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Asset Allocation Question
Old 12-07-2013, 06:28 AM   #1
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Asset Allocation Question

I understand the basic concept of asset allocation between stocks and bonds, but how often do you tinker with asset allocations when it come to just your stock portion?

Many people on this forum have a target asset allocation between stocks and bonds, for example 60% stocks/40% bonds. The common knowledge seems to be rebalance when your asset allocation changes by 5% (or any other number you choose). So if your stock investments go up to 65% and your bond investments are now at 35%, you would rebalance back to your 60/40 target asset allocation.

I currently do not own any bonds, as I mentioned in my first post: New Member, Just Wanted to Say Hi I am loyal to Fidelity, and as I said before, I match dollar for dollar in my Roth and Brokerage. I own the following funds, which can be multiplied by 2 (each account):
FSIVX, purchased $10K, today $12,228.81
FSRVX, purchased $10K, today $10,887.51
FSSVX, purchased $10K, today $14,598.43
FUSVX. purchased $11K, today $16,315.54

To clarify my question, is there any specific way I should split the International equities, REITs, Small cap, and S&P 500? I feel like all that rebalancing does is trigger a bunch of tax events, at least in the brokerage account.

I have about $10K cash in each account, and my plan is to eventually break into the bond market with FLBIX. I have been hesitant for a while because I am worried that the bond bubble could burst. Do I wait or I do I just jump in?
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Old 12-07-2013, 08:15 AM   #2
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These are the best examples of how to allocate equity holdings that I know of, just look at the ones with more "slices" Lazy portfolios - Bogleheads

And I definitely take tax consequences in mind when I rebalance and I use bands (5/25). Sometimes you get "lucky" and have losses to offset gains (usually not), but taxes should be part of the decision making process IMO. Ask yourself am I actually reducing my long term tax impact or just pushing taxes I will have to pay eventually into next year or later (forestalling the inevitable). In the past I've avoided taxes year after year only to find I had huge gains to deal with years later...you might have been better off paying taxes in smaller bites each year - it's a balance. Tax planning is an essential part of investing, but only one part.

Lots of people are using the term, but "bubble" is mostly a misuse of terms to describe the bond environment we're in. Yes rising interest rates are inevitable at some point (though many experts were saying it was imminent four years ago), but what happens to yields and more important bond fund NAVs (the real worry) is mostly predictable knowing duration and interest rate increases - you can calculate it on a cocktail napkin. It'll feel like a bubble to those holding long bond funds, but what will happen is mostly known. http://www.schwab.com/public/schwab/...ates_rise.html
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Old 12-07-2013, 08:24 AM   #3
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I wouldn't sweat your equity allocation too much. If you are adding to your accounts just buy more of what is down, if you like. As far as the bonds go, most gurus expect future returns in the 3 to4% range going forward. I'd stick to CDs for a while at least.
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Old 12-07-2013, 08:41 AM   #4
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Quote:
Originally Posted by Henman004 View Post

To clarify my question, is there any specific way I should split the International equities, REITs, Small cap, and S&P 500? I feel like all that rebalancing does is trigger a bunch of tax events, at least in the brokerage account.
Here is a picture of my AA, two views. In my spreadsheet I have additional columns where I can add "what-if" scenarios to individual funds, and think the allocation correction ahead of time. If I had your funds, I could add 10K for each and see the effect across our portfolio.

Part of your question is answered by how you classify the funds. For example, I also have a column for category of fund. I group funds by category at the bottom, and can see when small/mid runs ahead of large, and so on.
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Old 12-07-2013, 10:29 AM   #5
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I used to rebalance every quarter if the percentage drift goes 5% or greater. But decided to reblance less often (don't want to open the oven door too much when the cake is baking ) and just rebalance at the beginning of the year.
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Old 12-07-2013, 11:24 AM   #6
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We use 5% band; our current AA is 60/35/5, moving to 60/25/15 at RE.

Target-thx for posting your detailed AA. I notice that you include the NPV of pension(s). Do you calculate your AA with and w/o pension income and remain within two sets of AA bands or, just with pension income? What's your rationale for not including SS NPV in your calculations?
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Old 12-07-2013, 12:44 PM   #7
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I use a +/-20% of allocation threshold to rebalance, taxable or not. So if an equity allocation (I do it by fund) is supposed to be 10% of the portfolio and reaches 12% (20% high), I'll sell some of it and buy whatever is looking low. It doesn't happen very often, so the tax consequences are small. And even less if I can do it in a tax favored account.

