Market timing and taking RMDs

[Goldenmom]

Dear Samclem and other forum members,

We have 80% of our larger IRA invested 50/50 Wellington and Wellesley. I follow Dan Wiener's newsletter and forum and many over there have positions in Vanguard Dividend Growth and VG Health Care Fund. I have small positions in Dividend Growth and LifeStrategy Growth in our 2 smaller tax-deferred accounts, but don't know if these should just be folded into W/W. Do Dividend Growth and LifeStrategy Growth add value to our portfolio?


Also, I bought VG Health Care Fund “on the way down” from $231 to $193. Now it is starting to trend up a little. This sector is overweighted in our portfolio and needs to be rebalanced when it makes sense to start selling off some shares. I’m hoping to use profits from Health Care to fund our first RMD this year. I think HC will be a winner (again) in the long run, but I see how quickly profits can evaporate in this volatile market and it could just as easily start dropping again.



Can anyone suggest a systematic plan for selling off some shares as it goes up to set aside some money for our RMD? I monitor the sectors throughout the market day and can see when the health care sector is having an “up” day, but am confused about when to start selling shares due to the great range of share prices. In a low growth environment, what would you suggest as selling points to take some profits?


If HC does not trend back up, should I take our RMD from Wellington, Wellesley, or our Intermediate Bond Fund?


Thanks!

Goldenmom

 

[samclem]

Goldenmom,

I'm afraid I won't be of much help to you, as I'm not a big believer that I can successfully time the markets (better than other people--and that's what is required), so I don't have a system to recommend. And, I wouldn't be sector-invested in healthcare, because I'm not smarter than other investors who have decided (with their investment choices) that healthcare stocks are as fairly valued as anything else (all things considered). I suppose you could implement some sort of moving average and sell shares when they are higher than this average ("technical analysts" seem to like 200 days as a good period for moving average bands--I don't know what is magic about 200 days).

Do Dividend Growth and LifeStrategy Growth add value to our portfolio?

It's hard to say. You have 80% of a "larger IRA" in Wellington and Wellsely, but how much of your >total< portfolio is in them, and in these other funds? On the face of it, I'd expect there to be considerable overlap between the types of holdings that are in W/W and these other funds, and if you've only got a small amount in them, then it's not worth having.

Also, I bought VG Health Care Fund “on the way down” from $231 to $193. Now it is starting to trend up a little. This sector is in our portfolio and needs to be rebalanced when it makes sense to start selling off some shares. I’m hoping to use profits from Health Care to fund our first RMD this year.

How do you know if you are "overweighted" in healthcare? Is that relative to the share of healthcare stocks in the overall market? Or do you have a defined % of healthcare stocks you want to keep in your portfolio (for whatever reason) and you'd diligently subtracted out the stocks already owned in Wellington and Wellesly? Or is it a gut feel that you have "too many?"
As I mentioned above, I don't think it's possible to say when you should sell them, when they'll be at a peak.

I recommend that people set up an asset allocation and stick to it. When it is time to take RMDs, tke them from any overweight holdings, and continue to rebalance back to the desired asset allocations. That's a good, mechanical, nonemotional way to "buy low and sell high", and it doesn't require anyone to look at the changing market values on a daily basis. If people want to use Wellington and Wellesly that's fine too, just take your RMD from whichever is above the ratio needed to keep your stock/bond ratio where you want it. It should take about an hour a year.

 

[braumeister]

I monitor the sectors throughout the market day

You're way overthinking this.

 

[pb4uski]

+1 Many better things to do with my time than market time, which is a fool's errand.

 

[REWahoo]

You're way overthinking this.

+1

 

[Goldenmom]

Thanks for the quick replies.

Here are our current holdings at Vanguard:

Husband's IRA
Wellington: 241,297.18
Wellesley: 240,158.10
VG Inter.-Term Investment Grade Fund: 74,080.16
VG Health Care Fund: 154,125.25

Husband's 401(k):
VG Health Care: 22,227.71
VG LifeStrategy Growth: 6,103.59
Prime MM: 6,000

My IRA:
VG Dividend Growth: 10,297.13
VG Health Care: 43,098.94

I intended for Health Care to be no more than 10% of our total portfolio, but I foolishly chased it down and down and down. I need to rebalance HC as the market allows, but I'm not sure how to best do this.

Is there a site where I can easily track when HC is above the 200 moving average? I would need help figuring out how to track that. I watch HC every day and wonder when to start selling some of it off.

I would appreciate any comments on my portfolio. I need a fairly conservative portfolio to preserve capital, combat inflation, and provide for RMDs. We are in early retirement and still have part-time self-employment income which we're socking into my husband's solo 401(k). We're saving aggressively, spending less, and trying not to draw out funds except for the RMDs. We don't want to erode principal early in retirement. Any and all help is most welcome.

