Gradual Changes in Asset Allocation

[TromboneAl]

I'm doing my annual rebalancing.

Two years ago, I started with an allocation of 60% stocks in my portfolio, and every year, I decrease that by 1%. So I started the year at 58%, it grew to 58.4%, and today I plan to rebalance to 57%.

I'm wondering if I'm getting a little to conservative -- perhaps I should drop only .5% per year.

Just thought I'd get your thoughts before pushing the button.

Background: Age 54, retired, and using a 4% SWR.

 

[yakers]

My main retirement fund is a target retirement type, so the AA is adjusted automatically over time. It ends up an income fund w/20%/80% at the end date. So I think the idea of adjusting makes sense. I do not think it matters whether you adjust 1% a year or .5% ayear as long as you put a plan together and follow it, not just market timing.

 

[LOL!]

Since equities go up and down by 1% daily/weekly and bonds go up and down by 0.5% daily/weekly, I think that changing by 1% is just playing around in the noise.

To get out of the noise, I would suggest not calendar rebalancing but instead that you only look to rebalance on a big UP day, say 1.5% up or more on the DJIA. That is if you want to sell high. If you want more equities, then rebalance on a big DOWN day.

I think whether you are at 57% or 58% or 60% probably won't matter much. Maybe switch to a 5-year plan?

 

[LOL!]

Also look at the latest rebalancing article which discusses opportunistic rebalancing, range rebalancing and calendary rebalancing:

FPA Journal - Opportunistic Rebalancing: A New Paradigm for Wealth Managers

 

[audreyh1]

You're pretty young! I don't intend to let my equity allocation ever go below 55% until I am much, much older (I'm currently 48 ).

In fact, I'm doing the exact opposite of you, and letting my equity allocation drift up a wee bit over time (from 58% to 60%), because it's a more tax efficient portfolio. My mostly taxable retirement portfolio has been throwing off too many distributions! And the portfolio has grown enough that I'm less sensitive to the higher volatility.

Also portfolio survivability improves with higher equity allocation. Wasn't a 70% equity allocation the ideal in one of the studies? I don't remember exactly, but that fact stuck in my head.

So, yes, IMO, think long and hard about whether you really want to continue your plan.

I think it's too conservative, but it really depends on your goals. Obviously my needs changed somewhat over time: desire for more tax efficiency and less sensitivity to volatility. FWIW I've been retired close to 8.5 years. I wonder if that has also changed my perspective.

Audrey

 

[youbet]

Two questions really Al...... What AA do you want and when to you want to get there?

I think, and Firecalc seems to confirm, that a 50/50 AA works well, tested with historical data, during the withdrawal phase. You're choosing to move from 60% to 50% linearly between 52 yo and 62 yo.

Ahhhhh...... What's not to like? Dial up the power of the microscope you're looking at this with any higher and you'll be reallocating a fraction of a percent every month. And only history will tell you if the amount and timing of your tweaking were "exactly right."

I think it's a fine plan.

 

[jIMOh]

I'm doing my annual rebalancing.

Two years ago, I started with an allocation of 60% stocks in my portfolio, and every year, I decrease that by 1%. So I started the year at 58%, it grew to 58.4%, and today I plan to rebalance to 57%.

I'm wondering if I'm getting a little to conservative -- perhaps I should drop only .5% per year.

Just thought I'd get your thoughts before pushing the button.

Background: Age 54, retired, and using a 4% SWR.

I do the same thing, but do it backwards. Sell 1% of each holding to bonds. As you pointed out (indirectly), because stocks usually outperform, a 1% move might be only .9% or .8% by end of year. This will be a conservative movement if markets go UP. When markets go down, you might have to sell some bonds... something to think about.

 

[W2R]

Al, I am sort of doing that too. When I ER, I want my TSP to be all "G Fund" (government securities), so that taxable doesn't get overloaded with bonds and can have room for more equity index funds. So, I recently went from 40% to 50% "G Fund" in my TSP, and each month from here on out I am planning move another 2.5% out of TSP equity funds and into G.

