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Done your reallocation yet?
Old 01-03-2008, 09:54 AM   #1
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Done your reallocation yet?

For those of you who regularly reallocate to get back to intended positions, is the first of the year when you do it?
I've been rolling over the 403b accounts into the IRA & consolidating too many funds into large positions in fewer indexes to take advantage of VG's Admiral share class.
Once that dust has cleared, I'll massage & tweak to get the AA on track.
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Old 01-03-2008, 10:00 AM   #2
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I think you mean rebalancing, not reallocation.

I mainly do it whenever my portfolio reaches some target "out of balance" condition, which can occur at any time during the year.

I often do a little at the beginning of the year, because I don't reinvest my distributions for the funds that have outperformed in the previous year. This is just a little more tax efficient. Those distributions then get shuttled to the underperforming funds.

Audrey
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Old 01-03-2008, 10:52 AM   #3
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In the last few days we have made some changes to become more tax efficient and to lower our overall expense ratio. We also did some reallocation to increase real estate to a higher percentage. We sold a mid-cap value fund loaded with REITs and bought shares in the TIAA real estate account.

Some other tweaking:

We unloaded an actively managed foreign small cap fund FSCOX and bought the etf GWX in its place. We unloaded DODFX (foreign large value) in an IRA and bought VFIIX (Vanguard GNMA) in its place. To keep AA the same, we bought VEU (total int'l stock) in a taxable (to replace DODFX sold in the IRA) and sold our tax-exempt emergency fund.

In another IRA, we were just under the limit to get lower expense ratio admiral shares in a short term bond fund, so we exchanged enough large cap value Vanguard Windsor II to get to the admiral shares of VFSUX. We did this on 12/31 and noted that VWNAX dropped 1.4% while VFSUX rose 0.5% the next trading day for an almost 2% gain differential on the transferred money.

We are now about 31% domestic equities, 31% foreign equities, 30% fixed income and 8% real estate.
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Old 01-03-2008, 11:22 AM   #4
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Originally Posted by audreyh1 View Post
I don't reinvest my distributions for the funds that have outperformed in the previous year. This is just a little more tax efficient. Those distributions then get shuttled to the underperforming funds.

Audrey
Hi Audrey,

Just curious........ Why is this more tax efficient? Don't you pay taxes on fund distributions whether they are auto-reinvested into that same fund or placed in your MM fund where you reinvestment them? I don't see the difference tax-wise
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Old 01-03-2008, 11:45 AM   #5
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Yes, you pay taxes on fund distributions whether or not you reinvest them.

BUT

If you reinvest the distributions, and then turn around and sell some of the fund for rebalancing, you pay even MORE taxes.

So, if you need to trim a given fund, it's best to get the distribution in cash. If the distribution is larger than what is needed to trim the fund, just buy back with the remainder (after taxes).

You also need to get enough distributions in cash to pay your taxes on the total portfolio, otherwise you may end up having to sell some funds to pay your taxes, which in turn incurs more taxes!

Audrey
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Old 01-03-2008, 11:55 AM   #6
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Quote:
Originally Posted by BOBOT View Post
For those of you who regularly reallocate to get back to intended positions, is the first of the year when you do it?
I've been rolling over the 403b accounts into the IRA & consolidating too many funds into large positions in fewer indexes to take advantage of VG's Admiral share class.
Once that dust has cleared, I'll massage & tweak to get the AA on track.
June and December is when I do mine.

June is changing contributions only
December is buying/selling.

If something is outperforming in June, I drop the contributions to it by 1-5% (I will not eliminate contributions though). I contribute 10% or more to each fund anyway (some funds are as high as getting 45% of my contribution), so I just drop the percentage down if it's flying.

In December step 1 is making sure contribution percentages are correct (in line with desired allocation). If I dropped a fund from 25% to 15%, I bump back up to 15%. I then buy/sell based on the percentages as needed.

Thus far, I have not been off by more than 5% in June and 2% in December for any one piece of allocation.

All accounts I have are tax advantaged. Each acoount has a quite similar allocation (43% large cap domestic, 15% mid cap, 15% small cap domestic, 15% large cap foreign, 10% small cap foreign, 2% bonds).

Each rebalance increases the bond allocation by 1% as well (I sell 1% of each fund to add to current bond position). I will stop this when I get to 10% bonds (this will be year 2 of this shift, which will take 5 years to complete).
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Old 01-03-2008, 12:07 PM   #7
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I "harvested" my gains in late December in order to fund my 2008 gross expenses (I'm retired ). About a week after, I took the remainder of my investments (50/50 between Vanguard/Fidelity) and rebalanced within each company to "build up the losers and harvest the winners".

