Transitioning part of portfolio into fixed income?

[Synergy]

I'm hoping to get some input from investors on the best way to go from 100% security's to the fixed income market.
A summery of where I'm at:
I would like to retire in 4 years at age 55. I would be penalized if I tap into my union benefits before age 62 so I'll leave that alone until then. I've also got about 40.000 in an Roth IRA that I won't touch until I can do so without penalty.
The part that I would like advice on is currently held with Schwab. I've got a number of holdings but the lions share of it is split pretty close to 50/50 between the Schwab 1000 and QQQQ. I don't have any fixed income investments and would like to move into some. My plan (not etched in stone) is to be about 50/50 in Van Guard total market index and Van Guard total bond index when I actually am into retirement. (I'm looking at Van Guard for their low operating expenses).
I was hoping to get specific advice on how I should make the transition over the next 4 years. I know I'm over weighted in the tech sector and would guess that would be what I sell in order to go to bonds, but I don't know if I should sell the Q's in a lump sum or small increments (the same question with buying the bond fund, would it be considered a "sideways" move)?
Thanks,
Bob

 

[Dawg52]

I would be very nervous to be only 4 years away from retirement and have 100% in equities. What if the market tanks big time over the next year? Some keep a higher % in stocks because they have a hefty pension to balance it out. Maybe you have one to look forward to as well. If not, I would start a movement to bonds very soon.

BTW, good luck with your retirement plans.

 

[grumpy]

I've also got about 40.000 in an Roth IRA that I won't touch until I can do so without penalty.

Synergy,

The $'s in the Roth IRA that you contributed have already been taxed and can be withdrawn at any time with no tax or penalty.

Grumpy

 

[jIMOh]

I'm hoping to get some input from investors on the best way to go from 100% security's to the fixed income market.
A summery of where I'm at:
I would like to retire in 4 years at age 55. I would be penalized if I tap into my union benefits before age 62 so I'll leave that alone until then. I've also got about 40.000 in an Roth IRA that I won't touch until I can do so without penalty.
The part that I would like advice on is currently held with Schwab. I've got a number of holdings but the lions share of it is split pretty close to 50/50 between the Schwab 1000 and QQQQ. I don't have any fixed income investments and would like to move into some. My plan (not etched in stone) is to be about 50/50 in Van Guard total market index and Van Guard total bond index when I actually am into retirement. (I'm looking at Van Guard for their low operating expenses).
I was hoping to get specific advice on how I should make the transition over the next 4 years. I know I'm over weighted in the tech sector and would guess that would be what I sell in order to go to bonds, but I don't know if I should sell the Q's in a lump sum or small increments (the same question with buying the bond fund, would it be considered a "sideways" move)?
Thanks,
Bob

If you sold 50% of portfolio today and market went up 50% the next day, would you regret it?
If you did not sell anything today and market went down 50% tommorrow, what would you do?

Your risk tolerance has changed. You should sell some equities to rebalance.

In my case I am going from 100% equity to 80% over next 10 years. My method is I sell 1% of equities every 6 months. Small gradual changes in portfolio allocation.

In your case you have 48 months to reach retirement. You could sell 1% of equity positions per month. In 48 months you would have around 48% equities, depending on market performance.

You may want to consult a tax accountant, and do some tax loss selling (if you are sitting on any losses, sell those lots first).

 

[MooreBonds]

Did someone say more fixed income?

Question: How much in new contributions will you be adding to your portfolio over the next 4 years? How will that compare to the current portfolio stash?

If you're almost ready to FIRE, odds are the contributions won't be a huge proportion..but, if you allocate ALL of your new contributions in the next 4 years to fixed income/CDs/etc, AND start gradually selling off a small part of your portfolio, you may not have to end up selling off huge chunks as first thought.

Also, how much in 'reliable' dividends/interest does your portfolio yield each year (excluding capital gain distributions, one-time distributions and return of capital)? If that's somewhat close to 4%, and your next 4 years contributions can yield some more that will bring you even closer to 4%, then you're also in much better shape than at first glance.

 

[RetireeRobert]

........but I don't know if I should sell the Q's in a lump sum or small increments (the same question with buying the bond fund, would it be considered a "sideways" move)?
Thanks,
Bob

Whenever I make new investments or sell old one, I always "dollar cost average" my way in or out. Depending on the size of the position, I may make the move in 2 trades for smaller amounts, or 3 or 4 trades for larger positions. I space out the trades over time so I get a good "average" price.

Since you have 4 years, you can space your trades to take tax planning into account. Some of those four years may be better or worse years tax wise to take some profits for example. Or if you don't want to take that long to get rebalanced, you could still do some trades near year end, then other trades after new year start, if tax implications tell you not to do all trades in once tax year.

 

[Callie]

We are about 5 years away and reduced out equity to 55. We feel much better about that right now. We had about 30% before we made a plan. When we reblanced, we sold for cash rather than re-buying and got very close to the 45% fixed.

