020 Fund Price | Morningstar

Shows Fidelity Freedom® 2020 FFFDX is 30% Bonds.

 

[LOL!]

One cannot treat those mixed funds of equities and bonds as 100% equities in one's asset allocation calculation. Fortunately, one doesn't have to. Fidelity has an "Analysis" tab that will do all the calculations for you if you enter all your investments properly.

Only then can you decide what to do. And one can even enter the proposed result of your rebalancing to see if it matches what you think it should.

Bottom line: Don't use "rudimentary analytics", but instead use the tools given to you by your financial institutions.

 

[fosterscik]

As braaumeister states, you need to better understand the asset allocation mix of the target funds to see what your true asset allocation is.

+2
Vanguard 2020 is 43.6% bonds.

 

[sengsational]

I agree with the posters so far that you should probably get a more accurate bead on where you are at the moment first.

One fairly quick way to get this off the ground would be to go to Instant X-Ray Stock Fund Investment Portfolio Holdings Free Analysis Research Tool - Morningstar and type in your entire portfolio. If you have stuff that's not publicly traded, you can enter something similar (which is better than leaving it out completely).

From your OP, it sounded a bit like, although you don't know exactly where your allocation stands, you just want to take some off of the table. The majority opinion on this board seems to be that if you want to leave it off the table "forever" (aka, permanently change your asset allocation), it's not as "bad" as getting spooked out of the market and then deciding later to jump back in (trying to time the market).

But getting an asset allocation targets defined and "set in stone" is probably step one. I don't know your age, or whether you've still got income. I retired a few years ago at 55 and so without a paycheck, I changed my allocation. But if I still had a paycheck, it would be pedal to the metal equities. I wish I'd done that the whole time while I was working, but didn't know any better.

 

[OldShooter]

I don't like the balanced and life cycle funds because it muddies up the water when trying to look at AA. The comments above illustrate.

That said, @tominboise, it is impossible to comment on your AA without knowing your age and the amount of money we are talking about. When you are young, lots of equity makes the most sense. We ran almost 100% until we were close to retirement. If you are old, your appropriate AA changes dramatically depending on whether you will be leaving a multimillion $ estate or whether you are just eking out a survival income from a very small nest egg. The idea that AA depends only on age is complete baloney. One size fits none.

 

[tominboise]

All good commentary and advice. I will do some more research and reply again.

The value of these accounts is $1.613Mil. $830k is in an IRA (401k rollover). None of the individual stocks are in the tax deferred account. All the stocks are long term with respect to the majority of the gains.

I am 58 years old and doing the research on FIRE. I am still working and making around $225k per year between myself and DW.

 

[LOL!]

I don't like the balanced and life cycle funds because it muddies up the water when trying to look at AA. The comments above illustrate.

With modern portfolio analysis tools such at M* X-ray and the Fidelty Analysis tab (probably uses M* behind the scenes), there really is no muddying of the waters anymore. But one does have to use the tools and not some simple spreadsheet.

 

[OldShooter]

All good commentary and advice. I will do some more research and reply again.

The value of these accounts is $1.613Mil. $830k is in an IRA (401k rollover). Non of the individual stocks are in the tax deferred account. All the stocks are long term with respect to the majority of the gains.

I am 58 years old and doing the research on FIRE. I am still working and making around $225k per year between myself and DW.

OK, at that age and with that savings and that earning power I personally would be at 75-90% equities vs (as others have pointed out) well under 65%. If tax considerations permit it, I would replace the balanced funds (holding both stocks and bonds) with single-purpose finds just so I could look at my AA with clarity.

As you approach retirement probably moving your AA to a little more conservative mix would make sense. As the man said, "Do you want to eat well or to sleep well?"

Re the stocks I would have the objective of getting into a total market US or world fund just for diversification, but would ditch the stocks more as their investment attractiveness waned than being in a big rush to pay taxes. That decision also depends on volatility. If you have gold miners and techies that is one thing. If you have utilities and consumer staples that is another matter entirely. When Harry Markowitz, inventor of Modern Portfolio Theory and Nobel prize winner was asked if individual investors should try to pick stocks his answer was short and sweet: "No." (https://youtu.be/TbMjIn1p-i0)

But I am not you. I am just SGOTI. YMMV.

