Rebalancing made easier with funds

[modhatter]

I was looking for a spreadsheet or tool so I could teach my son to re-balance his (new portfolio to be) for when I am no longer here to help him. It occurred to me that funds as opposed to ETF's make re-balancing somewhat easier, as with funds you can select a $ amount to sell or buy when you want to re-balance, as opposed to whole shares. (it is more exact)

Is this a factor in deciding on funds instead of ETF's, when you can easily buy the ETF for the same amount as the Admiral Share?

I prefer the instant gratification of using ETF's myself, but for him it might be easier to re-balance with funds. Is this a consideration in your choice? I know a lot more people use funds as they were around longer and that's what they started with, and ETF's are the new kid on the block so to speak.

Also, does anyone have access to a spreadsheet or a website with a tool that is easy to understand to teach him with?

Last, what % do you use for a trigger for when you need to re-balance. In other words how much drift do you allow before you re-balance a particular fund.

 

[hnzw_rui]

I'm fairly young but I started with funds and I like their simplicity. Much easier than calculating the number of whole shares and stuff, no bid-ask spread, no intra-day pricing, no need to sell first before buying, etc.

I do have an ETF portfolio in my 457 as the fund options in our core plan have significantly increased in ER so I moved most of my funds to the self-directed brokerage option. I use Google Finance to monitor the share prices and positions in that portfolio.

As for the rebalance trigger, it's more like a schedule with me. I don't really sell, rather I put new money in underweight assets so I usually rebalance after 3-6 paycheck contributions. I have a custom Excel spreadsheet that I use to calculate how many whole shares I need to and can buy, etc.

 

[retire2020]

I review end of each qtr and rebalance AA if spread is >= 5%.

 

[easysurfer]

I use index funds and have done so before ETF's. Rebalancing is pretty straight forward. I go by the 100-age formula for % in equities. I rebalance only once a year if my asset allocation percentages drift farther than my 5% trigger.

 

[RunningBum]

The mechanics of buying/selling ETFs might be another issue for your son if you are concerned. Market vs limit orders, plus other more complex options that he may see and should probably ignore like stop loss orders, margin, etc, may be a reason to keep it simpler with funds.

Maybe it's because I use SpecID basis, but at VG I don't see a way to directly sell or exchange a fund by dollar amount. I can either select All or specify the number of shares, on a screen that will tell me the dollar amount the transaction will be, though it is only estimated and the actual will be based on the day's closing price. I can only buy by dollar amount. So I don't know that funds really make the math any easier for balancing.

 

[RunningBum]

I'm fairly young but I started with funds and I like their simplicity. Much easier than calculating the number of whole shares and stuff, no bid-ask spread, no intra-day pricing, no need to sell first before buying, etc.

That's a good point. I don't think you can do an "exchange" with ETFs, but with funds, even if you have to specify # of shares to sell, you can exchange all of the proceeds to a different fund without having to wait and see exactly how much you got and then figure out how many new shares you can buy. So the mechanics are easier with funds.

Also, are there bond ETFs, or just funds? It's probably a simpler concept to exchange between funds, rather than between equity ETF shares and bond funds.

 

[LOL!]

Funds are fine. ETFs are fine. One should be able to use both easily.

However, there is no reason to get any rebalancing exact, so I don't use a spreadsheet and really don't care too much about dollars or shares. I see my portfolio and think to myself: You need less large cap US, so sell some S&P500. You need more bonds, so buy some more bonds.

If I get within a 3% of my desired asset allocation, then I am doing OK. I don't let some asset allocation numbers tyrannize me.

 

[hnzw_rui]

Also, are there bond ETFs, or just funds? It's probably a simpler concept to exchange between funds, rather than between equity ETF shares and bond funds.

Yup, there are bond ETFs. I think the only ETFs I haven't seen are balanced ones but those probably exist, too.

Maybe it's because I use SpecID basis, but at VG I don't see a way to directly sell or exchange a fund by dollar amount. I can either select All or specify the number of shares, on a screen that will tell me the dollar amount the transaction will be, though it is only estimated and the actual will be based on the day's closing price. I can only buy by dollar amount. So I don't know that funds really make the math any easier for balancing.

I just have Roth IRA in Vanguard so I use average cost basis. There are no tax implications for me anyway. I can just use the exact dollar amount I want to move. I don't need to specify the number of shares or anything. The number of shares sold/bought will vary based on closing price but the dollar amount is fixed.

 

[gauss]

When I used to rebalance manually, I started with the spreadsheets provided at Rebalance your Couch Potato Portfolio with these free tools | Squawkfox.

