Asset allocation tutorial?

[freebird5825]

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Originally Posted by ERD50 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]

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Originally Posted by freebird5825 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]

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Originally Posted by LOL! 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]

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Originally Posted by 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.

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?

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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]

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Originally Posted by LOL! (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]

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Originally Posted by 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]

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Originally Posted by LOL! 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.

[kyounge1956]

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Originally Posted by LOL! (snip) Easy homework: Post the percentage of fixed income (taxable bond funds, the bond portion of balanced and TR funds) that you have in taxable accounts. Could you put that same amount in a bond fund in your tax-deferred accounts and replace the fixed income in your taxable account with a tax-efficient asset class? If you have tax-exempt bonds, would you come out ahead by using taxable bonds in a tax-deferred account or a Roth or a 529 plan? My answer to the homework: I have about 30% fixed income in my asset allocation and 0% of that fixed income is found in my taxable accounts.

This is the easiest assignment so far. I don't have a taxable account, so the percentage is zero.

[kyounge1956]

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Originally Posted by LOL! (snip) One might say there are 3 general ways of rebalancing which are really based on the "when" of rebalancing: 1. Rebalance with every new addition to the portfolio. 2. Rebalance at a set time every year: your birthday, January, etc. 3. Rebalance when certain percentage trigger points are reached, such as Larry Swedroe's 5/25 rule. (snip) Back to 'when' to rebalance: If one contributes to their portfolio every paycheck or monthly or quarterly, then one can check their asset allocation and put the new money to work in the asset class that is underweighted from their written asset allocation plan. (snip) Homework: Present here on this thread, the last act of rebalancing that you did.

I was all set to rebalance my 457 account, which is way off the asset allocation I selected in a previous homework assignment, but I've run into a snag. The choices on that plan are pretty limited; there is only one fund (PTTRX) that calls itself a bond fund, but on reading the information sheet I discovered it was holding 80% cash and almost all the rest FNMA bonds.

There are two other funds that have some bonds in them (55-65%), but if I change my new contributions to those I will also be increasing the amount of stock in the portfolio, which I have too much of already. I also did a rough estimate and even if the "bond" fund had actually been all bonds, just switching my new contributions and the existing amount in "Stable Value" to that would only have gotten me to about 60/40 by the end of next year. I don't want to trade any of the existing stock funds because they're down so much at the moment. It's a puzzlement. :confused:

[LOL!]

I use the "stable value" fund in my 401(k) as a cross between "cash" and short term bond fund. As you found out, it is not unusual to see that one's bond fund has a lot of cash in it.

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I don't want to trade any of the existing stock funds because they're down so much at the moment. It's a puzzlement.

I think you should try to overcome the behavioral finance trap of loss aversion. If you sell low and immediately buy something else that is fairly equivalent at a low price, then you have no net change. See the "tax loss harvesting" posts earlier in this thread.

For example, suppose you have available a "balanced" fund consisting of 50% S&P500 index and 50% bond index. You now own $10K worth of a bond fund and $10K worth of a S&P500 fund both with huge losses in them. If you sell your two funds and buy the balanced fund, you will still own $10K worth of bonds and $10K worth of the S&P500 index stocks.

[kyounge1956]

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Originally Posted by LOL! I use the "stable value" fund in my 401(k) as a cross between "cash" and short term bond fund. As you found out, it is not unusual to see that one's bond fund has a lot of cash in it.

I don't think I need to have any part of my retirement account in cash at this time. When I eventually do leave my job I will be selling my house and devoting a portion of the proceeds to my nest egg, and can fill up a cash "bucket" at that time.

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I think you should try to overcome the behavioral finance trap of loss aversion. If you sell low and immediately buy something else that is fairly equivalent at a low price, then you have no net change. See the "tax loss harvesting" posts earlier in this thread.

I didn't think there is any such thing as "tax loss harvesting" in a 457 account. It's tax deferred already. Have I misunderstood something?

Quote:

For example, suppose you have available a "balanced" fund consisting of 50% S&P500 index and 50% bond index. You now own $10K worth of a bond fund and $10K worth of a S&P500 fund both with huge losses in them. If you sell your two funds and buy the balanced fund, you will still own $10K worth of bonds and $10K worth of the S&P500 index stocks.

I was looking all around trying to find a graph for any kind of bond market index to see if bonds are also way down over the last few months. I was worried I would be selling stocks cheap to buy bonds high. I thought I'd rather be too high on my stock allocation for a while than do that. But I could not find such a graph and wasn't sure where the bond market is at the moment. I don't have any aversion to selling stocks cheap to buy bonds cheap.

I will look at the holdings again for the blended stock + bond funds. I don't think I will be able to keep to my target allocation of 30% stocks split evenly between US and foreign, though. The blended funds only have a small percentage of foreign stocks and the only avenue I have open to buy bonds without cash is to use them. If it's really impossible to hit my target with the funds available in my plan I will have to rethink my target.