 

[Goldenmom]

Guys, you are so right, but what do I do now?

I'm in a pickle and must either hold onto all of my health care or try to sell some of it when it is rallying. How would you get it rebalanced back to about 10% of the port over time?

Where do I find the 200 day moving average info?

HC may be a winner (again) in the long-term, but I may regret not selling some of it to provide for our RMD if the market rallies and then goes into a prolonged bear market.

Thanks.

(Yes, the enemy is me. I have learned my lesson. I need to learn a lot more on when to buy low.)

 

[braumeister]

I have learned my lesson. I need to learn a lot more on when to buy low.)

You're still missing the point.

Please reread samclem's last paragraph above.

 

[samclem]

Yes, the enemy is me. I have learned my lesson. I need to learn a lot more on when to buy low.

I think you've picked up the wrong lesson. Buying low, selling high--it looks very easy when looking at an historical chart, but it's not easy (and not practical) when you are actually living it. Buying low isn't enough, you also have to time the market well on when to sell. If it were easy everyone would be doing it. Most managed mutual funds do worse than indexed funds during most years, and that's with pros who do nothing else but look at stock prices, look at company internal reports, have years of experience in small sectors, etc. It's just not practical for you or me.

So, if it would help you from an emotional standpoint, you could hold on to the healthcare stocks until they return to the price you paid, then sell them and swear off market timing. That way, you can satisfy yourself that you didn't lose money on the trade. Of course, in reality there will possibly be an opportunity cost (the money could have been invested elsewhere while you hold on to these shares--waiting), but many investors seem to be able to overlook that. Or look at their 200 day moving average (or a year--whatever info you can find, it's all completely arbitrary as far as I can tell) and sell when the prices cross that line. Whatever will leave you in emotional peace. Or let Dan Weiner give his guess--and that's what it is (you can save some money, temptation, and aggravation by dropping his newsletter). From a strict statistical standpoint, there's not much reason to believe they won't go down further from here, and you should sell them all and invest the money in a nice broad index fund or into Wellesly and Wellington.

This is the money that has to last you for the rest of your life. Don't bring it into the casino.

Good luck!

edited to add: Opps--cross-posted with braumeister

 

[samclem]

Goldenmom,
You've got over 27% of your money in narrow healthcare funds (and undoubtedly W and W have additional healthcare holdings, so your actual investment in healthcare is surely higher once those are included). Of your >equities<, you are probably at over 50% in healthcare stocks. Health care stocks account for only about 14% of the total US stock market, so you are significantly overweighted in them (and underweighted in the other areas of the US and foreign economies that could be the next market leaders--we just don't know). This is quite risky, as you probably appreciate now. You've made a big bet--maybe on somebody's advice, or some hot idea among a group of gabbers.

One simple way out that can reduce the emotional pain is to do a very simplified form of "value averaging." In this method, you sell a fixed number of these shares on a regular basis (say, every month) over a long period (maybe a year, so every month you'd sell 8% of total number of shares you have right now). By selling a fixed number of shares every month (rather than a fixed dollar amount), you won't be selling more shares when they happen to be at a low price, and selling fewer shares when they happen to be expensive (that would be "dollar cost averaging" which works well when you are buying shares, less well when you are selling them). After a year, if share prices go up and down across their present value, you'll have made more money in these sales than if you'd sold a fixed dollar amount each month. And, you don't have to track a moving average or pay any attention to the share prices, which I think is another significant advantage for you at this point.

 

[pb4uski]

Guys, you are so right, but what do I do now?

I'm in a pickle and must either hold onto all of my health care or try to sell some of it when it is rallying. How would you get it rebalanced back to about 10% of the port over time?

Where do I find the 200 day moving average info? ....

Here is what I would suggest. To reduce health care to 10% you need to sell about $140k worth. Select a period of time you want to do this. For example, let's say it is 7 months. You could just sell $20k a month on the 1st of each month and then complete rebalancing to 10% in the 7th or 8th month, as necessary. Or you could decide to exchange x shares per month for y months and then complete the rebalancing at the end.

If you go to morningstar's site, put the ticker in the Quote box at the top of the page, and then go to the chart tab you'll see a box to put in the moving average of your choice.

 

[Fedup]

I have less than 5% in health care fund. In fact I sold at a high, both HC and Wellington at the peak in 2015 for spending money for 2016, it's in a taxable account. I've been slowly replacing them in a IRA account. They are mostly in Roth IRA, something I don't have to touch for a long time.


Sent from my iPad using Early Retirement Forum

 

[Sunset]

....
We are in early retirement and still have part-time self-employment income which we're socking into my husband's solo 401(k). We're saving aggressively, spending less, and trying not to draw out funds except for the RMDs. We don't want to erode principal early in retirement. Any and all help is most welcome.

