Rebalancing made easier with funds

[Looking4Ward]

Quote:

Originally Posted by hnzw_rui I believe there's a 60-day restriction when it comes to mutual funds to prevent excessive trading (which can increase fund expenses, etc). Automatic deposits are still okay. That said, I rebalance once or twice a year. Three tops so I've yet to run afoul of this restriction.

There is.

[Animorph]

Quote:

Originally Posted by Looking4Ward Thanks, but it's the part in bold that has me stumped. For instance, Wellington is roughly 70% equity while Wellesley is roughly 30% equity, while Vanguard Energy and Health Care funds are both 100% equity. My target AA is 70/30. Not sure, mathematically, how to get there taking the above into consideration. Currently it looks like this: Wellington is 70% of my portfolio Wellesley is 17% Vanguard Healthcare is 7% Vanguard Energy is 6% So my current AA is at 65/35. If I were to rebalance now to get it back to 70/30 I'm not sure what I would move from where.

That is more complicated, mainly because there will be multiple correct answers.

One way to make it easier would be to set a target percentage for each fund, assuming their average equity/bond allocation, and let the managers decide to raise or lower your equity percentage. That's what they're there for. You probably shouldn't watch Wellington go from 20% bonds to 30% bonds and then compensate for that by increasing your equity allocation elsewhere.

[gauss]

Quote:

Originally Posted by Looking4Ward Thanks, but it's the part in bold that has me stumped. For instance, Wellington is roughly 70% equity while Wellesley is roughly 30% equity, while Vanguard Energy and Health Care funds are both 100% equity. My target AA is 70/30. Not sure, mathematically, how to get there taking the above into consideration. Currently it looks like this: Wellington is 70% of my portfolio Wellesley is 17% Vanguard Healthcare is 7% Vanguard Energy is 6% So my current AA is at 65/35. If I were to rebalance now to get it back to 70/30 I'm not sure what I would move from where.

Assuming you have studied linear algebra in the past, your are looking to solve a simultaneous set of M equations and N unknowns.

You need to come up with the allocation for the 4 funds that will give you your target 70/30 allocation. When I had to do this in the past, I setup a system of 'N' linear equations and 'N' unknowns and solved for the N unknowns. In my case I was able to solve directly for the N weightings.

If you have more funds than asset classes, then you will have a few free variables that you can set arbitrarily (well arbitrarily in the sense that the resulting set of equations will still have a solution)

In your case you appear to have 4 funds and 2 asset classes.

I am probably not doing this justice, so if it is unfamiliar please disregard.

-gauss

[hnzw_rui]

Wellington is ~65/35. Wellesley is ~35/65. The only way you can get into your target 70/30 allocation is by moving more funds to Healthcare or Energy or some other equity funds. Heck, I'd probably just ditch Wellesley altogether and divide the proceeds between Wellington, Healthcare, Energy and FTSE All-World ex-US stock fund.

[Looking4Ward]

Well, I feel a little better seeing that there isn't an easy answer to this.

[RunningBum]

Quote:

Originally Posted by Looking4Ward I thought funds would be easier to rebalance but at least for me it's not proving to be the case. For example, in my taxable account I like to keep a 70/30 AA. And I only have four funds there - Wellington, Wellesley, Vanguard Health and Vanguard Energy. But when my AA gets out of whack it's really hard for me to figure what to move where.

Most advise that you have an AA for your entire portfolio, not just for a certain account. It's up to you though. As someone else said, there are multiple answers. If you had even amounts of each, you'd be at about 75/25. So you'd either need a lot more Wellington or some more Wellesley to pull the equity down. And if you'd rather not have nearly 1/4 in the Health and/or Energy fund, you could overweight Wellesley.

For example,
30% Wellington @.65 equity = 19.5 equity
30% Wellesley @.35 equity = 10.5 equity
20% Health @ 1.00 equity = 20
20% Energy @ 1.00 equity = 20
Total = 70% equity.

If you like that mix, just try to keep 30% of your taxable account in Wellington, 30% Wellesley, and 20% in the other two. So if you had $200K in the account, it should be $60K each in Wellington and Wellesley, $40K each in the others. Any fund over the target would be exchanged for whichever fund(s) are under the target.

[Looking4Ward]

Quote:

Originally Posted by hnzw_rui Wellington is ~65/35. Wellesley is ~35/65. The only way you can get into your target 70/30 allocation is by moving more funds to Healthcare or Energy or some other equity funds. Heck, I'd probably just ditch Wellesley altogether and divide the proceeds between Wellington, Healthcare, Energy and FTSE All-World ex-US stock fund.

