Rebalancing question

[kyounge1956]

My target asset allocation for all retirement accounts considered together is 30% equities, 70% fixed income. Right now I am at around 36% equities, made up partly of the stock allocation in Vanguard Target Retirement Income (VTINX) in my 457 plan at work, and partly of Vanguard's REIT index fund (VGSIX), which is in my Roth IRA. My periodic contributions go 100% to VTINX in the 457 account, and 100% to VIPSX in my Roth IRA. That's about 76% going to fixed income, so all other things remaining equal, I'll get closer to my target allocation over time.

My question is this: if stocks spike upward, how do I rebalance? There is only one bond fund in the 457 plan, which is actively managed. I recently sold the small amount I had in that fund under the "don't invest in things you don't understand" principle—short selling in this particular case. I can't figure out how to rebalance out of stocks (if I need to) when all the stock I own is in a blended fund which I can't sell out of without selling bonds at the same time, and no way of adding bonds separately in the 457 except the above-mentioned active fund, which I want to avoid. I could add a small amount of a stock fund separately in either account, so there would be something to sell out of if needed, but this would be going in the wrong direction, increasing the percentage of stocks when I am already on the high side of the target. Or I could replace some of the REIT in the Roth IRA with bonds...but what if REITs as an asset class had gone down while stocks went up? I'd be selling low to buy higher, and that's going in the wrong direction, too. I have some cash in the Roth from a recent cash-out and transfer of my Ameriprise VA, and was going to buy more VIPSX with it (which would put me closer to 32% stocks). Now I'm not sure that's the right thing to do. I've posted this question at Bogleheads too, for those of you who were about to suggest I ask there.

[Automatika]

VTINX is made up of 5 other Vanguard funds... Can you buy proportional shares of the other funds (VTSMX, VIPSX, Vanguard Total Bond, VMMSX, VEURX)?

[jIMOh]

What is more important

your allocation, or the specific funds they are invested in?

What is more important- your allocation, or investing in something you don't understand?

how long will it take new contribtions to balance you out?

If new contributions balance you out within 12 months, I do not think the answers to other questions are as important (now) as how you might answer then in 12 months.

I like focusing on allocation...
and I am not familiar with the funds listed, however if you can go into the 457 plan and maintain allocation, even if 1-2 of the funds are questionable, that is better than being unbalanced (to me allocation trumps all other issues- like picking funds, but that is me).

[kyounge1956]

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Originally Posted by Automatika VTINX is made up of 5 other Vanguard funds... Can you buy proportional shares of the other funds (VTSMX, VIPSX, Vanguard Total Bond, VMMSX, VEURX)?

Unfortunately not. The options in the 457 plan are pretty limited, and the only bond fund is the actively-managed one that I don't want to buy.

[kyounge1956]

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Originally Posted by jIMOh What is more important your allocation, or the specific funds they are invested in?

Allocation. The specific funds are only important because the limited choice is an obstacle to hitting my target allocation.

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What is more important- your allocation, or investing in something you don't understand?

Avoiding mystery investments, I think. Otherwise I wouldn't be puzzling over this, I'd hold my nose and buy the active bond fund.

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how long will it take new contribtions to balance you out? If new contributions balance you out within 12 months, I do not think the answers to other questions are as important (now) as how you might answer then in 12 months.

Years, and that's assuming the stocks don't rise more than the bonds.

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Years, and that's assuming the stocks don't rise more than the bonds.I like focusing on allocation... and I am not familiar with the funds listed, however if you can go into the 457 plan and maintain allocation, even if 1-2 of the funds are questionable, that is better than being unbalanced (to me allocation trumps all other issues- like picking funds, but that is me).

Hmmm. food for thought

[chinaco]

I am in a similar situation... so far, I have managed to rebalance using assets outside of the 401k.

This is the reason we have (and will) rollover assets from our employer based plans to IRAs. Limited choices, restrictions, high fees, fragmented portfolio that is difficult to manage...


I can think of 3 options:

1. Sell and Buy the bond fund in the employer plan.
2. Rebalance using assets outside of the employer plan. Which may cause you to sell something you would not otherwise sell.
3. If you are going to retire soon, wait till you rollover the assets (assuming you will rollover the assets and the potential loss of the 6% to market swings will not harm you).

[jIMOh]

This is "new" territory for me, as I maintain my allocation of 45% large cap, 15% mid cap, 15% small cap, 15% foreign large and 10% foreign small (or emerging markets) in all accounts... and the 75% domestic-25% foreign breakdown is also consistent in all accounts.

All accounts=401k me, 401k wife, Rollover me, Rollover wife, Roth me, Roth wife. When I add them up its 20+ funds but another story for another day.

