re-balancing/reducing stock allocation

[norisk]

Need help with this:

my total non-retirement savings is currently allocated to 53% US stocks (VTI) and 18% of US bonds (the rest is 14% REIT, 7% gold and 7% of all world stocks).

I know I am too heavy on stocks and not enough into bonds for my risk preference. I would ideally like to be 30% US stocks, 30% world stocks and 30% bonds and the rest is REIT/gold/alternative assets. That is where I started, but had to sell some assets over they years to pay for various things and I tried to sell low capital gains assets that is how I ended up with this skewed allocation.

Plus, it seems some kind of recession is inevitable so being too heavy into stocks does not feel right. SO I know I am overdue to rebalance, but if I sell stocks now to rebalance, I would end up with a lot of capital gains, which I dislike.

If it matters at all, I am 49yo and plan to retire in 3-5 years.

Should I rebalance NOW? and if so - how?

 

[LOL!]

I'm not sure what you mean by "total non-retirement savings" and why you don't mention retirement savings. I'd use all accounts to rebalance and try to have asset classes located tax-efficiently in order not pay any income taxes.

 

[OldShooter]

I'm not sure what you mean by "total non-retirement savings" and why you don't mention retirement savings. I'd use all accounts to rebalance and try to have asset classes located tax-efficiently in order not pay any income taxes.

+1 You really should be looking at all investable assets when talking AA.

 

[SecondCor521]

This is not a very helpful response in the direct sense, but I think if one decides to maintain an AA and rebalance then they should rebalance to that AA on a regular basis. Some people write IPS (Investment Policy Statements) to guide them on these matters; the most common thing to do is establish ranges or time frames which trigger rebalancing.

Although I don't have a written IPS, my AA has a low of 93/7 and a high of 97/3. I'm required to rebalance when I'm more than 2 percentage points off, and I may rebalance if the dollar amount is off by several thousand dollars. I have not yet hit the 2 percentage point limit because I voluntarily rebalance more often. My rebalancing, though, is inside my traditional IRA so there are no tax consequences for me.

Personally I think it is antithetical to an IPS and an AA to consider rebalancing or not rebalancing based on the current state of the market. Although one poster here did talk about establishing stock ranges based on CAPE; not sure if she ever did that or not.

Anyway, a more directly helpful comment might be for you to consider, OP, whether you want to rebalance more than you want to avoid taxes. A middle ground some people use is to rebalance each year only to the extent that they incur a tax bill they are willing and able to handle. The rebalancing then can take several years to get you back to your target.

 

[pb4uski]

+1 I rebalance across all my accounts so rebalancing is mostly in tax-deferred so I don't get nailed in taxes when rebalancing.

 

[Bir48die]

I rebalanced to 60/40 last October and will never have stock percentages less than that

 

[audreyh1]

Need help with this:

my total non-retirement savings is currently allocated to 53% US stocks (VTI) and 18% of US bonds (the rest is 14% REIT, 7% gold and 7% of all world stocks).

I know I am too heavy on stocks and not enough into bonds for my risk preference. I would ideally like to be 30% US stocks, 30% world stocks and 30% bonds and the rest is REIT/gold/alternative assets. That is where I started, but had to sell some assets over they years to pay for various things and I tried to sell low capital gains assets that is how I ended up with this skewed allocation.

Plus, it seems some kind of recession is inevitable so being too heavy into stocks does not feel right. SO I know I am overdue to rebalance, but if I sell stocks now to rebalance, I would end up with a lot of capital gains, which I dislike.

If it matters at all, I am 49yo and plan to retire in 3-5 years.

Should I rebalance NOW? and if so - how?

You aren’t yet retired. I assume you are still contributing. What is your desired allocation in retirement? 3-5 years is a good period of time to start shifting towards the retirement allocation. You can do this gradually through new contributions as well piecemeal unwinding of some positions to buy others. It’s hard to avoid capital gains when changing allocation or rebalancing.

It looks like you aren’t changing your stock allocation much - rather shifting exposure more to international stocks and changing gold and some REITs to bonds.

 

[SnowballCamper]

Need help with this:

my total non-retirement savings is currently allocated to 53% US stocks (VTI) and 18% of US bonds (the rest is 14% REIT, 7% gold and 7% of all world stocks).

I know I am too heavy on stocks and not enough into bonds for my risk preference. I would ideally like to be 30% US stocks, 30% world stocks and 30% bonds and the rest is REIT/gold/alternative assets.

Should I rebalance NOW? and if so - how?

Yes rebalance now. It's all out of wack from your stated AA. I assume you have the funds to pay the capital gains tax. If not, then follow SecondCor's advice to do as much as you can stomach the tax on.

