Question regarding AA adjustment timing

[Carpediem]

Warning: Extreme newbie question ahead - The majority of our retirement savings are in a VG tIRA invested in Wellington Admiral index fund (63/35 AA). Now that we're nearing freedom day, I'm thinking I'd like to move to a 50/50 AA. I am thinking about getting out of Wellington and going with Total Stock Market (50%) and Total Bond Market (50%). When is the best time to make this move - when market is up or market is down? In terms of the calendar year, is one time period better than others to make the move?

 

[RunningBum]

Well, you're selling equities, and it's always best to sell high. Whether we are at a high amounts to trying to time the market. If there was a time of year when you knew it went up or down, everyone would be jumping on it and it would level out.

IF you like Wellington, another strategy would be to sell half and buy Wellesley, which is about 35/65. Not saying it's better, just another alternative. It should need less balancing than having the two separate stock and bond index funds, but the latter will have lower fees.

 

[TwoByFour]

If you know when the market is "up" you will be better off doing the change at that time since you are effectively selling equities to buy bonds. The tricky part is that you won't know when the market is "up" until afterward, at least not in the sense of a market high. Right now the market is up relative to where it was 2 years ago. But it may go up further, or may go down. You won't know until the future. I would just do the move now.

 

[pb4uski]

.... IF you like Wellington, another strategy would be to sell half and buy Wellesley, which is about 35/65. Not saying it's better, just another alternative. It should need less balancing than having the two separate stock and bond index funds, but the latter will have lower fees.

That is what I would do... because that way on the bond side you are getting managed funds rather than index funds.

Hard to go wrong with either 50 Wellington/50 Wellesley or 50 Total Stock/50 Total Bond.

Regarding timing, whenever you like... especially since it is in tax-deferred so there are not tax consequences.

 

[sengsational]

If I were you, I'd not go with a total bond fund at 50% of my AA. 50% short or medium is ok, but my buddy Bill at efficientfrontier has convinced me long bond funds are a poor choice, and total bond fund is going to have too much long. When people flee to cash, those funds get hammered. Not as bad as equities, but if you're pulling from it in a 2008 like situation, it really is quite bad if it's been forced to sell low.


I might consider converting 5 or so years of expenses to short/meduim bond ladder, and leave the rest of it alone.

 

[Carpediem]

Excellent feedback so far. I appreciate any and all replies.

 

[Carpediem]

If I were you, I'd not go with a total bond fund at 50% of my AA. 50% short or medium is ok, but my buddy Bill at efficientfrontier has convinced me long bond funds are a poor choice, and total bond fund is going to have too much long. When people flee to cash, those funds get hammered. Not as bad as equities, but if you're pulling from it in a 2008 like situation, it really is quite bad if it's been forced to sell low.

Something like this?

Vanguard Intermediate-Term Bond Index Fund Admiral Shares (VBILX)

This index fund offers a low-cost, diversified approach to bond investing, providing broad exposure to U.S. investment-grade bonds with maturities from five to ten years. Reflecting this goal, the fund invests about 50% of assets in corporate bonds and 50% in U.S. government bonds within that maturity range. Risks of the fund include the fact that changes in interest rates, both up and down, can affect the fund by resulting in lower bond prices or an eventual decrease in income for the fund. Investors looking to add a diversified bond fund to their portfolio may wish to consider this fund.

 

[pb4uski]

I think that the notion that VBTLX is too long is false.

VBTLX... average effective maturity = 8.6 years..... average duration = 6.2 years
VBILX... average effective maturity = 7.3 years..... average duration = 6.2 years

Not very different from an interest rate risk perspective... and VBILX went down more in 2008... probably due to credit risk concerns.

All of the index and intermediate term bond funds, as well as the bond portfolios of Wellington and Wellesley have durations in that 6 year range.

 

[OldShooter]

... we're nearing freedom day. ...

You'll have time on your hands. Use it to study the concept of bond ladders. I've read that Fido has some good tutorials. Also use the time to study the benefits of diversifying outside the US for the stock side of your AA. https://www.vanguard.com/pdf/ISGGEB.pdf

 

[TwoByFour]

I think that the notion that VBTLX is too long is false.

VBTLX... average effective maturity = 8.6 years..... average duration = 6.2 years
VBILX... average effective maturity = 7.3 years..... average duration = 6.2 years

Not very different from an interest rate risk perspective... and VBILX went down more in 2008... probably due to credit risk concerns.

Duration is a good way to estimate how much a bond fund will decrease in value when interest rates rise, but the other thing to pay attention to is how long before your fund dividends are paying the higher rate. The faster that is, the faster you recoup the loss in value of the fund. The time to do that is proportional to the average maturity.

The other thing of course is inflation. Higher average maturity bond funds will be more vulnerable to inflation.