Have you considered your husband's solo 401(k) contributions to be into a ROTH and IRA type vs just the normal IRA type ?

Maybe you have, its just not indicated in your breakdown, and I see no ROTH's for either of you, which would be allowed due to his work.

 

[steelyman]

I think you should find an established blog that discusses these matters. Visit early and visit often (like they vote in Chicago).

This might accomplish two objectives: you can lose your shirt (or blouse, as the case may be) and also enrich the blogger through advertising revenue.

There.s a motto for this style of managing your hard-earned retirement money: "Stray off the course".

Or you could just carefully read the suggestions that others have given in this thread.

 

[Fedup]

If you have to get out of HC, sell on an up day. It's less painful.


Sent from my iPad using Early Retirement Forum

 

[Goldenmom]

Probably, but don't know how else to tell when Health Care is having a good or bad day.

 

[Goldenmom]

Great cartoon, and I see your point.

 

[Goldenmom]

samclem,
How many of my HC shares would be equal to 8%?

As you can see, I have HC in every account. Can you crunch those numbers for me?

I could then exchange 4% into Wellington and 4% into Wellesley each month until I get to 8 or 10% HC. I may even eliminate HC altogether.

BTW, I dropped the Dan Wiener newsletter trial earlier this week. They have a great forum over there and the weekly newsletter is interesting, but I found his model portfolios too aggressive for my stage of life. I will miss some of the great folks I met there.

Thanks samclem. I really appreciate having a systematic plan to extricate myself from this rookie mistake.

Goldenmom

Goldenmom,
You've got over 27% of your money in narrow healthcare funds (and undoubtedly W and W have additional healthcare holdings, so your actual investment in healthcare is surely higher once those are included). Of your >equities<, you are probably at over 50% in healthcare stocks. Health care stocks account for only about 14% of the total US stock market, so you are significantly overweighted in them (and underweighted in the other areas of the US and foreign economies that could be the next market leaders--we just don't know). This is quite risky, as you probably appreciate now. You've made a big bet--maybe on somebody's advice, or some hot idea among a group of gabbers.

One simple way out that can reduce the emotional pain is to do a very simplified form of "value averaging." In this method, you sell a fixed number of these shares on a regular basis (say, every month) over a long period (maybe a year, so every month you'd sell 8% of total number of shares you have right now). By selling a fixed number of shares every month (rather than a fixed dollar amount), you won't be selling more shares when they happen to be at a low price, and selling fewer shares when they happen to be expensive (that would be "dollar cost averaging" which works well when you are buying shares, less well when you are selling them). After a year, if share prices go up and down across their present value, you'll have made more money in these sales than if you'd sold a fixed dollar amount each month. And, you don't have to track a moving average or pay any attention to the share prices, which I think is another significant advantage for you at this point.

 

[Goldenmom]

samclem and others on this thread,
My last message flipped away and I can't find it now.

I was trying to tell you that I was going to come back to read this whole thread again this evening and hoped samclem could tell me the # of shares that equal 8%. I have health care in all 3 accounts so I would like a math helper, please.

Also, our daughter is 48 and has 67K to invest at Vanguard. (She liquidated a variable annuity at Ameriprise and moved her money to Vanguard. She was out from under surrender.) She has about 20 years until retirement. If she were your daughter, what Vanguard funds would you invest her in? She wants me to be her agent. You have done such a good job helping me with my HC dilemma that I'd like your opinion while you are all assembled here. I have been thinking about a balanced fund like balanced index or LifeStrategy Growth, or the Boglehead 3 Fund port., or a combo of Wellington and Div. Growth & maybe REITS, but I wanted to ask you what you think. Thanks! I am looking forward to some good ideas. She hates anything to do with investing and she will never mess with her funds. What is a simple "set it and forget it" portfolio for this 67K that will serve her well over the next couple of decades?

 

[samclem]

could you tell me the # of shares that equal 8%. I have health care in all 3 accounts so I would like a math helper, please.

The simplest thing to do: When you have your account page open, click on "Exchange" beside the Healthcare holdings. (assuming you want to use the money from the sale of Healthcare to buy more of another fund you already own in that account). When the page comes up, the default in the text box will be "sell in dollars", open it up and change to "sell in shares". After you do that, your balances will be shown in shares (not dollars). If you want to slowly get out over the course of a year with monthly exchanges, then divide the share balance by 12 and then sell that many shares (e.g. if you own 2,500 Healthcare share in your husband's IRA [it's probably close to that], divide by 12 to determine that you need to sell 209 shares now). Sell the same number of shares (209 in the example) next month and every month. 12 months from now, sell the last of the shares (there might be a few more than expected in there, if dividends are being reinvested, etc). You'll be totally out of the fund in 12 months. If I were in your shoes, I'd probably instead sell them over the next 9 months (so, divide by 9 instead of 12 to get the number of shares to sell: if you own 2500 shares now, sell 280 shares each month ) so they'd all be sold by the end of 2016 and you would have this cleaned up when you start 2017.