I suppose I'm complicating this by considering Wellesley to be my present ER funding, Wellington mid-term, and Health/Energy long term. In other words, I will always be taking money out of Wellesley each year and trying to keep three years worth of expenses in it since it performs fairly well under adverse economic conditions. Moving funds from Wellington to replenish Wellesley and leaving the two 100% equity funds alone to grow over 10-15 years or more when I start to tap into my IRA.

And now that I read that back to myself it seems that perhaps I shouldn't even be concerned about AA at all because I'm not really rebalancing, I'm replenishing.

[Looking4Ward]

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Originally Posted by RunningBum Most advise that you have an AA for your entire portfolio, not just for a certain account. It's up to you though. As someone else said, there are multiple answers. If you had even amounts of each, you'd be at about 75/25. So you'd either need a lot more Wellington or some more Wellesley to pull the equity down. And if you'd rather not have nearly 1/4 in the Health and/or Energy fund, you could overweight Wellesley. For example, 30% Wellington @.65 equity = 19.5 equity 30% Wellesley @.35 equity = 10.5 equity 20% Health @ 1.00 equity = 20 20% Energy @ 1.00 equity = 20 Total = 70% equity. If you like that mix, just try to keep 30% of your taxable account in Wellington, 30% Wellesley, and 20% in the other two. So if you had $200K in the account, it should be $60K each in Wellington and Wellesley, $40K each in the others. Any fund over the target would be exchanged for whichever fund(s) are under the target.

When I throw my IRA into the mix (which is currently 75/25) it brings my entire portfolio to 70/30. But that's by sheer luck and not because I know what I'm doing.

Thanks for that example, though - I can use that as a template to plug in different allocations to each fund to arrive at my desired overall allocation.

[sengsational]

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Originally Posted by gauss Assuming you have studied linear algebra in the past, your are looking to solve a simultaneous set of M equations and N unknowns.

I have a spreadsheet that lets me do trial and error. It is broken down into 9 asset classes, and each position has a place to hold it's allocation, which I looked up in the prospectus or Morningstar. It's complicated, but I should make a simplified version and put it on Google docs.

What makes it complicated for me is that I have his and hers IRA's, his and hers Roths, taxable, 401k and HSA. That's seven things that can't have money moved between them. So if you were over-weighted on US equities and under on, say, hard assets, but you didn't have a position in both of those in one of those accounts, you'd need to start a new position there or swizzle it around with more than just one account. It gets to be quite a puzzle, but it gives me something to do besides buy high and sell low.

[gauss]

Quote:

Originally Posted by sengsational I have a spreadsheet that lets me do trial and error. It is broken down into 9 asset classes, and each position has a place to hold it's allocation, which I looked up in the prospectus or Morningstar. It's complicated, but I should make a simplified version and put it on Google docs. What makes it complicated for me is that I have his and hers IRA's, his and hers Roths, taxable, 401k and HSA. That's seven things that can't have money moved between them. So if you were over-weighted on US equities and under on, say, hard assets, but you didn't have a position in both of those in one of those accounts, you'd need to start a new position there or swizzle it around with more than just one account. It gets to be quite a puzzle, but it gives me something to do besides buy high and sell low.

+1

And that is why we moved to balanced funds everywhere - single position each.

-gauss

[hnzw_rui]

Quote:

Originally Posted by gauss +1 And that is why we moved to balanced funds everywhere - single position each.

One thing I don't like about using balanced funds everywhere are the tax consequences. I'd prefer to keep just equities in taxable. In the Roth and tax-deferred, I can have both.

[gauss]

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Originally Posted by hnzw_rui One thing I don't like about using balanced funds everywhere are the tax consequences. I'd prefer to keep just equities in taxable. In the Roth and tax-deferred, I can have both.

Good point!

Since 2010 when the rules for Roths changed and we each started moving about $50k/year (max) into our Roths, via 'after-tax 401k' contribution and subsequent rollovers, we have drawn down the balance on our taxable investments to a small fraction of the original balance (with a corresponding increase in the Roth balances.)

-gauss

[sengsational]

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Originally Posted by sengsational ... I should make a simplified version and put it on Google docs.

I did it yesterday. Not for the faint of heart in spreadsheet usage.
http://www.early-retirement.org/foru...ml#post1632582