Asset allocation tutorial?

[TickTock]

Umm, so wait I wanted to get some advice, studies, charts, etc to look at whether or not all things being equal, a once a year rebalancing will increase returns. Did we go over that or make some conclusion on this?

Shabber2,

While there is no guarantee, yearly rebalancing ususally increases returns. See Bernstein's The Intelligent Asset Allocator for a bunch of charts showing the 'bulge' gained from yearly rebalancing for several different cases.

 

[RetireeRobert]

Historical Data Sources to Aid Asset Allocation

Can't remember if these links were mentioned earlier. I just ran across them in an AAII article, so here they are:

Planning Resources There are several other places where you can find historical data to help you make the final asset allocation decision. One of the best on the Web is at www.callan.com. Callan Associates routinely collects performance on thousands of institutional investment and mutual fund products; the information is aggregated in the form of various indexes based on investment style and asset class. A similar database available to the general public is maintained by Wilshire Associates at www.wilshire.com.

 

[LOL!]

A new article on rebalancing by Gobind Daryanani just appeared in the Jan 2008 issue of the Journal of Financial Planning: FPA Journal - Opportunistic Rebalancing: A New Paradigm for Wealth Managers

It discusses "opportunistic rebalancing" which is 'range rebalancing' combined with how often one 'looks' to see if rebalancing is necessary to bring things back to within tolerance.

Not explicit mentioned in the article, but suggestive is that this opportunistic rebalancing is not inconsistent with [-]buying[/-] rebalancing on dips.

Yet significant benefits can be achieved with optimal location combined with opportunistic rebalancing (30 bps from location and 50 bps to 80 bps from rebalancing, depending on the period considered).

Comments and questions welcome!

 

[Darryl]

Thanks for the article. I just settled on an AA last spring and my plan called for May 1st to be my first "official" rebalance day. I have a long term perspective, I'm still accumulating and I'm still trying to buy my way to the AA I set (I have the cash/bond, u.s. stock and intl at target but still have work within these classes). As we hit some rough patches this past year I accelerated my buying of classes that were getting hit and felt a little like I was market timing. This appears to absolve me of that offense. I also have been unsure of what size band to allow the classes in order to get the most benefit. This article has ended that debate for me I will be using 20%.

 

[RetireeRobert]

Asset allocation data for select asset classes, and for three model portfolios -- returns for 1, 5, and 10 year periods. At American Association Individual Investors website:

AAII.com Login

 

[LOL!]

I wanted to call attention to a relatively new Vanguard whitepaper "Portfolio Construction for Taxable Investors" which is esstentially a summary of this entire thread:
https://institutional.vanguard.com/iwe/pdf/portfolioconstruction.pdf

This was brought to my attention by poster ddb on the Diehards forum. It talks about asset allocation, sub-asset allocation, active and/or passive allocations, asset location, manager selection, rebalancing, and other topics in its 24 pages.

 

[unclemick]

I wanted to call attention to a relatively new Vanguard whitepaper "Portfolio Construction for Taxable Investors" which is esstentially a summary of this entire thread:
https://institutional.vanguard.com/iwe/pdf/portfolioconstruction.pdf

This was brought to my attention by poster ddb on the Diehards forum. It talks about asset allocation, sub-asset allocation, active and/or passive allocations, asset location, manager selection, rebalancing, and other topics in its 24 pages.

Nice paper.

Forty years 1966 until Jan 2006. Then Target Retirement 2015.

1. Unclemick has meet the enemy and he is them - it only takes one and yes it is that simple:

'God Looks After Drunkards, Fools and The United States of America.'

2. One Curmudgeon certificate downloaded from this very forum - LBYM and stay grumpy.

3. Faith, Time in the market - and I won't/ don't read any more stupid books!

heh heh heh - of course I do slip and sin once in a while. Your mileage may vary. I never listened when I was young either.

 

[LOL!]

Hey folks, a relatively new member to the forum, grfiv, has quite an outstanding set of web articles and presentations on the subject of asset allocation.

Read his introduction and get links to good stuff at this link: http://www.early-retirement.org/for...n-climber-ria-real-estate-investor-33276.html

 

[LOL!]