This is done within the context of my "early retirement" goal of a 60/40 mix.

BTW, I rebalanced my DW's accounts (same Fidelity/ Vanaguard split) in the same manner, even though she is still working (expects to retire this year).

Also, since we hold 36-48 months in "cash" (e.g. MM accounts) the current market moves don't really mean much.

Just a side note - we just added to our "final" IRA contributions (Roth) a/o Jan 2nd (since I'm retired, mine is as a "spousal IRA"). Both DW/me went with Vanguard's Emerging Market. My DW had this last year, and had close to a 40% return. Expectations are that it will be half that this year, but I'll take 20% ....

This ends a joint contribution of 53 years to our IRA's (DW at 26, me at 27). That, along with our respective 401K's over the last 25+ (again, over 50 years, combined) allow us a comfortable financial life (and it is good! )

- Ron
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Old 01-03-2008, 12:13 PM   #8
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By the way, a lot of people handing distributions (in taxable accounts) by taking them ALL as cash and letting the cash accumulate. Then, after the first of the year, take out the amount due in taxes on the distributions (hard to know this for sure until March when you get your "updated" 1099s), take the remainder and reinvest back into the funds according to their AA.

My approach is just a refinement of the above tactic because I prefer to reinvest the distributions in my underperforming funds as soon as possible.

Audrey
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Old 01-03-2008, 12:32 PM   #9
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I rebalanced my TSP on December 31st. Actually, one could say I balanced it since I changed the AA to one that is slightly more conservative than previously, with a few percent more allocated to the "G Fund".

I want my TSP to be all in "G Fund" before ER, so at the end of each month I will be moving 2.5% more into G from the equity funds, and rebalancing at the new AA.
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Old 01-03-2008, 05:08 PM   #10
 
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In an effort to further simplify my portfolio (force me to keep my hands off of it) and make it a bit more conservative I did a complete overhaul and went from:

Loomis Sayles Bond - 6%
Vanguard Inflation Protected - 15%
Vanguard Wellington - 43.5%
Alpine Dynamic Dividend - 5%
Vanuard sml Cap Value Index - 5%
VG REITS - 5%
VG Int'l Value - 9%
VG Int'l Stock Index -9%
VG Wellington Admiral (401K) 1.5%

To
Loomis Sayles Bond - 15.5%
Vanguard Short Term Bond Index - 7%
Vanguard Inflation Protected - 22%
Vanguard Total Stock Mkt Index - 29%
Vanguard Small Cap Index - 5%
Vanguard Int'l Stock Index - 20%
Vanguard Institutional Index (401K) - 1.5%
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Old 01-03-2008, 06:36 PM   #11
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I confess that I "reallocate" nearly every day. So far, I've stayed well ahead of the market, so it can't be that bad of character flaw.
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Old 01-03-2008, 07:50 PM   #12
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I'm moving from strict annual rebalancing to doing it every 1-2 years. The studies I've seen seem to suggest that 2-3 years is optimal, but at some point the old market timer's lizard brain might start to take over so regular rebalancing is probably better. I still hate doing it in the first few days of January -- I feel so many big institutional flows are coming in and out that markets can be weird and you might end up with bigger spreads, more volatility and not get as accurate a reflection of the market's value. Probably just a convenient excuse for waiting a few more weeks -- it's all going to get done mid-month.
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Old 01-03-2008, 08:08 PM   #13
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Just finished. It required six exchanges in the non-Roth accounts, and seven in each of our Roths (I keep both Roths looking like a mini version of the overall AA, due to the tax status).
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Old 01-03-2008, 08:56 PM   #14
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I'm only 1 or 2 % out of balance so I won't be re-balancing by selling and buying, I'll just re-direct spare cash such as my annual bonus in March to classes below target.
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Old 01-03-2008, 10:02 PM   #15
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I've been doing some rebalancing and selling some of those reinvested distributions to pay taxes.

Two things will make it difficult to rebalance in December or January:
1) Many funds pay distributions in December. If you are not careful you may buy just in time to get taxed on the money you just invested. However, it might be useful to sell before distributions and avoid dividends and short-term gains. In one case I was able to avoid distributions altogether when the fund I was selling distributed dividends after the fund I was buying.

2) Large distributions in funds I haven't held for long meant I was showing long-term or short-term capital losses for a few funds after the distribution date. Since I just bought shares via reinvested distributions, I have to worry about wash sale rules for the next 31 days. I'm going to wait until that time period expires before finishing my rebalance.

Waiting until February to rebalance sounds like a really smart idea to me!

Dan
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