We are just in CDs/MM, not buying any bonds right now, though we do own some.

 

[Synergy]

Thanks everyone for your input!

I appreciate it.

All the best,
Bob

 

[LOL!]

Earlier this year, we went from about 90% equities to just 75% equities. On any day that the stock market went up (say like on 11/13) say 2%, we sold some equities and replaced them with fixed income. These dates were mid-June, mid-July. I think you can be unemotional about this. Simply write down a plan like this:

"When the DJIA or the S&P500 looks like it wil gain at least 2% by the end of the day, I will sell 5% of my total assets out of QQQQ and purchase a TIPS fund."

You will be surprised at how rare a 2% one-day gain is, but they do occur a few times a year. A 3% gain like yesterday is extremely rare, so don't set your criteria that high.

 

[chinaco]

We were 100% equity (awhile back) except for a cash emergency fund. Since we intend to ER at approximately the 5 year mark, I made a large reallocation to bonds. Moved approx 30% of the portfolio in a matter of several weeks. This was a long-term decision. Since equities were up... it seemed like a good time to do it. All of it was in tax deferred funds. For the next several years, I will rebalance taxable equities to keep them allocated between international, domestic, capitalizations, etc. I will add all new taxable money to the taxable fixed fund in short/mid-term fixed in preparation spending it. I will move more tax deferred equity into bonds if needed to meet my target. My target is 60/40. I am at about 68/32 right now. Over the next 4 years, I will be moving about 2% into fixed each year. If the stock market falls apart... I may wait until it recovers to move more money into fixed.

 

[mh]

Whenever I make new investments or sell old one, I always "dollar cost average" my way in or out. Depending on the size of the position, I may make the move in 2 trades for smaller amounts, or 3 or 4 trades for larger positions. I space out the trades over time so I get a good "average" price.

Since you have 4 years, you can space your trades to take tax planning into account. Some of those four years may be better or worse years tax wise to take some profits for example. Or if you don't want to take that long to get rebalanced, you could still do some trades near year end, then other trades after new year start, if tax implications tell you not to do all trades in once tax year.

isn't dollar cost averaging supposed to be a bad idea when drawing down ?

 

[RetireeRobert]

isn't dollar cost averaging supposed to be a bad idea when drawing down ?

I am not drawing down, and neither was the thread initiator (assuming by "drawing down" you mean in retirement and withdrawing assets).

Just in general, I am not sure why dollar cost averaging would be bad then either.

Anyone?

 

[jIMOh]

DCA is just one technique

If market is going up, DCA on way in was bad idea, DCA on way out is good idea.
If market is going down, DCA will help on way in, it will hurt more on way out.

If you do not know what market will do, I would suggest holding more fixed income or cash to remove some of the doubt.

 

[Dawg52]

If you do not know what market will do, I would suggest holding more fixed income or cash to remove some of the doubt.

That pretty much applies to everyone then.

 

[In-control]

What I did was establish 3-4 years of living expenses in Ladderd CD's/MM etc. Expecting to Draw on yr 1 while building the next yr 4. I then divided the remainder of my portfolio(80%) in half and do 40% equities and 40% bonds.

I am FIRE in January and feel comfortable with this model - as it mitigates risk while providing just enough yield to meet my budget needs.

Good luck

 

[Bikerdude]

Synergy,

The $'s in the Roth IRA that you contributed have already been taxed and can be withdrawn at any time with no tax or penalty.

Grumpy

This is only true if the Roth was funded with contributions. If it was funded with a roll-over of a regular IRA and your under 59.5 I believe you must wait 5 years or until 59.5 which ever is sooner to avoid the penalty.

 

[2B]

I'm an equity junky and had been way over in my equity allocation even though I'm also on the short track to retirement. Earlier this year, I decided I needed to be 40% in fixed income and was, at the time, at 5%. I decided what my "best" asset allocation should be and decided it was 40% fixed, 30% US large cap, 10% US small cap, 20% foreign. Once the decision was made, I just did it.

The market has made all sorts of gyrations since then. I really don't know whether I'd have been better off with more equities but I needed to be where I needed to be. My advice is to just do it. Do it now!

 

[bamsphd]

I am not drawing down, and neither was the thread initiator (assuming by "drawing down" you mean in retirement and withdrawing assets).

Just in general, I am not sure why dollar cost averaging would be bad then either.

Anyone?

If you are invested in A and B, and you use dollar cost averaging to move money from A to B, then you are "drawing down" your position in A.

An advantage of dollar cost averaging into a volatile investment like a stock is that while on the high days you get fewer shares, on the down days you get more shares, and in the end your portfolio's average share price is lower than the average of the prices when you made your purchases.

To keep it simple, suppose you invested $3,000 in three $1,000 investments. To simplify the math, suppose the stock price was $1000/share, $1/share, then $500/share. So you purchased 1 share, 1000 shares, and then 2 shares. Your portfolio now consists of 1,003 shares at an average cost basis of $3000/1003 = $2.99/share. However the "average" price was ($1000 + $1 + $500)/3 = $500.33/share. So you made a killing!