Rebalancing can add a little growth to your portfolio when working with allocations of equities that have the same nominal growth rate. Buying low and selling high. Rebalancing with bonds works more to keep your volatility in line with your original intentions.
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Old 12-07-2013, 01:05 PM   #8
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Thank you all for the responses! You've given me some ideas and things to think about.

Midpack, I see your point on paying taxes now or later. Considering that I am active duty enlisted military, I am probably paying a lot less taxes now, than I will when I retire. Also, the links you posted have some great info!

Target, that is an awesome spreadsheet. I need to make something like that.

Gatordoc, for now, I'll probably do as you said and stay the course. I'll continue to add to what I'm already doing.

Easysurfer, I am pretty good at keeping the door closed with investments, but when there's a cake in the oven, I definitely can't keep the door shut. =)

Animorph, that is a great idea; rebalancing based on the individual fund. I am going to try that.
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Old 12-07-2013, 04:13 PM   #9
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Quote:
Originally Posted by Huston55 View Post
Target-thx for posting your detailed AA. I notice that you include the NPV of pension(s). Do you calculate your AA with and w/o pension income and remain within two sets of AA bands or, just with pension income? What's your rationale for not including SS NPV in your calculations?
I just have that one spreadsheet. I can remove it and see the effect on AA.

When we started paying proper attention to these matters (8 years ago), we expected to take the pension lump sum. That may not happen, as other investing spaces have taken off in a big way. The effect now, is that we are okay with taking on more risk.

I have another sheet where I model future income needs, and SS shows up there.
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Old 12-09-2013, 10:09 AM   #10
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Quote:
Originally Posted by Henman004 View Post
To clarify my question, is there any specific way I should split the International equities, REITs, Small cap, and S&P 500? I feel like all that rebalancing does is trigger a bunch of tax events, at least in the brokerage account.
Not quite sure what you are asking here; is it about AA in equities? Personally, 1/3 of my equities are international and 1/3 (of both US ant intl) and small value. We no longer own REITs.

The best way to rebalance is with new contributions.
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Old 12-09-2013, 11:20 AM   #11
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mrfeh, yes, I was asking about AA with equities. I appreciate your input.. My AA is about 1/4 between each. The link that Midpack provided shows what the "lazy investor's" portfolio would look like: Lazy portfolios - Bogleheads

I always thought new contributions was the best way to rebalance as well, but as I think about the whole picture, it is not always the best idea. At what point do you lock in your gains? Are you accounting for what you will eventually owe in taxes, if using a taxable account?

As Midpack mentioned, you should consider the tax liabilities. Also, Animorph's strategy of rebalancing when an individual fund hits the 20% threshold, allows you to lock in some gains. Then you can buy into something else low.
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Old 12-09-2013, 11:32 AM   #12
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mrfeh, yes, I was asking about AA with equities. I appreciate your input.. My AA is about 1/4 between each. The link that Midpack provided shows what the "lazy investor's" portfolio would look like: Lazy portfolios - Bogleheads

I always thought new contributions was the best way to rebalance as well, but as I think about the whole picture, it is not always the best idea. At what point do you lock in your gains? Are you accounting for what you will eventually owe in taxes, if using a taxable account?
Yes, taxes are a major consideration. Our income will be less in retirement, so I try to postpone taxes. That doesn't seem to be your situation.

Sometimes rules-of-thumb need to be avoided.


Quote:
As Midpack mentioned, you should consider the tax liabilities. Also, Animorph's strategy of rebalancing when an individual fund hits the 20% threshold, allows you to lock in some gains. Then you can buy into something else low.
I prefer to just stick to the 5% threshold between equities/fixed income. I don't look at individual funds; I look at asset categories (ie. SV equities, ex-US equities). Looking at individual funds to "lock in gains" smells like market timing to me, which I try to avoid.
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Old 12-09-2013, 11:40 AM   #13
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One of the most viewed threads in this forum addresses the question of asset allocation within equities somewhere in its posts: Asset allocation tutorial?
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