EDIT: Since this money isn't for retirement, what is it for (when do you need it)? Is your stated AA consistent with the timeline of when you think you'll need the money?

 

[norisk]

UPDATE on my re balancing question

I posted earlier my dilemma about rebalancing. I have a bond allocation of only 18% for my risk tolerance. I'd like to be 30% or 40% in bonds. This is a taxable account. my AA in the tax-deferred accounts is pretty close to my optimal. To rebalance I have to sell US stocks which will hit me with huge capital gains and my capital gains rate is the highest at the moment (will definitely be lower once I retire).

The money is for retirement - first to cover years until I can start withdrawing from IRAs/401ks and smaller amounts until SS kicks in.

I am not contributing new money to my investment accounts (I am paying off the last HELOC on my house which I want to pay off before I retire).

Does that clarify? Main question is - to rebalance or not and if yes, then how.

 

[target2019]

Rebalance over 3-5 years. Rebalance from 18% to 21% this year, and so on.

 

[jIMOh]

This is not a very helpful response in the direct sense, but I think if one decides to maintain an AA and rebalance then they should rebalance to that AA on a regular basis. Some people write IPS (Investment Policy Statements) to guide them on these matters; the most common thing to do is establish ranges or time frames which trigger rebalancing.

Although I don't have a written IPS, my AA has a low of 93/7 and a high of 97/3. I'm required to rebalance when I'm more than 2 percentage points off, and I may rebalance if the dollar amount is off by several thousand dollars. I have not yet hit the 2 percentage point limit because I voluntarily rebalance more often. My rebalancing, though, is inside my traditional IRA so there are no tax consequences for me.

Personally I think it is antithetical to an IPS and an AA to consider rebalancing or not rebalancing based on the current state of the market. Although one poster here did talk about establishing stock ranges based on CAPE; not sure if she ever did that or not.

Anyway, a more directly helpful comment might be for you to consider, OP, whether you want to rebalance more than you want to avoid taxes. A middle ground some people use is to rebalance each year only to the extent that they incur a tax bill they are willing and able to handle. The rebalancing then can take several years to get you back to your target.

+1

I agree with all the advice above.

1) Rebalancing is about allocation, not whether market is moving up, down, sideways or inside out.
2) I would rebalance looking at all accounts, pre tax, taxable etc... and use a strategy which minimizes taxes
3) you are 53-18-7-22 (Us stocks-bonds-foreign stocks-other) which is 60% stocks, 18% bonds, 22% other

my total non-retirement savings is currently allocated to 53% US stocks (VTI) and 18% of US bonds (the rest is 14% REIT, 7% gold and 7% of all world stocks).

I know I am too heavy on stocks and not enough into bonds for my risk preference. I would ideally like to be 30% US stocks, 30% world stocks and 30% bonds and the rest is REIT/gold/alternative assets. That is where I started, but had to sell some assets over they years to pay for various things and I tried to sell low capital gains assets that is how I ended up with this skewed allocation.

I want to repeat, you want to rebalance to 30-30-30-10 which is 60% stocks, 30% bonds, 10% other
you currently own 60% stocks now (53-7 not 30-30) and you own 14% other now, not the 10% you want.

There could be a discussion of how much deviation is in a 60% stock portfolio is 30-30 vs 53-7 vs 40-20. 60%stock is 60% stock, there are minor performance variations at 53-7 or 40-20. 60% stock is 60% stock. If these were sector funds, the deviation would be higher, if these are large index types, I don't think you will see much difference between 53-7 and 30-30.

If you sleep better with it being 30-30, then make it 30-30.

 

[OldShooter]

@norisk, none of this discussion makes any sense unless/until you look at your assets as a whole. For example, if your "non-retirement savings" is only 1% of your total assets then rebalancing is a waste of time and will have no overall effect. And conversely.

Also, looking at your total assets you may find that you can reduce equities tax-free in your tax-sheltered retirement accounts and easily get the total portfolio to an AA that you prefer.

The tale of the blind men and the elephant pertains. (https://en.wikipedia.org/wiki/Blind_men_and_an_elephant) You have to be looking at the whole elephant.

 

[Lsbcal]

Need help with this:

my total non-retirement savings is currently allocated to 53% US stocks (VTI) and 18% of US bonds (the rest is 14% REIT, 7% gold and 7% of all world stocks).

I know I am too heavy on stocks and not enough into bonds for my risk preference. I would ideally like to be 30% US stocks, 30% world stocks and 30% bonds and the rest is REIT/gold/alternative assets. That is where I started, but had to sell some assets over they years to pay for various things and I tried to sell low capital gains assets that is how I ended up with this skewed allocation.

Plus, it seems some kind of recession is inevitable so being too heavy into stocks does not feel right. SO I know I am overdue to rebalance, but if I sell stocks now to rebalance, I would end up with a lot of capital gains, which I dislike.

