Rebalancing?

[shasta]

My CFA did mention getting a 401K for the bond allocation.

 

[karluk]

YTD S&P +21%; Long term Inv Grade corp -6%.
Assuming $2mm, and 50/50 allocation, you'd need to sell $130k stock and add to bond to get back to 50/50.
Is everyone rebalancing now?

I can't speak for others, but I certainly am. According to my records, I have added about $60k in new investments into the bond and fixed income portion of my portfolio while selling a net of about $50k in stock mutual funds.

As you might guess, this sizeable rebalancing in the teeth of a major rally has not happened without incurring some opportunity cost. My calculations indicate that I'm about $2600 worse off due to the rebalancing than if I had not rebalanced at all since January 1. I acknowledge the underperformance, but consider it a reasonable price to pay for maintaining the level of risk that I'm comfortable with.

 

[truenorth418]

I would like to rebalance a little out of my Small Cap Fund, but I am a bit resistant because of tax implications. Including my high NYC state and local rates, my total tax hit on the ST cap gain would be close to 35%. I think I will wait until closer to the end of the year, maybe into January, to contain the damage.

 

[audreyh1]

This is my first year - but I look forward to rebalancing in August 2014.

I personally wouldn't want to do it < 1 year and pay short term gains taxes. (or am I missing something there)

This is usually only a problem with a new taxable portfolio. After a year or so, rebalancing usually only incurs long-term capital gains if you are not adding to your portfolio. And if you are adding - you can direct contributions to the undervalued assets rather than selling the overvalued ones.

 

[Which Roger]

Just a curiosity question if some don't mind elaborating: Several on this thread have mentioned that most of their assets are in taxable accounts. Just wondering how you got there. I have most of my assets tax-deferred. I max out 401k and IRA contributions (which is almost 30k/year), then if anything's left, put it in taxable, but it's always less than my tax-deferred contributions. I always thought this was the "typical" scenario for LBYMers, but I know there are other roads to Dublin.

 

[pb4uski]

I think what you describe (mostly tax-deferred retirement savings) is a more common road.

I ended up with taxable principally from two things. First, when our kids were growing up I used taxable accounts for college savings and then when DD went to college I found I could pay her college costs through cash flow so I never needed to tap into those taxable funds. Also, DS hasn't gone to college thus far so the money I have tagged for his college is sitting in the same taxable account.

Second, after DD finished school I diverted the cash flow that I had used for her college costs into my taxable account.

While I wasn't cognizant of it at the time, the taxable accounts was a key aspect of being able to retire before I turned 59 1/2 - I don't see how I could have retired so early without it.

 

[Midpack]

Just a curiosity question if some don't mind elaborating: Several on this thread have mentioned that most of their assets are in taxable accounts. Just wondering how you got there. I have most of my assets tax-deferred. I max out 401k and IRA contributions (which is almost 30k/year), then if anything's left, put it in taxable, but it's always less than my tax-deferred contributions. I always thought this was the "typical" scenario for LBYMers, but I know there are other roads to Dublin.

We also maxed out both our 401k's (limited by "non-discrimination testing") and TIRA contributions (not eligible for Roths at all) most of our working lives, but we saved about 3 times that amount which forced us largely into taxable. Would have deferred more, but laws prohibited same.

And when I was (much) younger and investing in individual equities, taxable accounts were the only vehicle to do so, and I don't regret my stock trading years at all. So we've ended up with about 2/3rds taxable. All 4 of our TIRAs are bond funds for tax reasons.

Not complaining, it is what it is, and I knew what our options were all along (the rules have changed considerably - there were no 401k's or IRAs when I began work!).

One data point...

 

[shasta]

Just a curiosity question if some don't mind elaborating: Several on this thread have mentioned that most of their assets are in taxable accounts. Just wondering how you got there. I have most of my assets tax-deferred. I max out 401k and IRA contributions (which is almost 30k/year), then if anything's left, put it in taxable, but it's always less than my tax-deferred contributions. I always thought this was the "typical" scenario for LBYMers, but I know there are other roads to Dublin.

I never used 401k's or anything. I lived in the private equity crazy startup world for years and got all of my portfolio value in cash income or private equity sales.

 

[scrabbler1]

Just a curiosity question if some don't mind elaborating: Several on this thread have mentioned that most of their assets are in taxable accounts. Just wondering how you got there. I have most of my assets tax-deferred. I max out 401k and IRA contributions (which is almost 30k/year), then if anything's left, put it in taxable, but it's always less than my tax-deferred contributions. I always thought this was the "typical" scenario for LBYMers, but I know there are other roads to Dublin.

