Rebalancing - which allocation?

[Christine]

I am selling some old expensive funds and reinvesting into a handful of index funds.

I already have money in these index funds. Some bought 5 years ago and others one year ago. And I want to rebalance.

When I originally bought these index funds I did not have a plan. So the allocation is somewhat random. But diversified among stocks and bonds, local and international.

How should I rebalance? And does it matter much?

1. Decide now on a preferred allocation
2. Use the allocation from one year ago when I bought the last funds
3. Also try to keep the original allocation of the funds bought 5 years ago

I don't name names or percentages as this is more a question of preferred method and not specific for my portfolio.

 

[ERD50]

You also need to consider taxes if you need to sell to rebalance or transfer to index funds.

To start, have any divs and cap gains paid out and not re-invested in the funds you are moving from. Those are taxed anyway, so no added tax in applying them to another fund.

I'd start with deciding on an AA going forward, I'm pretty agnostic on this, I think anything in a 50/50 to 90/19 range is fine, keep it on the high end if volatility does not scare you.

Are you retired and drawing now, or is this the accumulation phase?

-ERD50

 

[easysurfer]

I'd say "yes" on the preferred allocation. The preferred is what you feel comfortable with.

For me, I use the 100-age = percentage to have in equities. I like using the equation as that gives me a target and takes the subjectivity out of the percentage.

Also, worth noting, if you are rebalancing within retirement holdings like an IRA, that shouldn't generate a taxable event.
In addition, to make things easier, you might want to rebalance to just a total index funds (total US, total International, total bond) instead of having a handful.

 

[Christine]

Thank you for replying!

Are you retired and drawing now, or is this the accumulation phase?

Retired and 48 yo, and with a pension large enough that I keep adding to my portfolio and thus haven't taken out anything yet. Because of my pension I'm not too scared about volatility.

In addition, to make things easier, you might want to rebalance to just a total index funds (total US, total International, total bond) instead of having a handful.

I think I'll keep my existing index funds. But I might stop adding to some of them if I decide to dial down their allocation.

 

[Big_Hitter]

If you are 48 and won't need the cash right away, you may want to get aggressive.

 

[hnzw_rui]

Some lazy portfolios:

Invest Simple with Lazy Portfolios - MarketWatch.com

 

[pb4uski]

Do a little reading and decide on an AA. I like 60/40 but as ERD50 says, just about anything is ok.

In your situation where your pension more than covers your living costs, there are two schools of thought. One school of thought is that you have "won the game" and have no real need to take a lot of risk (especially if your pension is COLAed) so you would go real safe. The other extreme is that you don't "need" that money since your pension covers your living expenses so you can take on a lot of risk if your want to.

Anyway, after you decide your target AA, then compare that to your current AA and plot out how you can get from where you are to target in the most tax efficient way, considering the impact of new money. If it takes a few years to do it without making the taxman rich, so be it.

 

[Christine]

Thank you all. I'm reading and googling. I'm not in a hurry.

I like the ideas behind a lazy portfolio.

I don't mind some risk. And I view my pension similar to beeing heavily into bonds. So I don't need much more bonds in my portfolio. But still some for rebalancing purposes.

 

[audreyh1]

When changing to a new AA, I think it makes sense to simply add money where needed, if you are still building your investments (i.e. in accumulation mode).

 

[Christine]

When changing to a new AA, I think it makes sense to simply add money where needed, if you are still building your investments (i.e. in accumulation mode).

That is my idea too. Except for some expensive mutual funds I think should be moved to index funds. That will reduce the number of funds down to 4.

 

[mickeyd]

There are many good books on the subject. ("All about Asset Allocation" comes to mind.)

After that set your AA and see if it works for you. If not, adjust it.

 

[sengsational]

As if we needed any more convincing that picking and sticking to an AA is a good idea, this article, through historical analysis, says it reduces the chance that you'll run out of money in retirement.