If it matters at all, I am 49yo and plan to retire in 3-5 years.

Should I rebalance NOW? and if so - how?

Well why not just do it. Figure out where you should be and then either do it immediately in one step or over 3 steps and over time increments of X months. Bottom line is to be comfortable with your end point.

Now don’t get me wrong, I know how difficult making such decisions can be.

 

[LOL!]

Does that clarify? Main question is - to rebalance or not and if yes, then how.

Yes it does clarify. So what you should do is IGNORE the asset allocation in each individual account and use ALL your accounts together in a TAX-EFFICIENT way to get the OVERALL PORTFOLIO asset allocation that you desire.

That means sell equities in your tax-deferred account and exchange into bond funds and don't create a tax hit in your taxable account.

You will have more bond funds in your tax-deferred account percentage-wise than you have now.

 

[N02L84ER]

Yes it does clarify. So what you should do is IGNORE the asset allocation in each individual account and use ALL your accounts together in a TAX-EFFICIENT way to get the OVERALL PORTFOLIO asset allocation that you desire.

That means sell equities in your tax-deferred account and exchange into bond funds and don't create a tax hit in your taxable account.

You will have more bond funds in your tax-deferred account percentage-wise than you have now.

+1
Our traditional IRA is 100% bonds/cash. Our taxable accounts are 85% stock, 15% bonds/cash. Overall we have a 55% stock and 45% bonds/cash allocation.

 

[pb4uski]

I posted earlier my dilemma about rebalancing. I have a bond allocation of only 18% for my risk tolerance. I'd like to be 30% or 40% in bonds. This is a taxable account. my AA in the tax-deferred accounts is pretty close to my optimal. To rebalance I have to sell US stocks which will hit me with huge capital gains and my capital gains rate is the highest at the moment (will definitely be lower once I retire).

The money is for retirement - first to cover years until I can start withdrawing from IRAs/401ks and smaller amounts until SS kicks in.

I am not contributing new money to my investment accounts (I am paying off the last HELOC on my house which I want to pay off before I retire).

Does that clarify? Main question is - to rebalance or not and if yes, then how.

Your 30-40% bond target should be for your investments in total.... so you can sell stocks in your tax-deferred accounts and buy bonds in your tax-deferred accounts to bring the total bonds from 18% to 30-40% without incurring any tax cost at all.

So you have the best of both worlds, you get the overall AA that you want and no tax implications. Many of us do this all the time.

So for example, let's say your taxable and tax-deferred accounts each have $100 to make it easy... $200 in total... let's say that your taxable account is $100 in stocks and your tax-deferred account is $64 in stocks and $36 in bonds.... that's 18% in bonds ($36 out of $200).

So in your tax deferred account sell $34 in stocks and buy $34 in bonds, bringing your total in bonds to $70 ($36 + $34). The $70 in bonds is 35% of the total of $200... right between your 30-40% target.

Before	Taxable	Tax-Deferred	Total	AA
Stocks	100.0	64.0	164.0	82.00%
Bonds	0.0	36.0	36.0	18.00%
Total	100.0	100.0	200.0	100.00%
After	Taxable	Tax-Deferred	Total	AA
Stocks	100.0	30.0	130.0	65.00%
Bonds	0.0	70.0	70.0	35.00%
Total	100.0	100.0	200.0	100.00%

 

[gcgang]

Rebalance if you're out of whack.

I rebalanced last year. You're right, capital gains can add up. Just ended up paying a bunch of $ to state and fed treasurers. At least I'm doing my part to bring the deficit down.

But if you have stock in a tax deferred account and don't view your asset allocation in total, ignoring the ability to reduce stocks in tax sheltered without taxes, you're making a mistake.

 

[norisk]

re-balancing question

I posted my question earlier and got good suggestions! Thanks all who posted.

The main point I got is to sell stocks/buy bonds in the IRA, thus bringing my overall AA to my preference. So this would end up being mostly holding bonds in the IRA and mostly stocks in the taxable. Is that what other people are doing? Any links to articles to help me understand this idea better?

However, I will be using my taxable account until I can start withdrawing from the IRA and it will be heavy in stocks which will expose me to more risk than I like.

If that matters, my taxable account is about half of my total assets that I plan to use in retirement (the rest is IRA and a small annuity pension from a previous employer).

 

[capjak]

Investments:
https://www.bogleheads.org/wiki/Asset_allocation

Multiple accounts (Bonds in tax deferred, Stocks in Taxable and growth stocks in Roth see below)
https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts

 

[pb4uski]

Yes, many of us have all or most of our fixed income allocation in tax-deferred accounts because it is tax-efficient.