Jonathan Clements writes a 'how-to' asset allocation 'tutorial' in his column today in 7 easy steps:
Getting Going - WSJ.com

 

[freebird5825]

oooh, homework. <kidding>
...the last act of rebalancing that you did.
easy one.
i changed strategy in the 2Q of 2007, right after i FIREd. i wanted to adopt a balanced 50/50 temporarily for 1 year til i saw how my pension + fixed annuity actually covered my annual expenses and how much pain was to be involved.
i invest only in MFs. i increased my DCA into tax free muni MFs, reduced my DCA into stock MFs, and let the portfolio gradually adapt itself to the change. didn't sell anything. trying to reduce tax burden and generate income just in case my expenses grew beyond my pre-FIRE projections.
so far so good. my projected income and expenses are pretty much on target to what i had calculated pre-FIRE.
because of my age, i will return to a 60/40 by changing my DCA allotments again in late 2008 and gradually let it readjust.
comments are welcome!

 

[jIMOh]

Umm, so wait I wanted to get some advice, studies, charts, etc to look at whether or not all things being equal, a once a year rebalancing will increase returns. Did we go over that or make some conclusion on this?

Smart money ran an article years and years ago which did a monte carlo simulation with rebalancing.

Conclusion was to let winners ride more than rebalance out for long term (for best performance using past performance). I think conclusion was 2 years or 3 years, or 10% out of line with allocation.

I have not followed this whole thread, but saw this question and will add my comment to it.

In my own situation, I rebalance 2X per year.

I start Jan 1 off with proper allocation and proper contributions to main that allocation for the year (45% large cap, 15% mid cap and 15% small cap; 15% international large cap and 10% international small cap).

In June, I adjust contributions so anything underperforming is getting more money. Might take 45% and drop it to 40% for example, and up another asset by 5%. The goal is to have proper allocation in December without selling anything.

In December I will reset all contributions to normal allocations, and also buy/sell in 401ks and IRAs to make it all start January off properly. In the 18 months I have been doing this, my allocations have never been off by more than 2% of target anytime I checked.

A caveat to this is I am increasing from 0% bonds to 10% bonds, by adding 1% to bonds at each rebalance (lowered large cap to do this). So above allocation is only 43% large cap right now (unless market has adjusted it for me last 3 months) and 2% bonds. Will go to 42-3 in June when I rebalance.

 

[LOL!]

It's been awhile since this thread has had any posts, but it has had alot of page views: It's now in the top 10 most-viewed threads for the FIRE and Money forum.

But there has been alot of activity at the Diehards forum in the last couple of months as well. I want to bring to anyone's attention that Bogleheads :: View Forum - Investing - Portfolio Help has evolved into a free online personal portfolio asset allocation help forum where you can show your portfolio, your fund selections, your desired asset allocation and get a personalized response from the folks who hang out there. You can even ask questions after seeing a customized for you portfolio asset allocation.

There is nothing like it on the web as far as I can tell. It's simply awesome!

 

[bamsphd]

I thought this was a good thread to reread in these interesting times.

Sorry I'm behind on my homework. I'll get it done Real Soon Now....

The recent changes in my portfolio's mark-to-market value have finally motivated me to finish some of my homework. I expect to do some tax loss harvesting, and to rebalance my portfolio soon.

So almost 11 months after the homework was assigned, my CURRENT portfolio X-Ray information is:

• Cash 9.17%
• US Stocks 45.50%
• Foreign Stocks 21.76%
• Bonds 22.56%
• Other 1.01%

Valuation
21 21 24
4 6 6
6 7 6

Interest Rate Sensitivity
91 0 9
0 0 0
0 0 0

The only assets I could not enter properly were my individual TIPS, which were entered as conventional short-term treasuries, and make up 10.43% of my portfolio.

 

[ERD50]

The recent changes in my portfolio's mark-to-market value have finally motivated me to finish some of my homework. I expect to do some tax loss harvesting, and to rebalance my portfolio soon.

Speaking of homework... I need to do some on those Long Term Capital Gain tax rates for 2008-2010.

This might not be a good year to do 'tax loss harvesting'. If your cap gains tax rate is very low this year, it might be better to use those losses later. Taking them now will just increase the gains in future years, which may be taxed at a higher rate.

Due to the wonderful complexity of our tax system, you may need to run this through a tax program to even see if you qualify. However, since Congress can't seem to finalize the 2008 laws before the end of 2008, there is no way to know for sure at this time.

-ERD50

 

[freebird5825]

...the last act of rebalancing that you did.
in the 2Q of 2007...adopt a balanced 50/50 temporarily for 1 year til i saw how my pension + fixed annuity actually covered my annual expenses and how much pain was to be involved.
i increased my DCA into tax free muni MFs, reduced my DCA into stock MFs, and let the portfolio gradually adapt itself to the change...will return to a 60/40 by changing my DCA allotments again in late 2008 and gradually let it readjust.