But the value of not running out of money when making withdrawals cannot be measured. That is why the optimum asset allocation is priceless.

This is an article from a guy who did some analysis on asset allocation (all bond, all stock, 50-50). In an analysis that used historical time periods, pulling the maximum safe withdrawal rate with all bond or all stock had instances of failures, but with a 50-50 mix with rebalancing, there were no failures.

Your Asset Allocation Should Be Priceless | Marotta On Money

 

[sengsational]

I like the ideas behind a lazy portfolio.

By the way, here's that same guy's take on the lazy portfolio:

Marotta's 2015 Gone-Fishing Portfolio Calculator | Marotta On Money

And you can get a bead on your current AA by going to:
http://portfolio.morningstar.com/Rtport/Free/InstantXRayDEntry.aspx

 

[Christine]

This is an article from a guy who did some analysis on asset allocation (all bond, all stock, 50-50). In an analysis that used historical time periods, pulling the maximum safe withdrawal rate with all bond or all stock had instances of failures, but with a 50-50 mix with rebalancing, there were no failures

Thank you for this - it was very interesting. I've been conservative with a 40/60 allocation but now that I got the pension I wasn't sure I'd get I want to be more aggresive with my portfolio.

 

[purplesky]

I am selling some old expensive funds and reinvesting into a handful of index funds.

I already have money in these index funds. Some bought 5 years ago and others one year ago. And I want to rebalance.

When I originally bought these index funds I did not have a plan. So the allocation is somewhat random. But diversified among stocks and bonds, local and international.

How should I rebalance? And does it matter much?

1. Decide now on a preferred allocation
2. Use the allocation from one year ago when I bought the last funds
3. Also try to keep the original allocation of the funds bought 5 years ago

I don't name names or percentages as this is more a question of preferred method and not specific for my portfolio.

A Vanguard or Fidelity target date retirement fund would be a easy option. Maybe 2040 or 2030.

Or use something like this allocation long term.

Vanguard Total Bond Market Index Fund 10%
Vanguard Total International Bond Index Fund 5%
Vanguard Total Stock Market Index Fund 50%
Vanguard Total International Stock Index Fund 20%
Vanguard SP 500 index fund 15%

You are young. Go easy on the bonds.

You could also buy the ETF versions of these index funds.

 

[Christine]

You are young. Go easy on the bonds.

I'm getting there. But my belly don't wan't me to buy stocks with my cash too fast or I won't sleep well it says.




Edit: stocks - not bonds.

 

[purplesky]

I'm getting there. But my belly don't wan't me to buy stocks with my cash too fast or I won't sleep well it says.




Edit: stocks - not bonds.

Its your call. Just remember time is on your side to invest in stocks.

Take a look at all those solid companies in the SP 500 index and it might help you sleep.

Your pension should also help you relax .

 

[mathjak107]

A Vanguard or Fidelity target date retirement fund would be a easy option. Maybe 2040 or 2030.

Or use something like this allocation long term.

Vanguard Total Bond Market Index Fund 10%
Vanguard Total International Bond Index Fund 5%
Vanguard Total Stock Market Index Fund 50%
Vanguard Total International Stock Index Fund 20%
Vanguard SP 500 index fund 15%

You are young. Go easy on the bonds.

You could also buy the ETF versions of these index funds.

a total market fund and s&p 500 fund wouldn't make much sense. they are pretty much identical in how they act .

an s&p 500 fund and an extended market fund would make a whole lot more sense.

the difference between a total market fund and an s&p 500 fund is less than 1% most of the time and that is when there is a big difference between midcaps /small caps and large caps. the s&p 500 dominate all the other stocks in a total market fund almost making them a moot point.


an extended market fund is the market less the s&p 500 stocks. you can season that to taste and get just the blend you want as opposed to just duplicating the action of the s&p 500 .