I am hoping that by doing this I won't be moving it all at a 2-year low for stocks. I have no crystal ball, so it seems smarter to spread the shift out over a couple of years.

My overall asset allocation includes taxable and Roth IRA accounts as well. I will be moving from an overall AA of 60:40 towards 45:55 or maybe 47:53. (Overall AA would be counting all accounts.)

 

[RunningBum]

Last year I also started a 1% change each year, but I started higher, at 75%.

I'm trying to decide if I really want that high in stocks when I retire early this year, in case of a big drop endangering my nest egg early, but I think no matter what I do I'll do the gradual yearly change like you, unless I read something in the meantime that tells me to do otherwise. I'm going to decide what AA I want at each decade and figure out my %change/yr based on that.

I don't think I want to rebalance after big up days or big down days. I'm not certain why, seems like market timing I guess. I'll have to read the paper LOL! linked to, to see if that changes my mind.

 

[novaman]

You're pretty young! I don't intend to let my equity allocation ever go below 55% until I am much, much older (I'm currently 48 ).

In fact, I'm doing the exact opposite of you, and letting my equity allocation drift up a wee bit over time (from 58% to 60%), because it's a more tax efficient portfolio. My mostly taxable retirement portfolio has been throwing off too many distributions! And the portfolio has grown enough that I'm less sensitive to the higher volatility.

Also portfolio survivability improves with higher equity allocation. Wasn't a 70% equity allocation the ideal in one of the studies? I don't remember exactly, but that fact stuck in my head.

So, yes, IMO, think long and hard about whether you really want to continue your plan.

I think it's too conservative, but it really depends on your goals. Obviously my needs changed somewhat over time: desire for more tax efficiency and less sensitivity to volatility. FWIW I've been retired close to 8.5 years. I wonder if that has also changed my perspective.

Audrey

Really? 70% equity allocation ideal?? What study are you referring to? I'm curious because up through 2007 I've been virtually 100% in equities, but I'm now reallocating my portfolio, dropping to 78% equities (I'm 44). I'd like to see what ideal models are out there.

 

[audreyh1]

Really? 70% equity allocation ideal?? What study are you referring to? I'm curious because up through 2007 I've been virtually 100% in equities, but I'm now reallocating my portfolio, dropping to 78% equities (I'm 44). I'd like to see what ideal models are out there.

I'm hoping someone else can remember it. Rich in Tampa? Anyone else?

Even though 70% came out well for long term survivability, I don't think my brain would survive the shorter term effects of the higher volatility!

Audrey

 

[ESRBob]

Yeah, my sense is that after a single good down year in equities, nobody will be talking about 70% equity allocations to say nothing of 100% equity allocations for at least 3-5 years.

 

[Nords]

Two years ago, I started with an allocation of 60% stocks in my portfolio, and every year, I decrease that by 1%. So I started the year at 58%, it grew to 58.4%, and today I plan to rebalance to 57%.
I'm wondering if I'm getting a little to conservative -- perhaps I should drop only .5% per year.
Just thought I'd get your thoughts before pushing the button.
Background: Age 54, retired, and using a 4% SWR.

The surf must be flat today... or just too darn cold.

Are you heading for a particular target? Will you end up with too few stocks and a portfolio that's getting eaten by inflation? Will Social Security (whenever you choose to start it) push you too far to the conservative side? Or will stock-market volatility keep you awake at night?

Bernstein has always advocated bonds as a way of reducing volatility, but that's mainly to sleep at night and to avoid having to sell equities into a down market. Volatility is a lot less relevant when you keep 2-5 years in cash instead of a big slug of bonds. But everyone has their own comfort zone.

It's been a while since I've read the studies, but I'm under the impression that rebalancing every 2-3 years is not much less effective than rebalancing annually, and it might be cheaper.

