Rebalancing approach

[explanade]

I'm a couple of percentage points over the target equity percentage.

I have a number of funds in different institutions, including accounts I've had for over 20 years.

This would be the first time redeeming any funds for any reason. I could close out some of these smaller accounts and invest the proceeds in a VG bond fund or maybe Wellesley, which would also consolidate my holdings since VG is where most of my after tax holdings are in dollar terms.

However, some of these older accounts would have more gains than other accounts.

Would it make more sense to liquidate accounts which would have smaller gains for tax reasons?

[audreyh1]

It's always tough to rebalance or clean up my investment accounts when doing so increases AGI and taxes.

It might be possible to transfer investments in old accounts "in kind" to your Vanguard account. And thus consolidate without tax consequences, but you'll still need to address selling the funds you don't want to keep at some point. And Vanguard may limit which assets they will accept in kind.

A couple of percentage points over target is not much out of balance. If you need to withdraw some funds anyway, it's good to rebalance while doing so.

You have to decide which is more important to you - getting your investments in line with your desired plan/allocation, or minimizing taxes each year.

[LOL!]

Here is a good article about rebalancing: Portfolio Rebalancing: The Whys And The Hows | Seeking Alpha

Whenever I rebalance I try to keeps commissions, taxes, and any other costs to zero.

With all those accounts at different institutions, maybe move investments "in-kind" if possible to a few chosen places and also simplify.

[Chuckanut]

Ok. Good points in the article.

Suppose that one find the stock portion of the AA to be low. Ms hold one buy a stock fund now with the market bumping up against all time highs? Or wait for a correction? Or dollar cost average over a few months?

[audreyh1]

In taxable accounts, one study found that 18 months was optimal between rebalancing. This reduced the tax consequences of rebalancing annually or more often as well as giving the asset classes enough time to diverge in terms of performance to have some total return benefit.

I generally take my distributions in cash. That, with my annual withdrawal in January, it's more practical tax-wise to do my rebalancing annually along with the withdrawal.

[explanade]

I have a 2-3 year cash reserve that I'm planning to use for expenses while my investments are set to DRIP.

So the main reason to do it would be to rebalance. Consolidation would be a secondary reason.

With the Dow and S&P at record highs, maybe trimming some of the equities would be good.

[growing_older]

One way to rebalance: Keep an eye on the allocation drift from your target allocation. Since you are likely continuing to invest in the accumulation phase just adjust your new investments into the under represented asset classes. If despite this you manage to drift above or below a target value by some amount (say 5%) then do an actual rebalanced. This will rarely be needed.

[explanade]

I guess I could turn off DRIP for some equity funds and then take the dividends from those and put those into mixed or bond funds.

[growing_older]

Quote:

However, some of these older accounts would have more gains than other accounts. Would it make more sense to liquidate accounts which would have smaller gains for tax reasons?

Is there any way to avoid taking a tax hit, just to rebalance? I would look for assets in tax sheltered accounts or new money being invested before voluntarily paying tax just for a rebalance. It isn't necessary for each account to be balanced, only that the overall portfolio be balanced, so look to minimize costs by being creative about which accounts need to have anything sold, which makes 401k, IRA, 403b and similar accounts very attractive candidates. Also, a couple of percentage points one way or another isn't going to make much of a difference. You can do this opportunistically as accounts allow.

[explanade]

Hmm, in general, when folks here who are ER redeem shares, they're doing it from taxable accounts right, since they can't withdraw from retirement accounts until age 59-60?

And when they redeem, to rebalance or just to take out money to fund their living expenses, aren't they liable for cap gains anyways?

In that case, are they selling the shares which have the least amount of cap gains or just using average cost basis so it doesn't matter?

[growing_older]

That's the reverse of what you do in accumulation. If you are going to take a taxable sale, then you take it from whatever assets you need to get the right tax result you want, then buy and sell appropriate asset classes inside the tax advantaged accounts to get back to the asset allocation you want. If you have a large portfolio and are taking only a few percent distribution each year, you can take it from whatever asset class(es) are over represented and minimize the amount of active re-balancing you need to do.