 

[tominboise]

On the IRA side, using the Fidelity analysis tools, I am at
45% Domestic Stock
27% Foreign Stock
20% Bonds
7% Short term


The individual stocks I happen to own are:

IDACORP INC
CHEVRON CORP
WELLS FARGO & CO NEW
BOEING COMPANY
AMERICAN ELECTRIC POWER COMPANY INC
COSTCO WHOLESALE CORP
PEPSICO INC
FEDEX CORP
COCA-COLA COMPANY
BANK AMERICA CORP

All of which are positive with the exception of the BOA, which I inherited at a very high book value which later tanked. The current value of the stock portfolio is $230k as of close today. The top 3 holdings of which are 65% of all the stocks I hold individually.

 

[RobLJ]

Yes--the Fidelity Analysis tool/tab is very helpful in that it shows the bond/stocks/cash component of every holding in your portfolio.
For Vanguard, you may have to look at the target/balanced funds individually and do a simple spreadsheet.
Quicken also gives me a breakdown of allocations for the portfolio as a whole.

One cannot treat those mixed funds of equities and bonds as 100% equities in one's asset allocation calculation. Fortunately, one doesn't have to. Fidelity has an "Analysis" tab that will do all the calculations for you if you enter all your investments properly.

Only then can you decide what to do. And one can even enter the proposed result of your rebalancing to see if it matches what you think it should.

Bottom line: Don't use "rudimentary analytics", but instead use the tools given to you by your financial institutions.

 

[copyright1997reloaded]

Re the stocks I would have the objective of getting into a total market US or world fund just for diversification, but would ditch the stocks more as their investment attractiveness waned than being in a big rush to pay taxes. That decision also depends on volatility. If you have gold miners and techies that is one thing. If you have utilities and consumer staples that is another matter entirely. When Harry Markowitz, inventor of Modern Portfolio Theory and Nobel prize winner was asked if individual investors should try to pick stocks his answer was short and sweet: "No." (https://youtu.be/TbMjIn1p-i0)

But I am not you. I am just SGOTI. YMMV.

I too am just SGOTI. But I like having some individual equities in my non-tax-deferred accounts. I currently have about 30% of my net worth in individual stock holdings. Maybe I like this because it gives me something to do. Some of these are very long term. I've owned Baxter since 1989 (and have gotten several spin offs including ones that were later acquired by cardnial heallth, cvs, and also Edwards Life Sciences). Others include Linear Technology since 1990 (acquired last year by ADI), Marriott (also with spin offs), Honeywell (again with some spinoffs), and Abbot Labs (now split into ABT + ABBV). These have all done well and some very well. For example, my cost basis on Linear Tech was .57 and it was acquired by ADI for $60 (and actually more as the non-cash portion in ADI stock has continued to rise). Oh, almost forgot AAPL (Apple) bought in late 2000, cost basis $1.40. My philosophy on these is if the fundamental reason for buying remains unchanged, hold on to them. On the other hand if the thesis changes, get rid of them. Also part of this is to try to ride long term trends that over the last 30 years and I believe continuing:
1. As chip die sizes decrease, each turn of the technology crank will enable more and more applications of technology as devices become smaller and cheaper. Industry after industry will become technology based.
2. Medical advances will continue, and with aging population in developed nations and more wealth in developing nations, demand for medical services and devices will continue to rise.
3.Along with the first two, travel and leisure will continue to grow.

 

[donheff]

Vanguard has a portfolio analysis tool. I assume it breaks out life cycle funds.

 

[LOL!]

Vanguard has a portfolio analysis tool. I assume it breaks out life cycle funds.

The Vanguard tool doesn't really work that well, especially if one has any mixed funds from non-Vanguard places. Check out all the complaints at bogleheads.org if you want to read rants.