[LOL!]

Quote:

Originally Posted by kyounge1956 I didn't think there is any such thing as "tax loss harvesting" in a 457 account. It's tax deferred already. Have I misunderstood something?

There is no TLH in a tax-deferred account, but you can still have "loss aversion". I understood that you could sell some stable value fund and some stock fund to buy a fund with "some bonds in it", but you didn't want to because your stock funds were down.

[kyounge1956]

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Originally Posted by LOL! There is no TLH in a tax-deferred account, but you can still have "loss aversion". I understood that you could sell some stable value fund and some stock fund to buy a fund with "some bonds in it", but you didn't want to because your stock funds were down.

You understood correctly, I am loss-averse. That's why my target allocation is so conservative. I will need to tinker with the portfolio Xray tonight and see if it's possible to get down to 30% stocks even if I sell everything I have now and put it into the fund with the highest percentage of bonds, and direct all future contributions to that fund, plus put my entire Roth IRA in a bond fund when I get that switched over. In the quick spreadsheet I did the other night it didn't look like I could possibly get to the target by the end of next year, and that was when I still thought the "bond" fund was all bonds.

So, I thought, since I'm not retired yet, the cost of selling all that stuff at such a low point in the stock market would be to "lock in" my losses, possibly delaying retirement, but the only negative aspect of having too much stock in my asset mix at this time is some extra volatility. If I were actually living off the portfolio I would want to get rid of the volatility as rapidly as possible, but since I'm still working, I think I'd rather put up with the volatility than have to work longer. I've got at least 4 years to get to the target allocation, and at retirement should have a reasonably large sum of money from sale of my house that I can use to adjust the it further if redirecting my contributions hasn't quite gotten me to the target percentages by that time. Also, after I retire I will have access to a greater variety of funds than I do in my 457, so getting to the target should be a great deal simpler. I'm just glad I came across this thread. I really needed to think about this stuff and get my ducks in a row.

Am I making sense?

[bamsphd]

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Originally Posted by kyounge1956 I was looking all around trying to find a graph for any kind of bond market index to see if bonds are also way down over the last few months. I was worried I would be selling stocks cheap to buy bonds high. I thought I'd rather be too high on my stock allocation for a while than do that. But I could not find such a graph and wasn't sure where the bond market is at the moment.

Try this link
VBMFX: Summary for VANGUARD BOND INDEX FD TOTAL BO - Yahoo! Finance

Basically, just go to Yahoo, plug in the Vanguard total bond market mutual fund ticker, and compare it with the S&P500 using the Yahoo "compare" button.

Put some different dates in the "From" box near the lower right corner lay before you make any decisions based on the graph. A start date of June 4th, 1990 will look very different from a start date of June 4th 1999.

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Originally Posted by kyounge1956 I don't have any aversion to selling stocks cheap to buy bonds cheap.

Despite the significant drops in muni and corporate bonds, compared to stocks, bonds in general have hardly budged. That is why we like to have some in our portfolios.

[kyounge1956]

I played around with the T Rowe Price tools and portfolio Xray, and I think I can get pretty close to my target, even with the limited selection of funds available in my plan. The end result has less bonds overall, a small amount of cash (which the target didn't) and the quantities of US and foreign stocks are not quite equal. Is there anywhere in those tools I can check whether the resulting "pretty close" portfolio will have about the same return and standard deviation as my target allocation? If not can anyone suggest someplace I can plug in the ticker symbols of the funds and find out what the return and volatility would be?

[kyounge1956]

I'm still flailing around here! I found the data and formulas in a book at the library to calculate estimated returns and standard deviations. My problem now is the numbers are all telling me I need to add a big slug of bonds to the mix, and contrary to what I thought in my previous post, it doesn't appear possible to get an asset mix with the characteristics I want using the funds available through my 457 plan.

Originally I was planning to use the same allocation in both my 457 plan and Roth IRA, but it looks like my only option to get the overall allocation I want is to put most or all of the Roth money in bonds and the other assets in the tax-deferred plan. Can anyone suggest a thread or book on the most likely consequences of doing so? thx

[LOL!]

You should probably go visit the bogleheads forum and get free personalized asset allocation advice: Bogleheads :: View Forum - Investing - Help with Personal Investments

Basically, don't treat your accounts as separate portfolios. Treat all your accounts as one big portfolio. In my IRA nowadays, I have one fund: Vanguard TIPS and that's it. In my 401(k) I have almost all fixed income. In my 403(b) I have fixed income and a real estate investment. Think about it: I have not listed any of the equity investments. I have almost no equity investments in my retirement accounts. The reason is that there is no room in my tax-advantaged accounts. So I have my equities in tax-efficient ETFs and index funds located in my taxable accounts.

Get thee over to Bogleheads. I will look for you over there.