 

[Alan]

I'm doing my annual rebalancing.

Two years ago, I started with an allocation of 60% stocks in my portfolio, and every year, I decrease that by 1%. So I started the year at 58%, it grew to 58.4%, and today I plan to rebalance to 57%.

I'm wondering if I'm getting a little to conservative -- perhaps I should drop only .5% per year.

Just thought I'd get your thoughts before pushing the button.

Background: Age 54, retired, and using a 4% SWR.

Al, It sounds like a good plan to me. 1% per year is just fine in my books. I assume you are going to stop at some point such as 50/50 or 40/60

 

[RunningBum]

Yeah, my sense is that after a single good down year in equities, nobody will be talking about 70% equity allocations to say nothing of 100% equity allocations for at least 3-5 years.

2000-1 cured me of 100% equity, but no down year is going to scare me out of taking the gains of the up years.

 

[ESRBob]

Cool! I've been dying to know -- is 2008 going to be an up year?

 

[TickTock]

Yes.

Unless it's not.

 

[REWahoo]

Al, outside the sleeping well at night factor, I think you might be over thinking your equity percentage if your main concern is portfolio survival. Looking at FIRECalc the success rate between 50% and 60% equities is essentially the same. If you run some calculations using the FIRECalc defaults and changing only the % of equities in the "Your Portfolio" tab, this is what it shows:

Equities - Success
20% - 70.1%
30% - 86.3%
40% - 92.5%
50% - 94.4%
60% - 95.3%
70% - 95.3%
80% - 94.4%

Not much difference once you get up above 40% in equities.

 

[Dawg52]

Al, outside the sleeping well at night factor, I think you might be over thinking your equity percentage if your main concern is portfolio survival. Looking at FIRECalc the success rate between 50% and 60% equities is essentially the same. If you run some calculations using the FIRECalc defaults and changing only the % of equities in the "Your Portfolio" tab, this is what it shows:

Equities - Success
20% - 70.1%
30% - 86.3%
40% - 92.5%
50% - 94.4%
60% - 95.3%
70% - 95.3%
80% - 94.4%

Not much difference once you get up above 40% in equities.

Right, so why go over 40-50%?

 

[REWahoo]

Right, so why go over 40-50%?

If you can handle greater volatility, odds are you will die with a larger portfolio than those of us with weaker stomachs.

 

[jIMOh]

Right, so why go over 40-50%?

I assume this is for someone in draw down mode. As time mitigate volatility, once a person loses the time aspect of the equation (less than 20 year horizon), bonds make sense.

I was 100% equity from 1997-2006. 2007 was the first time I added bonds to my portfolio, and I am around 15-25 years from retirement (25 for sure, 15 if I can FIRE).

 

[Dawg52]

If you can handle greater volatility, odds are you will die with a larger portfolio than those of us with weaker stomachs.

Weak stomach?

 

[ziggy29]

Right, so why go over 40-50%?

Probability of avoiding failure and maximizing expected portfolio growth are not one and the same. If one's goal is ONLY to minimize the chances of failure, you may be right, but if you also have a secondary goal of maximizing the expected value of your estate upon your passing, you may want to increase your exposure to equities a bit.

 

[Dawg52]

I assume this is for someone in draw down mode. As time mitigate volatility, once a person loses the time aspect of the equation (less than 20 year horizon), bonds make sense.

Yes. But some considers their pension as part of their bond allocation. Therefore they may be able to stomach a higher allocation to stocks. Just depends on your situation.

 

[Dawg52]

Probability of avoiding failure and maximizing expected portfolio growth are not one and the same. If one's goal is ONLY to minimize the chances of failure, you may be right, but if you also have a secondary goal of maximizing the expected value of your estate upon your passing, you may want to increase your exposure to equities a bit.

True. I'm single with no children so not a big desire for me. Again, just depends on your situation.