 

[purplesky]

a total market fund and s&p 500 fund wouldn't make much sense. they are pretty much identical in how they act .

an s&p 500 fund and an extended market fund would make a whole lot more sense.

the difference between a total market fund and an s&p 500 fund is less than 1% most of the time and that is when there is a big difference between midcaps /small caps and large caps. the s&p 500 dominate all the other stocks in a total market fund almost making them a moot point.


an extended market fund is the market less the s&p 500 stocks. you can season that to taste and get just the blend you want as opposed to just duplicating the action of the s&p 500 .

I don't have a problem overlapping some of the the best companies on the planet. Its not really a big deal at the end of the day.

I own many individual shares of UPS and GE and Apple and LUV etc. in my portfolio and I also own these companies in my index funds at Vanguard and Fidelity and in my 401k.

I have small and mid cap index as well.

Do you have a extended market fund to suggest to her.

 

[mathjak107]

fidelity has an extended market fund FSEMX or vanguard VEXMX

if you want total market coverage in an effective manner then an s&p 500 fund and an extended market fund is the way to go . other wise all you really have with a total market fund is a large cap fund anyway.

 

[purplesky]

fidelity has an extended market fund FSEMX or vanguard VEXMX

if you want total market coverage in an effective manner then an s&p 500 fund and an extended market fund is the way to go . other wise all you really have with a total market fund is a large cap fund anyway.

Thanks for the suggestion. I really don't own that much small cap and mid cap so this fund FSEMX is a great choice to mix allocation with my large cap.

LIBERTY GLOBAL PLC CL C
LINKEDIN CORP CL A
ILLUMINA INC
UNITED CONTINENTAL HLDGS INC
TWITTER INC
LAS VEGAS SANDS CORP
BIOMARIN PHARMACEUTICAL INC
TESLA MOTORS INC
CHENIERE ENERGY INC
CHARTER COMMUNICATIONS CL A

I like the top 10 holdings.

The Vanguard Extended Market ETF (VXF) also looks like a good way to go.

 

[mathjak107]

your welcome. much better choice than mixing a total market fund with an s&p fund.

the name total market fund is very deceiving . while yes it contains thousands of other stocks the way it is weighted not only do the s&p stocks control the entire fund but did you know that the top 50 holdings in an s&p fund can out weigh the other 450 and negate their moves too.

 

[target2019]

You can go with total market etf or fund as the core. Then add small value or extended to tilt more in that direction.

For example, in my SEP I hold total market as a core fund. Over in Roth there is small value. In 401k there is extended market. My example is more complicated.

Two funds is enough to cover the US market for the OP, as Mathjak describes.

 

[purplesky]

your welcome. much better choice than mixing a total market fund with an s&p fund.

the name total market fund is very deceiving . while yes it contains thousands of other stocks the way it is weighted not only do the s&p stocks control the entire fund but did you know that the top 50 holdings in an s&p fund can out weigh the other 450 and negate their moves too.

Yes I do occasionally look at how the funds are weighted. I have noticed that many funds own the same mix of stocks but since they are great companies that I know and like I am comfortable with the overlap.


Top Ten Securities1 in SP 500.

Apple Inc.
Exxon Mobil Corp.
Microsoft Corp.
Johnson & Johnson
Berkshire Hathaway Inc. Class B Wells Fargo & Co.
General Electric Co.
JPMorgan Chase & Co.
Procter & Gamble Company Pfizer Inc.

In my 401k I have 15% in the Russell 2000 and 15% in the SP 400.

I will now start to focus more on extended index ETFs outside of my 401k.

 

[purplesky]

You can go with total market etf or fund as the core. Then add small value or extended to tilt more in that direction.

For example, in my SEP I hold total market as a core fund. Over in Roth there is small value. In 401k there is extended market. My example is more complicated.

Two funds is enough to cover the US market for the OP, as Mathjak describes.

I do own VTI in my Vanguard Roth. My 401k doesn't offer a total stock market fund but there is a SP 500 index fund and I have about 35% in that.

I hope the OP is following Mathjak and your suggestions.