5 months later update in a very ugly market: never did the 60/40 AA change, and am still running at 51/49. slightly increased DCA into TE munis recently to shorten the time to arrive at self-inposed target principal. overall YTD loss now at 21%. no intention or need to rebalance.
we are all feeling the pain...

 

[freebird5825]

Speaking of homework... I need to do some on those Long Term Capital Gain tax rates for 2008-2010.

This might not be a good year to do 'tax loss harvesting'. If your cap gains tax rate is very low this year, it might be better to use those losses later. Taking them now will just increase the gains in future years, which may be taxed at a higher rate.

Due to the wonderful complexity of our tax system, you may need to run this through a tax program to even see if you qualify. However, since Congress can't seem to finalize the 2008 laws before the end of 2008, there is no way to know for sure at this time.

-ERD50

i would be very interested in what you find out about tax harvesting for 08. turbotax update software should arrive in the next month or so, per their snail mail notice. it may get delayed, perhaps, by the congressional indecision?

 

[ERD50]

i would be very interested in what you find out about tax harvesting for 08. turbotax update software should arrive in the next month or so, per their snail mail notice. it may get delayed, perhaps, by the congressional indecision?

taxact online has a 2008 preview version. I've used them the past few years, so I will check that out. You don't pay anything until you actually file, so you can 'play' to your heart's content.

File Your 1040 Tax Form With TaxACT Online Ultimate - 120+ Tax Forms Available

If you just want to do a quick check, I've loaded round amounts in lumped categories just to test the effects w/o getting into nitty gritty detail. Though, tax laws are sooooo complex, that is getting harder and harder to do. Real results sometimes depend on the detailed entries

Did I ever mention just how much I hate our tax collection system? Well, I try not to use words like that...

-ERD50

 

[freebird5825]

cool, thanks for the link.
i REALLY hate our tax laws. no words minced, eh?

 

[kyounge1956]

Homework Assignment #1

OK, here we go with the 1st homework assignment.
(snip)
2. Login to your account there, then click on "Use Morningstar tools". You will have to find this link yourself (it's homework after all!).
3. Then click on "Instant X-ray". Enter just one (1) of your funds and show the X-ray.
4. Report here in this thread, the name of the fund and the 9-box "stock style" grid that is shown in the X-ray (we need 9 numbers here).
5. What percent of assets in your fund has the style mid cap growth? (snip)

Fidelity Contrafund
8....27....47
1.....3....12
0.....1.....1

12% is Mid-cap Growth

 

[kyounge1956]

I'm running into a snag on the second homework assignment. One of the funds in my 457 plan is just called "Stable Value Fund". The fund description provided by the custodian says "The Stable Value Fund will invest 100% in the Wells Fargo Stable Return Fund with the same investment objective." Under investment advisor it says "The Stable Value Fund is a bank collective fund advised by Wells Fargo Bank, N.A., and sub-advised by Galliard Capital Management, Inc., a wholly owned subsidiary of Wells Fargo Bank. Wells Fargo Company, headquartered in San Francisco, California, manages trust and employee benefit clients through its subsidiaries. Galliard Capital Management is a fixed income adviser specializing in stable value portfolio management. The Wells Fargo Stable Return Fund has been managed since 1988 by Karl Tourville, a managing partner of Galliard Capital Management."

I can't find the ticker symbol for this with the lookup feature on troweprice.com, either as "Stable Value Fund" or as "Wells Fargo Stable Return Fund". All the other funds in my account show their tickers on the screen at the custodian's website, but this one doesn't. Is there another way to find out the ticker code? What do I do if I can't find the ticker?

While I'm at it, how do I enter US Savings bonds in the portfolio Xray? I have both EE and I bonds worth about 20% as much as my 457. And what do I use for the "cash equivalent" and the Variable Annuity (and/or the individual funds within it) in my Ameriprise Roth IRA? (Yeah, they got me, too.)

 

[LOL!]

I just enter my stable value fund and cash as cash (CASH$), There is a way to enter bonds as well where you give the maturity date and the coupon rate.

For funds without ticker symbols, I just use the ticker symbol of another fund with similar investments. So for an Ameriprise variable annuity, I would just pick another Ameriprise fund. Or if you want to get picky, you can probably figure out if the annuity is a mixture of Ameriprise funds and add fractional amounts of all the funds to the M* portfolio manager.

 

[kyounge1956]

I just enter my stable value fund and cash as cash (CASH$), There is a way to enter bonds as well where you give the maturity date and the coupon rate.

I have entered thm individually in the savings bond calculator at treasurydirect.gov, but I can't put them into the portfolio Xray individually, there are too many. Is there a ticker symbol or equivalent for savings bonds?