[audreyh1]

Quote:

Originally Posted by explanade Hmm, in general, when folks here who are ER redeem shares, they're doing it from taxable accounts right, since they can't withdraw from retirement accounts until age 59-60? And when they redeem, to rebalance or just to take out money to fund their living expenses, aren't they liable for cap gains anyways? In that case, are they selling the shares which have the least amount of cap gains or just using average cost basis so it doesn't matter?

Many of us take all taxable account mutual fund distributions in cash, since we have to pay taxes on those anyway. And use that to fund part of the withdrawal and to rebalance.

If you reinvest dividends/distributions, and then sell to rebalance, you create a double taxation event for yourself.

[audreyh1]

Another thing on rebalancing (besides not reinvesting distributions)

I have been slowly converting my basis method on mutual funds to actual share basis, rather than average share basis. This lets me then select the highest basis shares to sell for rebalancing purposes, if I end up needing to sell some shares.

This seems to really help tax wise.

[Travelwanted]

Quote:

Originally Posted by explanade I'm a couple of percentage points over the target equity percentage.

FWIW:

"Don't worry about exact percentages. Ten percent more or less of an asset class will not make a significant difference in your portfolio performance."

-p. 98 in The Bogleheads Guide to Investing

[explanade]

Quote:

Originally Posted by audreyh1 Many of us take all taxable account mutual fund distributions in cash, since we have to pay taxes on those anyway. And use that to fund part of the withdrawal and to rebalance. If you reinvest dividends/distributions, and then sell to rebalance, you create a double taxation event for yourself.

So when I need to sell to rebalance, I guess I would have to turn off DRIP.

Say maybe turn it off before the last quarter, which is when a lot of the dividends and cap gain distributions are awarded on VG funds, so that I can use the proceeds in January for rebalancing purposes and/or funding living expenses.

Hopefully no lag on VG's part on switching DRIP on and off.

[audreyh1]

Quote:

Originally Posted by explanade So when I need to sell to rebalance, I guess I would have to turn off DRIP. Say maybe turn it off before the last quarter, which is when a lot of the dividends and cap gain distributions are awarded on VG funds, so that I can use the proceeds in January for rebalancing purposes and/or funding living expenses. Hopefully no lag on VG's part on switching DRIP on and off.

Just turn it off and leave it off. Much simpler that way.

[Chuckanut]

Quote:

Originally Posted by audreyh1 If you reinvest dividends/distributions, and then sell to rebalance, you create a double taxation event for yourself.

Unless one had an additional gain after the dividend is paid, a good thing IMHO, how does that happen?

[audreyh1]

Quote:

Originally Posted by Chuckanut Unless one had an additional gain after the dividend is paid, a good thing IMHO, how does that happen?

If you are careful to sell the reinvested dividends first, then just on those shares you won't. But if people are set up by default to sell FIFO and/or average cost basis, as they usually are, you'll be realizing a gain on a larger amount of shares than if you had not reinvested.

And reselling recently reinvested dividends means the gain, if any, is taxed at short term rates.

And you have to watch for inadvertent wash sale issues if reinvested dividends have lost money and you sell too soon for rebalancing purposes.

In general, automatically reinvesting dividends can be a mess unless you don't sell anything for a good long while.

[sengsational]

The issue I have is too many accounts, and consolidating is not possible, or not advisable (his and her traditional, his and her Roth, plus two other tax advantaged accounts). So I balance across all, but it is quite a challenge, especially when I have specific international country allocations to hit and not every account has a full lineup of choices. I have a small percentage in taxable accounts, which I am spending out of first, since I'm 55 now, so I've got a conservative pressure on the taxable accounts (don't want to use those funds for high beta stuff, even if it would make rebalancing less complicated).