Unfortunately, when you sell a fixed dollar amount out of a portfolio, the reverse happens. You sell more shares when the price is low, and fewer when the price is high. Say you had slowly accumulated 1,003 shares and you sold them in three blocks of $1000 at the same prices as above. That means you sold them at an average of $2.99/share despite an average market price of $500.33/share. So you got fleeced!

In reality, most of us invest in far less volatile investments than my example above, so usually the dollar cost averaging effects are relatively minor.

You can somewhat avoid these affects by buying with fixed dollar amounts to benefit from dollar cost averaging, while selling fixed share amounts (or fixed percentages) to at least avoid the worst negative affects.

Unfortunately, that does not work as well when transferring assets from A to B. The best I can suggest is if A is more volatile than B, transfer based on fixed percentages of A. If A is less volatile than B, transfer based on fixed dollar amounts.

 

[RetireeRobert]

If you are invested in A and B, and you use dollar cost averaging to move money from A to B, then you are "drawing down" your position in A............

But the poster's question to which I replied was: "Isn't dollar cost averaging supposed to be a bad idea WHEN drawing down?"

Now you say, dollar cost averaging IS drawing down.

I think the three of us are all on different wavelengths. If the first poster could clarify what they meant by "drawing down", maybe we all can get back in sync? Or maybe I had one too many hot buttered rums today.

 

[mh]

But the poster's question to which I replied was: "Isn't dollar cost averaging supposed to be a bad idea WHEN drawing down?"

Now you say, dollar cost averaging IS drawing down.

I think the three of us are all on different wavelengths. If the first poster could clarify what they meant by "drawing down", maybe we all can get back in sync? Or maybe I had one too many hot buttered rums today.

i was on the 'wavelength' as described by bamsphd. i realize now
i did not express that well. sorry about that..

 

[haha]

I'm an equity junky and had been way over in my equity allocation even though I'm also on the short track to retirement. Earlier this year, I decided I needed to be 40% in fixed income and was, at the time, at 5%. I decided what my "best" asset allocation should be and decided it was 40% fixed, 30% US large cap, 10% US small cap, 20% foreign. Once the decision was made, I just did it.

Did this rather large change cause you to realize a lot of capital gains?

Ha

 

[2B]

Did this rather large change cause you to realize a lot of capital gains?

Ha

None at all. The fixed income bulge was created in my IRA. That really wasn't a problem because about 80% of my net worth is in my IRA.

Even if it did create capital gains, it needed to be done. I've seen too many people screw up their investments trying to avoid taking capital gains. I think it makes sense to minimize taxes through tax efficient index mutual funds but getting asset allocations "right" trumps the tax even if it was all in taxable funds.

 

[Marc]

I have a similar quandry. I just turned 50 and am still 100% in equities. I plan on retiring in eight years so I need to start building up a bond portfolio. Except for 200K in ETF, all of my money is in tax deferred acccounts. I have decided to change all of my future contributions (around 40k per year) into bond funds. I am also thinking of taking $5K per quarter and transfering it out of two of my mid-cap funds as I am very overweighted in mid-caps. This $60K per year should get me to around 20% bonds by the time I am ready to retire. This means that I will never be buying stocks or stock funds for the rest of my life.

Does this make sense? It seems strange that I will never be buying any more stocks or stock funds. As for allocation, I am putting the lion's share into Fidelity Total Bond and about a quarter in Fidelity Capital and Income; are these funds reasonable? Should I be moving funds over at a faster pace?

Thanks in advance for all advice.

Marc

 

[Ed_The_Gypsy]

As Marc, I am almost all equities and starting to plan for distribution for retirement.

In-Control uses a 4-year distribution buffer (bucket?) of MM and CDs to smooth out the ups and downs of his equities.

Galeno, an early poster on this board, used a similar technique (until he went back to w*rk ). He had one bucket of 100% equities, took 4% out of it every hear and fed it into a 6-year sequence (IIRC) of CDs and a MM fund to smooth out the market cycles. His fixed income strategy seemed a little elaborate at first but I think he simplified it later on.

I plan to use Galeno's approach. I figure that my Social Security will be my 'bond component' of my pot.

I haven't quite figured out if I should be setting up the second bucket of CDs/MMs yet. I figure to work for 5 or 6 years yet. By accident, I am accumulating dividends in a MM account at the moment, so I guess I actually have started.

 

[Ed_The_Gypsy]

Marc,

I don't like bonds because a) you can lose principle, and b) hot ones can be called. So, why bother?

Bonds another asset class for investment. They are a play on interest rates to make capital gains, which has value if this is out of phase with the equities market, but over the long run bonds don't return as much as equities, so I am not interested. I want a stable buffer, not another asset class.

My point of view.