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In accumulation phase, retarget instead of rebalance?
Old 07-04-2012, 08:36 AM   #1
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In accumulation phase, retarget instead of rebalance?

Comrades,

We're currently in peak accumulation phase, and I'm coming due for my annual rebalance but was thinking wouldn't it just make more sense to stay dynamic with where the monthly stash is going instead of actually buying and selling? Since we've got a good chunk in taxable accounts I'm thinking could avoid some tax hit today, then again lt cap gains tax rate is pretty low right now maybe better pulling chips off table when can.

Toy example = if I'm 50/50 in S&P500/TotalIntlStock I'm out of wack by S&P up 5% vs. intl down 15% over last year. Instead of doing a single transaction why not just direct 100% of my monthly contributions towards intl until back in sync then go back to a 50/50 contributions split. Repeat as needed.

Obviously depending on how off they are, how big the balances are, and how big monthly contributions are I could end up in a cycle of constantly chasing a desired asset allocation that I never reach.

Does this seem stupid?
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Old 07-04-2012, 08:41 AM   #2
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I would run the numbers on the tax implications of rebalance using 2012 tax rates and then again with your best estimate of future tax rates and decide if you want to risk the costs. Factor in when you would expect to being paying taxes on your gains if you go with your contribution allocation change vs. rebalance.

There are several possibilities for future tax rates including:
Bush tax cuts expiration or not
PPACA surtaxes or not
anything else that Congress might think of or not
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Old 07-04-2012, 09:20 AM   #3
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Yes, you can probably rebalance without selling if you just redirect your contributions. At least, that worked for me (back when I was still working).
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Old 07-04-2012, 09:27 AM   #4
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Yes. I think you can try by redirecting. As you said, there are the variables of how big the balances are, and how big monthly contributions and just because of the various perfomances you may not reach getting rebalanced.

To minimize tax impacts and too much work, I try to do my rebalancing within IRAs. Also, I only rebalance once a year. I do take a peek on my allocations each quarter. Just peeked recently, after 6/30, my allocations are still within 5% of my targets even though there has been pretty good swings in the year thus far. But I didn't need to rebalance after first quarter, then rebalance again after second quarter.
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Old 07-04-2012, 09:34 AM   #5
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Redirecting contributions to attain your desired AA can work, but as you point out it will be more effective when your contributions are high relative to your account balances. In later years, as your balance grows relative to your contributions, there's sometimes just not enough coming in to make that work. Do it if you can.

Can you find a way to get more into tax deferred accounts? They are ideal for this--keep a baseline foundation of assets in your taxable accounts (favoring the most tax-efficient asset classes) and then rebalance (tax free) in the tax deferred accounts.

Also, if you haven't done it already, turn off any automatic reinvestments in your taxable accounts. Instead, send those $$ to a MM fund and then deploy it where you need it when you rebalance, all without selling anything and generating taxes. If the idea of having thse $$ sit in a MM fund for months between rebalancing bugs you, you could instead redirect the proceeds into the MFs that are deficient (according to your desired AA), but the constant changing of that stuff when you've got a lot of funds would be too much for me. Just put it into one bucket and then dump that bucket where needed once or twice per year.
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Old 07-04-2012, 09:39 AM   #6
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I would imagine rebalancing would be more compelling if the difference were between highly uncorrelated major asset classes such as equities vs fixed income. If the rebalancing is between more highly correlated asset sub-classes, as in the example, redirecting contributions seems fine.
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Old 07-04-2012, 12:16 PM   #7
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Quote:
Originally Posted by tiuxiu View Post
Comrades,

We're currently in peak accumulation phase, and I'm coming due for my annual rebalance but was thinking wouldn't it just make more sense to stay dynamic with where the monthly stash is going instead of actually buying and selling? Since we've got a good chunk in taxable accounts I'm thinking could avoid some tax hit today, then again lt cap gains tax rate is pretty low right now maybe better pulling chips off table when can.

Toy example = if I'm 50/50 in S&P500/TotalIntlStock I'm out of wack by S&P up 5% vs. intl down 15% over last year. Instead of doing a single transaction why not just direct 100% of my monthly contributions towards intl until back in sync then go back to a 50/50 contributions split. Repeat as needed.

Obviously depending on how off they are, how big the balances are, and how big monthly contributions are I could end up in a cycle of constantly chasing a desired asset allocation that I never reach.

Does this seem stupid?
Not at all. That is what I did in accumulation phase - I just directed new money investments to underweighted investments. If it was off big time then I might actually sell overweighted and buy underweighed, but the reality was that new money could get me back into sync.
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Old 07-04-2012, 12:23 PM   #8
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FWIW, "back in the day" when I/DW were still in the accumulaton phase and making our contributions to our respective 401(k)'s and IRA, we would rebalance through future contributions rather than mess around with buying/selling.

Now that we're retired, we do it in the same manner through liquidation of an asset base that is a bit high, in order to meet our current income requirements.
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Old 07-04-2012, 12:24 PM   #9
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Thanks for kind replies, much appreciated.

Optimally I would rebalance in just my tax-deferred accounts but (on the helpful advice of this very forum) our stash is arranged so that asset classes are delineated between taxable and deferred. For example my entire international stock asset class is in mutual funds in taxable account, entire bond fund goodies are on deferred side, the others a mixture of both depending on what is possible.

Brings up an interesting corollary... if our government passed legislation increasing taxes on long term capital gains to say 25% starting in 2013 would any of you rake your chips now just to pay on the gains before the hike? Not speculating on whether they have plans to do so, just throwing out a hypothetical.
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Old 07-04-2012, 12:41 PM   #10
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Quote:
Originally Posted by tiuxiu View Post
Brings up an interesting corollary... if our government passed legislation increasing taxes on long term capital gains to say 25% starting in 2013 would any of you rake your chips now just to pay on the gains before the hike? Not speculating on whether they have plans to do so, just throwing out a hypothetical.
LOL...I currently have so much carry-over losses (like $50k) that if I were able to have that much unrealized gains to offset that and enough left over to be worried about paying 25% in 2012 vs higher in 2013, I'd be ! And even worse is that - while I do have some positions showing a gain -overall, my taxable accounts are showing a net unrealized loss (and quite large, at that)
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Old 07-04-2012, 01:45 PM   #11
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Originally Posted by rescueme View Post
FWIW, "back in the day" when I/DW were still in the accumulaton phase and making our contributions to our respective 401(k)'s and IRA, we would rebalance through future contributions rather than mess around with buying/selling.

Now that we're retired, we do it in the same manner through liquidation of an asset base that is a bit high, in order to meet our current income requirements.
+1 for all of this. You can rebalance on top of that if necessary. No need to be totally restrictive on where everything is placed. Rebalance where you can. When things turn the other way or your portfolio grows enough you will probably be able to move everything to where you want. Although you need to watch for wash sales, you can swap positions pretty easily when the value in each account allows for it.
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