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Time to rebalance? Help!
Old 02-07-2008, 07:35 PM   #1
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Time to rebalance? Help!

I'm taking a closer look at our IRAs right now (DH and I each have a Roth and a Traditional, all four are at Scottrade). We have a spastic investment mix in them, and I feel that it's time to rebalance. The existing investment mix is half apathy/time/hesitation, half wanna-try-my-hand-at-individual-stock-picking.

Our deferred comp plans are currently in a 90/10 stocks/bonds mix, using mutual funds, and new assets are being automatically allocated (LOVE this function, thanks plan administrators).

I'm wondering if now is a good time to rebalance. All of our IRAs have lost money; the wacko allocations didn't help, I'm sure. I'm wondering if I should rebalance now, or wait a bit to see if some of the stocks recover. On the one hand, I'll be selling depreciated stocks to pick up depreciated stocks -- Nothing in the IRAs is doing particularly well. On the other hand, I worry that selling equities while they're down to pick up other equities (and some bonds) is a poor decision.

The bonus of rebalancing now is that we can then put the IRAs on autopilot. We'll probably follow our above allocation, using ETFs.

New money is now only going into the Traditionals, so the Roths are the ones that will be most impacted by the rebalance (small balances, no new money, so no future dca)

Any thoughts?
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Old 02-07-2008, 09:11 PM   #2
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From the tone of your post I'd say you were in panic mode. Perhaps you should go back to square one and consider what your AA should really be. Then consider writing an Investor Policy Statement which might include how you intend to rebalance. Mechanical rebalancing might be the answer to get the emotions out. Say, once per quarter or once per year.

Have you selected a reasonable benchmark for your investments? For instance, if you are 90/10 are you beating that combination of 90% Vanguard Total Stock Market and 10% Vanguard Total Bond Market (assuming you have no international in this mix)? If you are not beating this over a reasonable period maybe you should settle for market returns.

Just some quick thoughts.
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Old 02-07-2008, 09:14 PM   #3
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Do you mean should you reallocate (decide and implement a different mix of holdings) or rebalance (correct accounts that have strayed back in to the original allocation that you're OK with)?
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Old 02-07-2008, 10:10 PM   #4
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Not to be a dirty market timer , but now seems like an ok time to sell bonds, but you might hold off on buying until rates rise/prices fall. Or, at least DCA over the next year or two.
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Old 02-07-2008, 10:21 PM   #5
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Thanks for highlighting the need to clarify, Rich. Yes, what I mean is that we need to reallocate the IRAs to bring them in line with the allocations in our deferred comp plans. So -- reallocate now (taking losses on the individual equities that we own but also purchasing equity index funds at a lower price (theoretically)) or wait until some of the equities recover and then re-allocate.

Rebalancing of the deferred comp plans is something we do yearly, in June.

As for panic mode -- I'm not sure why I gave that impression, lsbcal. I don't feel panicked. The IRAs are disorganized and we need to get them organized. We have a written investment plan; the IRAs are the last thing we need to get in line. Given that they're a fairly small percentage of our portfolio, a bobble like this isn't going to keep us from retiring. Still, I'd like to minimize the damage while getting them in line with the rest of our allocations.

As far as benchmarks, most of our money is in index funds. We expect those to closely approximate the index they're tracking (so far, so good). The few individual equities we have in our IRAs (10 or so) are all large caps; we measure them against the S&P 500.

Does that help?
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Old 02-07-2008, 11:07 PM   #6
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Quote:
Originally Posted by Urchina View Post
....we need to reallocate the IRAs to bring them in line with the allocations in our deferred comp plans. So -- reallocate now (taking losses on the individual equities that we own but also purchasing equity index funds at a lower price (theoretically)) or wait until some of the equities recover and then re-allocate.
Sounds like a timing question which is always quite difficult to determine. Since individual stocks are subject to specific company risk you would need to do this on a stock analysis basis I would think. If the stock has good 3-5yr prospects then why sell to lock in the loss unless it was a mistake in the first place. Of course, if the stock loss is on the order of the index loss then perhaps there is nothing lost in switching. I'm probably just mentioning things you've already considered.

Quote:
As for panic mode -- I'm not sure why I gave that impression, lsbcal. I don't feel panicked.
Sorry, I was jumping to (the wrong) conclusions .
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Old 02-08-2008, 10:27 PM   #7
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Once you know your asset allocation, you can bring your overall portfolio into line with it. But there is no need to make the IRA funds a mini-version of your entire portfolio -- you can just make sure the funds there and the funds in your taxable accounts together comprise an overall portfolio that is allocated into the various asset classes you are looking to be in. There may be other considerations for what goes into either the taxable or IRA portions of your portfolio, but getting your portfolio balanced needn't be done in each separately.

If this AA approach is what you're looking for, you can find a long discussion of it in the book Work Less Live More and its companion workbook which has a CD ROM with spreadsheets for figuring out how much of each asset class to buy or sell at rebalancing time. (full disclosure: I'll make 90 cents if you buy the books, but a lot of libraries have them for free)
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