Rebalancing made easier with funds

[RunningBum]

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.

Most advise that you have an AA for your entire portfolio, not just for a certain account. It's up to you though. As someone else said, there are multiple answers. If you had even amounts of each, you'd be at about 75/25. So you'd either need a lot more Wellington or some more Wellesley to pull the equity down. And if you'd rather not have nearly 1/4 in the Health and/or Energy fund, you could overweight Wellesley.

For example,
30% Wellington @.65 equity = 19.5 equity
30% Wellesley @.35 equity = 10.5 equity
20% Health @ 1.00 equity = 20
20% Energy @ 1.00 equity = 20
Total = 70% equity.

If you like that mix, just try to keep 30% of your taxable account in Wellington, 30% Wellesley, and 20% in the other two. So if you had $200K in the account, it should be $60K each in Wellington and Wellesley, $40K each in the others. Any fund over the target would be exchanged for whichever fund(s) are under the target.

 

[Looking4Ward]

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.

I suppose I'm complicating this by considering Wellesley to be my present ER funding, Wellington mid-term, and Health/Energy long term. In other words, I will always be taking money out of Wellesley each year and trying to keep three years worth of expenses in it since it performs fairly well under adverse economic conditions. Moving funds from Wellington to replenish Wellesley and leaving the two 100% equity funds alone to grow over 10-15 years or more when I start to tap into my IRA.

And now that I read that back to myself it seems that perhaps I shouldn't even be concerned about AA at all because I'm not really rebalancing, I'm replenishing.

 

[Looking4Ward]

Most advise that you have an AA for your entire portfolio, not just for a certain account. It's up to you though. As someone else said, there are multiple answers. If you had even amounts of each, you'd be at about 75/25. So you'd either need a lot more Wellington or some more Wellesley to pull the equity down. And if you'd rather not have nearly 1/4 in the Health and/or Energy fund, you could overweight Wellesley.

For example,
30% Wellington @.65 equity = 19.5 equity
30% Wellesley @.35 equity = 10.5 equity
20% Health @ 1.00 equity = 20
20% Energy @ 1.00 equity = 20
Total = 70% equity.

If you like that mix, just try to keep 30% of your taxable account in Wellington, 30% Wellesley, and 20% in the other two. So if you had $200K in the account, it should be $60K each in Wellington and Wellesley, $40K each in the others. Any fund over the target would be exchanged for whichever fund(s) are under the target.

When I throw my IRA into the mix (which is currently 75/25) it brings my entire portfolio to 70/30. But that's by sheer luck and not because I know what I'm doing.

Thanks for that example, though - I can use that as a template to plug in different allocations to each fund to arrive at my desired overall allocation.

 

[sengsational]

Assuming you have studied linear algebra in the past, your are looking to solve a simultaneous set of M equations and N unknowns.

I have a spreadsheet that lets me do trial and error. It is broken down into 9 asset classes, and each position has a place to hold it's allocation, which I looked up in the prospectus or Morningstar. It's complicated, but I should make a simplified version and put it on Google docs.

What makes it complicated for me is that I have his and hers IRA's, his and hers Roths, taxable, 401k and HSA. That's seven things that can't have money moved between them. So if you were over-weighted on US equities and under on, say, hard assets, but you didn't have a position in both of those in one of those accounts, you'd need to start a new position there or swizzle it around with more than just one account. It gets to be quite a puzzle, but it gives me something to do besides buy high and sell low.

 

[gauss]

I have a spreadsheet that lets me do trial and error. It is broken down into 9 asset classes, and each position has a place to hold it's allocation, which I looked up in the prospectus or Morningstar. It's complicated, but I should make a simplified version and put it on Google docs.

What makes it complicated for me is that I have his and hers IRA's, his and hers Roths, taxable, 401k and HSA. That's seven things that can't have money moved between them. So if you were over-weighted on US equities and under on, say, hard assets, but you didn't have a position in both of those in one of those accounts, you'd need to start a new position there or swizzle it around with more than just one account. It gets to be quite a puzzle, but it gives me something to do besides buy high and sell low.

+1

And that is why we moved to balanced funds everywhere - single position each.

-gauss

 

[hnzw_rui]

+1

And that is why we moved to balanced funds everywhere - single position each.

One thing I don't like about using balanced funds everywhere are the tax consequences. I'd prefer to keep just equities in taxable. In the Roth and tax-deferred, I can have both.

 

[gauss]

One thing I don't like about using balanced funds everywhere are the tax consequences. I'd prefer to keep just equities in taxable. In the Roth and tax-deferred, I can have both.

Good point!

Since 2010 when the rules for Roths changed and we each started moving about $50k/year (max) into our Roths, via 'after-tax 401k' contribution and subsequent rollovers, we have drawn down the balance on our taxable investments to a small fraction of the original balance (with a corresponding increase in the Roth balances.)

-gauss

 

[sengsational]

... I should make a simplified version and put it on Google docs.

I did it yesterday. Not for the faint of heart in spreadsheet usage.
http://www.early-retirement.org/for...dsheet-on-google-drive-78666.html#post1632582