Rebalancing...one fell swoop or via new investments?

[Weebit]

Hello forum - you guys are a true resource! I mostly lurk and listen and learn!

I need to rebalance my portfolio. I've been ignoring it which is good (prevents hasty sells) but also bad (portfolio may have gotten too out of alignment with target AA).

Also, my target asset allocation needs to change due to my age. (Old-school thinking + Vanguard says so + my husband feels most comfortable with a higher bond fund allocation as we age so I'm going with it.)

I just went to the first of several accounts, and it is painful to think of selling a chunk of Asset Type A to move into Asset Type B when everything (especially Asset Type A!) is DOWN.

I know I can't time the market...but is there an argument to be made to overweight contributions for the next 6 months to regain balance? Or should I rip the band-aid off and do it in one fell swoop and set up my contributions so exactly align with new target AA?

Thanks for your thoughts - now and every day on a wide range of topics!
Weebit

 

[Rianne]

What is your target AA?
What is your AA now?
How much of that is in an IRA?
How much is taxable?
How old are you?

We did a major overhaul from bond funds to CDs and treasuries. We created a ladder with very nice interest rates. Regarding AA, we're still approx 45/65, so we remain in taxable index funds but they are all LTCG.

At first, it was scary to sell large chunks, but once we did, took the bond fund loss. it was easy to re-evaluate and calculate what interest we wanted in our retirement accounts.

It seems like a giant task and it takes a while to re-evaluate safety vs risk. Again, it depends on where you are in terms of retiring or still working. Read what the knowledgeable finance people say on this forum.

 

[Montecfo]

Hello forum - you guys are a true resource! I mostly lurk and listen and learn!



I need to rebalance my portfolio. I've been ignoring it which is good (prevents hasty sells) but also bad (portfolio may have gotten too out of alignment with target AA).



Also, my target asset allocation needs to change due to my age. (Old-school thinking + Vanguard says so + my husband feels most comfortable with a higher bond fund allocation as we age so I'm going with it.)



I just went to the first of several accounts, and it is painful to think of selling a chunk of Asset Type A to move into Asset Type B when everything (especially Asset Type A!) is DOWN.



I know I can't time the market...but is there an argument to be made to overweight contributions for the next 6 months to regain balance? Or should I rip the band-aid off and do it in one fell swoop and set up my contributions so exactly align with new target AA?



Thanks for your thoughts - now and every day on a wide range of topics!

Weebit

Rebalancing is not a scientific endeavor. Many ways to accomplish it.

Yes you are selling low but also buying low, right?

And we could get lower as growth slows further.

If in tax deferred I would try to get it done.

 

[audreyh1]

If you are way off, I would recommend rebalancing at least most of the way, and then continue balancing with new money. I’m assuming this is tax deferred.

Don’t know what to tell you about going to a more conservative AA. That is a very individual thing.

I still own bond funds. I’m fine with them as I always hold and rebalance. Now is when they are a much better deal since interest rates are much higher.

 

[VanWinkle]

I'm at 50/50 including cash into the fixed income side. With both bonds and stocks going down, I have not had to rebalance since March 2022 when I invested new money into the equity side from the bond side(a mortgage I held paid off). If the rebalance is only needed due to a change of heart on asset allocation, I would try to do it in small steps instead of all at once. If this can be done in a tax deferred account, I would still likely do it in steps instead of all at once. Big changes are not usually the way to go, but small changes over time seem to have a little more mental success.

 

[Weebit]

Thanks for the questions. Answers are below.

What is your target AA?
What is your AA now?
How much of that is in an IRA?
How much is taxable?
How old are you?

I just turned 60 so my Target AA was updated this year.
It is now 65% equities / 35% bonds.
More detail on equities:
Large cap US - 27%
Mid cap US - 6%
Small cap US - 6%
International - 26%

Bonds are a mixture of US short/intermediate/long term + international.

All the holdings are in tax deferred accounts: 401K, 403B, 457, SEP IRAs.

My current holdings are 78% equities / 22% bonds.
More detail on equities:
Large cap US - 35%
Mid cap US - 9%
Small cap US - 7%
International - 28%

The "out of balance" is due to me not rebalancing regularly (I own it!) AND the change in my target AA due to hitting a milestone birthday this year and shifting AA to more bond holdings.

Thanks,
Weebit

 

[GravitySucks]

I never rebalanced when working, but of course that won't stop me from chimeing in.

If your job is secure and you can meet your new AA by adding only FI until you retire- that is the way I'd go. That keeps you from selling stocks in this market.

However the times I changed my AA after retirement I did it in one fell swoop.

 

[Rianne]

All of your holdings are in tax-deferred accounts, so you won't have to consider taxes. Does your holding company give you personal performance numbers? Can you look at 10 yr, 5 yr, 3 yr, and YTD performance and determine losses or gains in your bond funds? And in your equity accounts? Is it down from your principal investment? Or just down for the year? We've held our equities for about 10 years, so we're still up 5.3% from our original equity investments. Our bond funds tanked over that time.

Do you want to be 65/35 from 78/22 or do you want to reallocate to a higher bond holding? Sounds relatively easy. You have to determine where you want to sell equities, hopefully without a loss and where your bond funds are performing to your satisfaction. Or do you want to buy CDs and treasuries? Very nice interest rates now.

 

[Midpack]

All the holdings are in tax deferred accounts: 401K, 403B, 457, SEP IRAs.

It doesn't make much difference with all your holdings are tax deferred, whatever you're comfortable with. If large chunks bother you, DCA in and/or new contributions.

In taxable, I would always use new contributions to rebalance to avoid a forced taxable event. Without that info in your OP, I'm not sure the first replies were as useful as they could have been.

 

[Dash man]

I found we were a little out of our 70/30 equity/FI balance with all the bond and CD buying over the past few months. So I’m moving some back into equities by choosing stocks with growing dividends each year. I’ve had some pretty good dividend increases this year with a number outpacing inflation.

 

[Exchme]

Rebalancing should be about controlling risk to what you said you wanted when you cleared your mind and thought through your plan without emotion. Questioning your logic when fear (or even greed) is running high does not sound like a good way to change plans.

Personally, I struggle with making big moves, so I keep a very tight rebalancing band and do several small moves per year. I know it makes no difference in the long run, but I can handle that emotionally as I won't lose big on any one move that way.