For funds without ticker symbols, I just use the ticker symbol of another fund with similar investments. So for an Ameriprise variable annuity, I would just pick another Ameriprise fund. Or if you want to get picky, you can probably figure out if the annuity is a mixture of Ameriprise funds and add fractional amounts of all the funds to the M* portfolio manager.

The funds and amounts are listed on the statement but IIRC they are all proprietary funds. I may be back later to ask how to find a similar fund...

 

[kyounge1956]

(snip)

Homework: Use your M*/TRowePrice to enter and save your actual current portfolio. (Here's a link: T. Rowe Price: Interactive Tools). You can just enter current prices and current number of shares. You do not need to enter the actual transactions if you do not wish to.

Be sure to enter ALL your investable assets: your tax-deferred, your taxable, your 401k, your spouse's investments, etc.) When your portfolio is entered and saved, click on "Portfolio X-ray".
Report what percentage (round off) you have for cash, bonds, domestic stocks, and foreign stocks.

Example: we are 8% cash, 21% bonds, 40% US stocks, and 31% foreign stocks.

(Future homework will require you to enter other portfolios for comparison.)

Rounded to the nearest percent, I have:

Cash 59%
US Stock 27%
Foreign Stock 13%
Bonds 1%

This includes my Roth and 457 accounts but does not include the savings bonds. I decided I would call them the car replacement fund and not count them as part of my retirement portfolio. It also includes the surrender value of my variable annuity as part of the cash fraction. This is a much higher proportion of cash and much lower bonds than the one I used to do my projections. I based that on the return and standard deviation info I got from my Financial Planner, but I think she included the savings bonds as part of the whole.

P.S. for any Mac users who may read this thread later on, the T Rowe Price site appears not to like the Safari browser. It wouldn't save my portfolio
It works OK with Firefox, though.
(OS 10.5.5, Safari 3.1.2 Firefox 3.0.3)

 

[kyounge1956]

Rounded to the nearest percent, I have:

Cash 59%
US Stock 27%
Foreign Stock 13%
Bonds 1%

This includes my Roth and 457 accounts but does not include the savings bonds. I decided I would call them the car replacement fund and not count them as part of my retirement portfolio. It also includes the surrender value of my variable annuity as part of the cash fraction. This is a much higher proportion of cash and much lower bonds than the one I used to do my projections. I based that on the return and standard deviation info I got from my Financial Planner, but I think she included the savings bonds as part of the whole.

After thinking about this a little I decided not to include the surrender value of the annuity as part of the portfolio. I can't get at the money right now because of the high surrender charge, so I will just pretend it's in a bank vault with a time lock on it and figure out what to do with it when the vault opens.

With that change, the percentages are:
Cash 50%
US Stock 33%
Foreign Stock 16%
Bonds 1%

 

[kyounge1956]

Now let's review what we have done so far:
(snip)
At the end of reading these articles, one should have a general idea of what percent fixed income and cash that one wishes to have in their portfolio. This will be a personal decision, but should be based on the risk level or maximum portfolio loss in a year that is acceptable to you or perhaps based on the desired long-term average annual return that you need. It can also be based on personal experience that you've had with your portfolio. For some help with this, you might take a look at Portfolio Solutions

Company research: Low cost investment manager, Portfolio Solutions which are both from Rick Ferri's (author of All About Asset Allocation) company's web site.

Homework: After some careful thought, tell us what your desired asset allocation in terms of %stocks, %fixed income is. Give us a sentence on why you chose that split. Tell us whether you are in the total stock market weighted camp or the F-F slice-and-dice camp or somewhere in-between. Then finally tell us how you want to split up your equities into domestic and foreign. (snip)

My preferred asset allocation is 30% equity, 70% fixed. In the models I did with an online Monte Carlo simulator, I used a "below average risk" portfolio (of 30% US stocks, 10% international stocks, and 60% fixed income) with a return of 7.5% and a standard deviation of 7.1%. Using the chart in "Fine Tuning Your Asset Allocation", I find that to keep my standard deviation under 7.1%, I need to use the 30% equity (equally split between US and foreign)/70% bonds portfolio. Fortunately, the chart shows a return of 9.2% for that allocation, which is more than I need for a successful strategy. Since the allocation in the chart provides higher return with less volatility than the assumptions I have used in my planning so far, I will also use half US and half foreign stock. For the time being I fall into the slice and dice camp, but mostly because that's the approach taken in most of what I've read on finance, so it's familiar. I can't put my finger on any specific reason it's superior to the other.