I contributed to my 401k only up to the maximum value of the company match (for most of the years I was in it). For a few years in the 1990s I made some after-tax contributions, and for a few years in the 2000s I contributed more pretax dollars to maintain the overall addition to the account after I switched to part-time work, thereby reducing the company match. I did not have an IRA at the time.

When I left the company and ERed, I cashed out the company stock portion of the 401k. That huge, growing amount of money was, by the time I left in late 2008, more than half of the total 401k's value. I was able to use NUA (Net Unrealized Appreciation) to greatly lessen the tax bite. I also cashed out the principal part of the after-tax contributions which I could take out in one shot with no taxes due.

The net effect of this transformation was to pretty much reverse my allocation of taxable/tax-deferred from 2/3 tax-deferred to 2/3 taxable overnight, part of my ER plan to get from age 45 to age 59.5 when the first of my "reinforcements" would kick in. (Unlike pb4uski, however, I knew years before I ERed in 2008 I would need the taxable account to be large in order to ER.)

 

[Alan]

Just a curiosity question if some don't mind elaborating: Several on this thread have mentioned that most of their assets are in taxable accounts. Just wondering how you got there. I have most of my assets tax-deferred. I max out 401k and IRA contributions (which is almost 30k/year), then if anything's left, put it in taxable, but it's always less than my tax-deferred contributions. I always thought this was the "typical" scenario for LBYMers, but I know there are other roads to Dublin.

About 50% of our assets are taxable and that is mainly because we sold our house and invested the proceeds, so that we could be much more mobile in retirement.

 

[teejayevans]

Just a curiosity question if some don't mind elaborating: Several on this thread have mentioned that most of their assets are in taxable accounts. Just wondering how you got there. I have most of my assets tax-deferred. I max out 401k and IRA contributions (which is almost 30k/year), then if anything's left, put it in taxable, but it's always less than my tax-deferred contributions. I always thought this was the "typical" scenario for LBYMers, but I know there are other roads to Dublin.

If you going to ER (before 59.5), you will need some $ in taxable accounts to carry you until you can freely access 401k/IRA accounts. (yes you can use 72t but that has its limitations). So keep that in mind.
TJ

 

[MichaelB]

Just a curiosity question if some don't mind elaborating: Several on this thread have mentioned that most of their assets are in taxable accounts. Just wondering how you got there. I have most of my assets tax-deferred. I max out 401k and IRA contributions (which is almost 30k/year), then if anything's left, put it in taxable, but it's always less than my tax-deferred contributions. I always thought this was the "typical" scenario for LBYMers, but I know there are other roads to Dublin.

Living and working overseas is our reason it's all taxable. I had something similar to a 401k but when I quit it did not meet IRS requirements for a rollover, so I had to declare it as income and pay tax. My compensation also had a very high % of variable income and we got into the habit of spending just the fixed monthly part and saving most of the variable.

 

[pb4uski]

About 50% of our assets are taxable and that is mainly because we sold our house and invested the proceeds, so that we could be much more mobile in retirement.

Actually now that you mention it, the sale of our paid off house is a good chunk of our taxable accounts too. I'd forgot about that.

 

[Chuckanut]

Just a curiosity question if some don't mind elaborating: Several on this thread have mentioned that most of their assets are in taxable accounts. Just wondering how you got there.

Years ago I was listening to a money talk show on the radio. The guest host was a guy named Bill Flanagan. He warned that putting stock funds into regular IRA's would turn long term capital gains taxes into the much higher personal rate taxes at the margin. He recommended tax efficient index funds instead. I invested in these funds. They went up.

 

[nun]

I rebalanced recently and sold some equities, but I bought more of my 457 plan stable value fund, which is getting 2.65%, rather than a bond fund. My intermediate term corporate bond fund is down 2% this year and if it falls much more I'll probably buy some more of it in the next round of rebalancing.

 

[NW-Bound]

Regarding tax-deferred vs. taxable accounts, I asked about that in a poll. The distribution pretty much spanned the entire spectrum.

See: http://www.early-retirement.org/forums/f28/percentage-of-taxable-money-in-portfolio-64714.html.

 

[In-control]

I rebalanced last Friday as the market was at a new high and I was 2% over allocated stocks. I don't go by time of year but rather the % allocation.