How do you know your Asset Allocation?

[jIMOh]

Rebalance when overall target allocation (stocks to bonds) is off by 5% or more. To determine which asset classes to allocate from/to, I use a rule that looks at a specific % deviation from the asset allocation percentage. So:

30% allocation to Large Cap 5%+/- deviation
10% allocation to Small Cap 25%+/- deviation
5% allocation to Real Estate 25%+/- deviation
15% allocation to International Stock 25% +/- deviation
Fixed Income 25%+/- deviation

Can you give an example- It sounds like a 25% deviation from 10% is 12.5%??

Thx!

 

[Gotadimple]

Can you give an example- It sounds like a 25% deviation from 10% is 12.5%??

Thx!

That's correct. At 12.5%, I would rebalance to another asset class that was below the minimum.

Rita

 

[Free_at_49]

You gotta decide what is the maximum % you can stand to lose, that determines your Asset Allocation.

 

[jIMOh]

That's correct. At 12.5%, I would rebalance to another asset class that was below the minimum.

Rita

Is the logic you do not let more volatile asset classes move one way or other, but with less volatile classes, you let them go more?

curious why different classes have different percentages off.

 

[LOL!]

What has been described is Larry Swedroe's 5/25 rebalancing bands. Basically, rebalance whenever an asset class goes out of balance by 25% of its weight or 5% of total portfolio value whichever is smaller. So for all asset classes at 20% and more of total portfolio value, this rule limits the band to plus or minus 5% of total assets. For all asset classes less than 20% of total portfolio value, this rule limits the band to plus or minus 25% of that asset class's weight.

 

[haha]

You gotta decide what is the maximum % you can stand to lose, that determines your Asset Allocation.

It's the only thing likely to work. If the experience of the last two years means anything, it means that when things go bad, almost everything goes bad. There is no hiding, except in issues with US government backing and short durations. Possibly Swiss or German or even British sovereign debt may be fine, for those who buy groceries with Euros or SWF or British pounds.

Long term bonds may or may not rise in price. During the recent crash they did. But it doesn't have to happen that way, and the next stress might be caused by foreigners laying off buying US government debt and LT interest rates rising. Ben may find some limit to quantitative easing.

Ha

 

[ERD50]

Manual spreadsheet, coarse allocations (I count my Hi-Yield fund as 50% stock 50% Bond). Rarely look at it, maybe a couple times a year if the market has changed and I'm thinking maybe I should re-balance.

I'd be more attentive to this, but when I run FireCalc, I don't see any great sensitivity long term as to whether your AA is 75/25, 70/30, 65/35... or 50/50. I figure I've got about the same chance of re-balancing to what will prove to be the wrong direction as I do the right direction. So I don't much bother.

Analysis Paralysis? Lazy? Astute? All or none of the above?

-ERD50

 

[donheff]

I'd be more attentive to this, but when I run FireCalc, I don't see any great sensitivity long term as to whether your AA is 75/25, 70/30, 65/35... or 50/50. I figure I've got about the same chance of re-balancing to what will prove to be the wrong direction as I do the right direction. So I don't much bother.

Analysis Paralysis? Lazy? Astute? All or none of the above?

-ERD50

I don't pay much attention either although I did go a little more conservative a few years back to free up a few years of anticipated income in cash equivalents. I don't bother running the Firecalc checks, I rely on you and others to tell me the answers You have convinced me that my laziness is a virtue.

 

[easysurfer]

You gotta decide what is the maximum % you can stand to lose, that determines your Asset Allocation.

Yes, that's what they day. After all the studies and allocation models the rule of thumb is to use an allocation that you feel comfortable with

Is asset allocation science, art or psychology? A little of each...I suppose.

 

[ERD50]

You gotta decide what is the maximum % you can stand to lose, that determines your Asset Allocation.

Yes, that's what they say. After all the studies and allocation models the rule of thumb is to use an allocation that you feel comfortable with

Yes, but then we run into different ways to 'lose'. Get too conservative and you might not lose to a market downturn, but you might lose to inflation. So that may not be an answer either. Oh well, no one said this was gonna be easy!

You have convinced me that my laziness is a virtue.

Well, it sounds better if you refer to our laziness as being 'pragmatic' But, same thing.

-ERD50

 

[deserat]

Wow - uhh, I think we check AA back of the envelope or very crudely once a year or so (end of year). We will have cascading pensions, so the investments are in addition to - we do have a decade or so of investment income augmentation needed before next pension comes in, so are working towards taxable account with an amount that spins off a specific income for during that time (and possibly augmented with part-time *work* as consultants).

However, we have been slowly moving our assets from all equities to a more balanced approach anticipating the upcoming retirement. We also have been very aggressive on the defensive side of the equation minimizing that which we buy to what we really need or truly value. We don't anticipate having a mortgage in our retirement, so the lifestyle costs decrease concomitantly.

BL: Count me in the lazy column regarding AA diligence.

PS: I have read Four Pillars - excellent book, although it is dusty now and I've forgotten specifics. I remember he warned about lowering expectations regarding yield and had some awesome examples from history regarding bubbles (tulips anyone?) As for FIRECALC, I think I played with it once or so. We're spreadsheet fans showing where we are net worth-wise, what we anticipate coming in for retirement income purposes and what we spend. To be honest, with pensions, one can always pare down to only spending what's coming in if needed - hence the LBYM ninja (new term which replaces evangelist and black belt according to WSJ) skills. If pensions go by the wayside, I believe there would be a lot more pressing issues that will be forefront in our minds (we have active military and Reserve military pensions) than retirement lifestyle.