What was nice about these spreadsheets is that they allowed you to specify an amount to add to a portfolio (for those in the accumulation stage) and it will figure out how to allocate the contribution to bring you back towards balance on a regular basis. You can also use the spreadsheets with a '$0' contribution to calculate how to do a traditional rebalance.

Although the spreadsheets provided have different cute names (ie U.S. Margarita Couch Potato) the main difference between them is the number of different assets that they are setup to support.

Eventually I stopped this and just went into all balanced funds.

-gauss

 

[friar1610]

IF you have Vanguard funds or ETFs there is a portfolio tester tool that lets you try various hypothetical changes to your port before you execute them and see what the impact is on your overall AA. I have used it many times and found it very helpful.



Sent from my iPod touch using Early Retirement Forum

 

[easysurfer]

Here's a sample rebalancing spreadsheet template:

Simple Portfolio Rebalancing Spreadsheet Template — My Money Blog

 

[modhatter]

Here's a sample rebalancing spreadsheet template:

Simple Portfolio Rebalancing Spreadsheet Template — My Money Blog

Yes, I have been searching and I like that one best. I wish you could download it though. I could probably replicate the formulas I guess.

I like Etf's because I can place a bid for a stock to pick up shares when it experiences a little drop. Sometimes they are very short lived so having a bid in place for what you want to buy makes it easier.

My son will be withdrawing from my portfolio when I pass, so it will require some selling to re-balance, so just adding money to re-balance isn't going to do it.

When you say you can exchange funds within a fund, but not ETF's, could you elaborate on that with some examples? Unfortunately, most all money will be in taxable accounts.

 

[easysurfer]

Yes, I have been searching and I like that one best. I wish you could download it though. I could probably replicate the formulas I guess...

You may be able to download. Click on the Google Docs Spreadsheet link, then click on "File" of the menu, then do a "download as"

I don't have excel but downloaded to an open office document. The spreadsheet then when I opened may still need some tweeking (for example, instead of pie charts, the format came of bar chart), but the formulas look retained.

Give it a try. Downloading might save you some time.

 

[RunningBum]

When you say you can exchange funds within a fund, but not ETF's, could you elaborate on that with some examples? Unfortunately, most all money will be in taxable accounts.

If you're asking me, I didn't say "within a fund", but rather, with funds you can exchange between them. By that I mean that at least at Vanguard, I can specify how much of one fund I want to sell, and to which funds I want the proceeds to go in one move. I don't have to wait for the sell to go through to know how much of the new fund I can buy. I can just tell them to use 100% of the proceeds to buy a new fund, or 75% to buy fund A and 25% to buy fund B.

With ETFs, I would have to submit a sell order, and wait for it to execute, and then determine with the proceeds how many shares of the ETF I want to rebalance to I can buy. Two separate moves. As far as I can tell, I can't just tell the broker to take whatever proceeds I get from the sale and buy as many shares as I can with that amount in the new fund.

 

[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.

 

[Animorph]

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.

Take your total value, multiply by the target percentage of each fund (four different results for four funds). Subtract the actual current value of the fund from it's target value calculated in the previous step. If the result is positive for a fund, buy that much more. If negative, sell that much. After doing that all funds will be at their targets, barring additional price changes.

 

[LOL!]

Have folks been running into any frequent trading restrictions with their Vanguard mutual funds lately? You know, if you sell shares, then you can buy back in that same account for a few weeks without jumping through some hoops.

 

[hnzw_rui]

Have folks been running into any frequent trading restrictions with their Vanguard mutual funds lately? You know, if you sell shares, then you can buy back in that same account for a few weeks without jumping through some hoops.

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.

 

[modhatter]

You may be able to download. Click on the Google Docs Spreadsheet link, then click on "File" of the menu, then do a "download as"

I don't have excel but downloaded to an open office document. The spreadsheet then when I opened may still need some tweeking (for example, instead of pie charts, the format came of bar chart), but the formulas look retained.

Give it a try. Downloading might save you some time.

Easysurfer: Thank you, I was able to do it that way.

RunningBum: Yes, I can see how that would be much more convenient. There seems to be merits with both forms. Decisions, decisions.

 

[Looking4Ward]

Take your total value, multiply by the target percentage of each fund (four different results for four funds). Subtract the actual current value of the fund from it's target value calculated in the previous step. If the result is positive for a fund, buy that much more. If negative, sell that much. After doing that all funds will be at their targets, barring additional price changes.

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.

 

[Looking4Ward]

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]

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]

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.