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Rebalancing
Old 01-17-2013, 04:11 PM   #1
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Rebalancing

I have been selling stocks and buying bonds into this bull market to keep my AA in check. The worst part about it is paying the tax on the cap gains. Every now and then I want to let it ride....I know that's a mistake. I also worry about the bond market with interest rates this low. Not making knee jerk reactions has served me well....I guess I will just keep doing what I'm doing.

I typically rebalance when I get 3% off my AA.
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Old 01-17-2013, 04:16 PM   #2
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Speaking of rebalancing... does Vanguard have an easy way to do that? It seems as tho I had to put in a sell for each and then put in the buys. My 457 plan with Great West Retirement has an "exchange" screen - either dollars or percentage.

Not a biggie as I only rebalance once a year or so. Just curious.
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Old 01-17-2013, 04:35 PM   #3
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Originally Posted by tdv2 View Post
I have been selling stocks and buying bonds into this bull market to keep my AA in check. The worst part about it is paying the tax on the cap gains. Every now and then I want to let it ride....I know that's a mistake. I also worry about the bond market with interest rates this low. Not making knee jerk reactions has served me well....I guess I will just keep doing what I'm doing.

I typically rebalance when I get 3% off my AA.
It's complicated - you really have to pay attention to the details.

Those of us in retirement with taxable accounts typically allow our distributions to accumulate in cash during the year (i.e. don't automatically reinvest them in the fund) and then use the proceeds to rebalance after taking out our annual withdrawal. This helps minimize taxes somewhat.

I am careful about the tax consequences of rebalancing, and because of that I try to do it mostly from distributions which I have to pay taxes on anyway. This helps reduce the amount of fund selling I usually have to do to rebalance.

I keep a pretty wide deviation from AA - a given asset class has to be at least 8% out of balance before I'll consider rebalancing. Unless there is a large market event (i.e. a major crash), I'm not likely to need to rebalance except at the time of my annual withdrawal. This also minimizes taxes.

If I'm selling bonds to buy stocks, the tax consequences tend to be minimal as bond funds don't appreciate that much. After a large stock run-up, my stock funds tend to pay out pretty large capital gains distributions anyway, so I don't usually have to sell much more for rebalancing.

You do what you can........
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Old 01-17-2013, 04:44 PM   #4
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I typically rebalance when I get 3% off my AA.
3% seems pretty tight to me. I use 5-10% (somewhere in that range, as the mood strikes me).
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Old 01-17-2013, 04:45 PM   #5
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It's complicated - you really have to pay attention to the details.

Those of us in retirement with taxable accounts typically allow our distributions to accumulate in cash during the year (i.e. don't automatically reinvest them in the fund) and then use the proceeds to rebalance after taking out our annual withdrawal. This helps minimize taxes somewhat.

I am careful about the tax consequences of rebalancing, and because of that I try to do it mostly from distributions which I have to pay taxes on anyway. This helps reduce the amount of fund selling I usually have to do to rebalance.

I keep a pretty wide deviation from AA - a given asset class has to be at least 8% out of balance before I'll consider rebalancing. Unless there is a large market event (i.e. a major crash), I'm not likely to need to rebalance except at the time of my annual withdrawal. This also minimizes taxes.

If I'm selling bonds to buy stocks, the tax consequences tend to be minimal as bond funds don't appreciate that much. After a large stock run-up, my stock funds tend to pay out pretty large capital gains distributions anyway, so I don't usually have to sell much more for rebalancing.

You do what you can........
It is complicated as you say when you are trying to minimize the tax bill. About 2/3 of my assets are in taxable accounts. Some say to hold the entire bond portion in tax advantaged accounts. I haven't done that myself.
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Old 01-17-2013, 05:02 PM   #6
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Originally Posted by AWeinel View Post
Speaking of rebalancing... does Vanguard have an easy way to do that? It seems as tho I had to put in a sell for each and then put in the buys. My 457 plan with Great West Retirement has an "exchange" screen - either dollars or percentage.

Not a biggie as I only rebalance once a year or so. Just curious.
There is an exchange feature in Vanguard

https://personal.vanguard.com/us/wha...rvices/savings

In the automatic exchanges, I've set up both monthly exchanges to deplete gradually from one fund to others over the course of a year and exchanging a huge chunk at a time (my preference when I re-balance at the start of the year).
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Old 01-17-2013, 05:14 PM   #7
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It is complicated as you say when you are trying to minimize the tax bill. About 2/3 of my assets are in taxable accounts. Some say to hold the entire bond portion in tax advantaged accounts. I haven't done that myself.
Only 10% of our investments are in tax-deferred accounts - so I don't even try!

Besides, I do need to withdraw income every year, and if a chunk of it comes as qualified dividends and capital gains distributions - tax-wise that is a preferable way to get it.

The folks who get hurt most on the taxable investments are those not yet retired who are reinvesting all distributions/dividends yet have to pay taxes on any distributions and rebalancing.

One you do retire, however, having investments in taxable accounts can let you take advantage of some preferable tax treatment - low cap gains/qualified dividend rates (sometimes even 0%!), ability to realize capital losses when prudent, etc.
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Old 01-17-2013, 05:20 PM   #8
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I rebalanced my taxable accounts at Vanguard couple of weeks ago. My tax advantaged accounts are all bonds, but I still have bonds in my taxable account as well so that is where the rebalancing occurs. In my taxable accounts, dividends and capital gains all go to cash.

1) First I withdrew cash for my living expenses for 2013. In my case, they do not exceed dividends from 2012.
2) I determined the desired allocation for each fund in my remaining portfolio, in order to be balanced again.
3) Then I used the Exchange Funds transaction to exchange from the (equity) funds I wanted to sell into Prime Money Market.
4) Finally I used the Exchange Funds transaction to exchange from Prime Money Market to the (bond) funds I wanted to buy.

I didn't want to exchange directly from equity funds to bond funds, because to me what I did was less confusing. YMMV
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Old 01-17-2013, 05:29 PM   #9
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I have a larger tolerance for deviations in my AA in my taxable account than I do in my IRA, where rebalancing has no tax consequences. The last time I did any rebalancing in my taxable account was in 2010 but I have made some rebalancing moves in my IRA in 2011, 2012, and already once in 2013.
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Old 01-17-2013, 05:30 PM   #10
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I rebalanced my taxable accounts at Vanguard couple of weeks ago. My tax advantaged accounts are all bonds, but I still have bonds in my taxable account as well so that is where the rebalancing occurs. In my taxable accounts, dividends and capital gains all go to cash.

1) First I withdrew cash for my living expenses for 2013. In my case, they do not exceed dividends from 2012.
2) I determined the desired allocation for each fund in my remaining portfolio, in order to be balanced again.
3) Then I used the Exchange Funds transaction to exchange from the (equity) funds I wanted to sell into Prime Money Market.
4) Finally I used the Exchange Funds transaction to exchange from Prime Money Market to the (bond) funds I wanted to buy.

I didn't want to exchange directly from equity funds to bond funds, because to me what I did was less confusing. YMMV
Yeah - I did it in that order too -withdrew my annual draw from cash where distributions had accumulated, calculated resulting AA, then trimmed from any funds that needed trimming (a few stock funds) on Jan 2nd , then the next day bought any funds that were behind (a few were stock funds, most were bond funds).

There were actually some big jumps from Dec 31 2012 to Jan 2nd 2013 and Jan 3rd 2013. Stocks jumped like 2% on Jan 2nd. And by the 3rd bond funds had dropped a bit because interest rates backed up.
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