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Rebalancing and Allocation during Accumulation
Old 03-08-2007, 04:45 PM   #1
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Join Date: Jan 2006
Posts: 331
Rebalancing and Allocation during Accumulation

Okay, I did a search and I'm a little confused. Apparently from what I've turned up, I'm probably doing part of this wrong. Sorry if this is long but I wanted to make sure I provided any information that might be relevant.

So, first off, is there any point in selling one of my funds to rebalance, or should I just try to make sure my new purchases do some of the rebalancing for me? That's what I've been trying to do so far. Although I will be honest and say that my investment horizon is at least 20 more years, so I don't stick all that firmly to percentages at this point. I just keep throwing money into the market figuring that once my current run of excess capital dries up (and it will within about a year), that I'll need to start trying to maintain the ratios a lot better.

Second, as to how to handle rebalancing if I don't have any contributions to make, I've read here that you guys use your dividends to help with that. Most of my retirement savings is in after tax accounts since I got started late on investing and my 401k reflects this. So, if I understand what you guys do, in your taxable accounts you put your dividends into something like Vanguard Prime and then use it to do rebalancing, thereby avoiding paying taxes on selling the funds that are overweighted. Is that correct?

Also, do you do the same thing with your non taxable accounts?

Here is a rough break down of where my money is at right now. I realize it might look a little chaotic, but keep in mind I've only had the after tax account since may of last year, and the 401k/IRAs since may of '05.

Allocation by account/fund
Taxable (64.18% of portfolio, but will stop all but token contributions soon)
VFINX 19.82%
NAESX 19.84%
VIMSX 19.49%
VGTSX 5.04% (overlap with my IRA since I can't contribute more to it)

401k/IRA (29.61% of portfolio, but I will continue investing here for years to come):
FFFGX 13.52%
VGTSX 16.09%

Roth (6.01% of portfolio):
VTIVX 6.01%

Allocation by fund type
Large Cap Blend 19.82%
Mid Cap Blend 19.49%
Small Cap Blend 19.84%
Total International 21.13%
Auto Adjusting 19.53%

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Re: Rebalancing and Allocation during Accumulation
Old 03-08-2007, 05:25 PM   #2
Recycles dryer sheets
Join Date: Jul 2005
Posts: 423
Re: Rebalancing and Allocation during Accumulation

I personally do my rebalancing with new money exactly how you said. New money would go towards my specified asset allocation. If I want to have 10% in large cap and 10% in small cap, and I currently have 15% in large cap, I would put new money towards the small cap to even it out.

As far as general rebalancing, I stick to once a year, and if percentage-wise it isn't TOO out of whack, I leave it be in taxable accounts. I also harvest my tax loses whenever I can by switching into different indexes. If my large cap is down, I sell say S&P500 ETF for a loss, and reinvest in the Russell 1000, or even another S&P500 ETF from a different company. This way you still have the same exposure and you can carry forward losses through different tax years. These can really add up and then be used against gains when rebalancing.

I generally only buy index funds in my taxable accounts and there isn't much in the way of dividends usually. So I haven't been able to employ the use of the dividend for rebalancing. Usually I just do re-invest dividends.

As far as non-taxed assets, just do it quarterly or yearly, whichever keeps you happy.

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