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My target asset allocation for all retirement accounts considered together is 30% equities, 70% fixed income. Right now I am at around 36% equities, made up partly of the stock allocation in Vanguard Target Retirement Income (VTINX) in my 457 plan at work, and partly of Vanguard's REIT index fund (VGSIX), which is in my Roth IRA. My periodic contributions go 100% to VTINX in the 457 account, and 100% to VIPSX in my Roth IRA. That's about 76% going to fixed income, so all other things remaining equal, I'll get closer to my target allocation over time.

Here would be my questions and assumptions:

I assume your 457 balance is way way higher than the Roth balance (because it would take "years" for new contributions to rebalance)

I assume you invest a decent amount of money in the 457, but at same time knowing if you can REDUCE 457 contributions might be wise.

I assume the 30-70 allocation is well thought out
I assume you are "equity averse" more than you want to be bond heavy?

Focusing on the allocation, how much of the 70% is bonds and how much of the 70% is cash? Does the 457 have any NON EQUITY choices? Commodities, cash, other bond funds? How about moving enough out of bonds or equities into cash to get the 36% down to 30%. Would you rather have 30% equites and some cash getting a lower return (lower than bonds) or have the 36% equities and getting (higher) returns with more volatility?

I assume 30-70 allocation is there because you want volatility to go away, but that is just a guess.

If you can reduce 457 contributions, consider a taxable investment in muni bonds or another asset class (like commodities) to keep total portfolio to 30% equities.

[kyounge1956]

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Originally Posted by jIMOh This is "new" territory for me, as I maintain my allocation of 45% large cap, 15% mid cap, 15% small cap, 15% foreign large and 10% foreign small (or emerging markets) in all accounts... and the 75% domestic-25% foreign breakdown is also consistent in all accounts. All accounts=401k me, 401k wife, Rollover me, Rollover wife, Roth me, Roth wife. When I add them up its 20+ funds but another story for another day. Here would be my questions and assumptions: I assume your 457 balance is way way higher than the Roth balance (because it would take "years" for new contributions to rebalance)

Correct. More than twice as much in the 457 as the Roth.

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I assume you invest a decent amount of money in the 457, but at same time knowing if you can REDUCE 457 contributions might be wise.

I am maxing out both 457 and Roth. The maximum contribution for 457 is more than 3x the max for Roth—another reason it would take so long to get to the target via new money. In a thread a little while ago I asked if it would be advantageous to put some of my savings into a taxable account instead of tax-advantaged plans. I need to go read the replies again, but it didn't sound like it would.

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I assume the 30-70 allocation is well thought out I assume you are "equity averse" more than you want to be bond heavy?

Yes, I am a chicken! I was aiming at a particular return and standard deviation when I chose that allocation.

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Focusing on the allocation, how much of the 70% is bonds and how much of the 70% is cash?

Right now there is a pretty big slug of cash in my Roth IRA, but only because I have not yet reinvested all the proceeds from my late unlamented VA. Ordinarily, I don't keep any of either account in cash except the small amount that's included in VTINX, and enough in the Roth to cover one automatic fund purchase if my monthly deposit is ever delayed.

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Does the 457 have any NON EQUITY choices? Commodities, cash, other bond funds?

Hardly any. The choices are extremely limited, unless I use the "self directed" option, which will has extra fees and other restrictions. All that's available in the pre-selected funds are a range of Vanguard Target Retirement funds, several actively managed equity funds in various styles, and the one actively managed bond fund. I have been agitating to get some better choices, but the City is reviewing their choice of plan custodian this year and they are not willing to change anything until they know they will still be the custodian. So maybe in a year or so I may be able to get them to give us access to other asset classes, but right now it's not in the cards. There isn't really a cash option in the 457 either. There's the Stable Value fund, but it's a black box. I've never been able to find out exactly what it is, and its standard deviation and correlation to other classes are a mystery so I don't know how it would affect overall balance. And there are some CD-like investments, but I suppose like other CD's probably earning very low rates at the moment (although I admit I have not actually checked). The certificates are one possibility I hadn't thought of.

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How about moving enough out of bonds or equities into cash to get the 36% down to 30%. Would you rather have 30% equites and some cash getting a lower return (lower than bonds) or have the 36% equities and getting (higher) returns with more volatility?

That is a good idea, but after checking on one of my other funds, I decided to do something else. It turns out that, since I bought it in May 2009, the REIT index fund (in my Roth) has gone up, percentage wise, more than any of my other funds. So this morning I placed a sell order for about half of what I had in that fund. When that sale goes through, I will use the cash, plus the rest of the money from the VA, to buy more of the TIPs fund. I think that will put me at 30% equity or possibly just below. Unless there is a strong stock market rise, I don't think my equity allocation will get high enough to need rebalancing until after my planned retirement date. At that point I'm planning to roll over the 457 into an IRA—then it will be easy to get the allocation I want.

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I assume 30-70 allocation is there because you want volatility to go away, but that is just a guess.(snip)

And a good guess, too. I need big swings in portfolio value like I need a hole in the head!