And in early retirement we sell equities in taxable accounts to generate spending money and pay no or little tax on the resulting long term capital gains and then sell bonds and buy stocks in tax-deferred accounts as necessary to rebalance.

You are not exposed to more stock risk since no matter how you do it across all your accounts you are only 60% stocks... whether the 60% is all taxable, tax-deferred or tax-free doesn't change the overall equity risk of loss

 

[GenXguy]

I posted my question earlier and got good suggestions! Thanks all who posted.

The main point I got is to sell stocks/buy bonds in the IRA, thus bringing my overall AA to my preference. So this would end up being mostly holding bonds in the IRA and mostly stocks in the taxable. Is that what other people are doing?

Yes, but not just in my IRA, but in my 457B also.

I've gone from 80% stocks to 42% stocks in the last year or so while generating no taxable gains and may retire in less than 7 months. Or maybe OMY.

 

[capjak]

Investments:
https://www.bogleheads.org/wiki/Asset_allocation

Multiple accounts (Bonds in tax deferred, Stocks in Taxable and growth stocks in Roth see below)
https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts

Forgot the tax efficiency wiki:

https://www.bogleheads.org/wiki/Tax-efficient_fund_placement#Step_4:_Place_high_growth_stock_funds

 

[norisk]

Yes, many of us have all or most of our fixed income allocation in tax-deferred accounts because it is tax-efficient.

And in early retirement we sell equities in taxable accounts to generate spending money and pay no or little tax on the resulting long term capital gains and then sell bonds and buy stocks in tax-deferred accounts as necessary to rebalance.

How do you end up paying no tax on long term capital gain? You stay under the capital gain income limit?

 

[audreyh1]

How do you end up paying no tax on long term capital gain? You stay under the capital gain income limit?

Yes, long term capital gains plus qualified dividends are not taxed until you almost exceed the 12% tax bracket after subtracting standard deduction or itemized deductions. For married filing jointly that’s like $103K total income for 2019.

And if you exceed it a bit, you just pay capital gains tax rate on the amount above the 15% threshold. Of course you pay ordinary income taxes on any part of the total that is ordinary income, and ordinary income may push some of the capital gains income above the 15% cap gains tax threshold, but still you’ve got a pretty high threshold. So unless ordinary income is high, it’s likely that you pay 0% on a big chunk of your cap gains.

https://thecollegeinvestor.com/23577/capital-gains-tax-brackets/

 

[atmsmshr]

Everyone is different for AA based on personal circumstance, goals, age, and risk tolerance.

My strategy

• Nearly 100% stocks for 32 years. S&P index and utility (NEE) for the most part. (Not recommended - I swung for the fence and got lucky. Hated looking at my 401k balance in 2000 and 2008 but stayed put and kept buying)
• Rebalanced 18 months ago to conservative AA when getting close to the assets 25x income number. Could not stand the thought of a total portfolio drop of 30% just prior to FIRE. (slept peacefully during the 2018 Christmas correction). In rebalancing all at once, the goals were:
• Made a SS bridge fund assuming collection at 67 and parked in MM 2018 while Fed raised rates. Moved to Intermediate bond fund (mostly Treasuries) as soon as rate hikes were stopped.
• Made a pension bridge fund assuming collection at 65. Same allocation as above.
• Keeping all of my company match stock until 60 when I will do a rollover IRA and started sweeping capital gains in NUA. (risky, not recommended). After tax gains realized, stock will be diversified to USA and international indices. Bonds will stay conservative intermediate and short. Some Roth conversion after 60.
• Knowing I will spend down a chunk of savings before income streams start (freedom for money), subtracting the bridge funds gives me a 75/25 AA on the remaining portfolio.
• Just prior to retirement, ramped savings in 401k to as much as I could stand for pre-tax and back door Roth.
• Burn me at the stake for being heretical, I have currently have 6 months living expenses post tax checking account. This is being used to keep us out of the 22% tax bracket.
• This strategy gives me a total AA that is currently ballpark around 33/67. It is an automatically rising AA as we spend the bridges and which look like a bond tent to guard against SORR. The risk portion of the portfolio after NUA tax gains are captured will be 60-70 stock / 40-30 bond AA.
• Legacy goal - Our two kids can have the estate residual - we don't have a dollar figure in mind. We are blessed with relatively well adjusted children finding their own way in the world.

Been spending like a drunken sailor on planned home improvements and vacations for the first three months of retirement this year by using this strategy and net worth is unexpectedly rising. I am planning on the spending and NW to decline from here to 67, but so far funding level has been a peasant surprise.

So, in selecting my AA, I guesstimated:
- FIRE date and willingness to keep working
- Expenses
- SS collection
- Pension options
- tax strategy
- legacy goals
- investment risk tolerance
- 'what if' scenarios


YMMV

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