Also, our daughter is 48 and has 67K to invest at Vanguard. (She liquidated a variable annuity at Ameriprise and moved her money to Vanguard. She was out from under surrender.) She has about 20 years until retirement. If she were your daughter, what Vanguard funds would you invest her in?

I would strongly recommend that you buy a single, balanced, broadly-diversified fund for her, not a portfolio of funds. Why?
1. You won't always be around to rebalance for her. Let the pros do it automatically without your involvement. She's an adult and her personality is formed: she may never care to take an active part in investing her money. This way it is all taken care of for her, and she'll get >better< investment results than most active investors.
2. It gets you out of the guessing and decisionmaking game. You won't have to explain to her what you are doing, why you've decided to move things, and you won't have to fret over whether you are doing the right tactical move for your daughter.
3. When she adds to her investments, there's no debating or decisionmaking about where to put the new money. It just goes right into the same fund-of-funds and immediately allocated according to the set allocation. Very easy, very automatic, no temptations to try to pick the "best" asset class that week.

If it were my daughter, I would put it all in a Vanguard Target Date Fund that is appropriate. If she were retiring in 20 years, I'd probably put it into the Vanguard Target Date 2035 fund. They will automatically move it gradually into a more conservative portfolio mix as she approaches retirement. It's truly a one-stop, worldwide diversified stock and bond product, and it is low cost. Neither you nor she will need to think about it again for a couple of decades. Done. And she'll likely get better investment results than the majority of investors that try to time the market, make bets, follow hunches, etc.


Here's how the allocation of that fund will change over time: VGD Target Date Fund 2035 Allocation Glidepath

Heck, most of us would probably be better off going that way, according to the real-world results of real investors.

Just a quick observation:

I intended for Health Care to be no more than 10% of our total portfolio . . .

If you want health care stocks to be "no more than10%" of your total portfolio, you could just use Wellesly and Wellington, you don't need to invest in any specialized sector funds. Wellesly is about 33% stocks and of those 14.5% are health care stocks. Wellington is a about 66% stocks and of those 18.2% are health care stocks. Doing the math, if you just put half of your portfolio in each (Wellesly and Wellington) you'd be at 9.09% --darn close to 10%. Before you invested a dime in Vanguard Healthcare Fund, you probably already had about 10% of your money in healthcare stocks.

Good luck.

 

[Goldenmom]

I very much appreciate your advice, samclem, and the simple method you outlined for selling my HC over 9 months. I will start this month. You even made it simple enough for the math-challenged like me. I hope your formula will help others with a similar problem.

I also like the idea of the Target Date 2035 fund. I want something my daughter can handle after I am gone. If she invests in a single, balanced fund, we probably don't even need to complete the agent authorization for her account.

She really dislikes dealing with her investments and finds it both frustrating and very uninteresting. Unfortunately, she will have a reality check at some point when it sinks in that she will have no pension from her physical therapy job, and that her paychecks will eventually stop, and she will have to live on SS and her investments. I'm encouraging her to work longer, defer SS until she's 70, invest in low-cost Vanguard funds, and save, save, save.

Would you dollar cost average her money in over a number of months or lump sum it into Vanguard now?

Thanks to everybody for your willingness to help me with these questions. You perform a very valuable service to other investors.

Goldenmom

 

[samclem]

Would you dollar cost average her money in over a number of months or lump sum it into Vanguard now?

That's a good question. Many people would prefer to DCA it in, and that does reduce the risk of jumping in just before a drop. But, overall, markets generally go up, so investing the money immediately is the method that increases the chances of the best outcome.

An article on the pros/cons of each approach. (link) From that article:

Both lump-sum investing and DCA have their appropriate time and place. The research shows that lump-sum investing pays off about 66% of the time, which is a long way from all the time. . . . If you hit that bad 33% in lumpy style, you can lose a lot of money.

I would add that if you miss a runup in prices because you didn't lump-sum in, you'll also miss out.

​

At the end of 20 years, the difference is likely to be tiny. Since you asked what I'd do: I'd invest it all at once and then move on. I also wouldn't even look at the balance except maybe once per year--it serves no purpose to get excited about daily, monthly, or even annual downs or ups along a 20 year path.

 

[Fedup]

Probably, but don't know how else to tell when Health Care is having a good or bad day.

I check the share of ibb index.


Sent from my iPad using Early Retirement Forum

 

[samclem]

Probably, but don't know how else to tell when Health Care is having a good or bad day.

I recommend that you don't bother to find out if it's having a "good day" or a "bad day." If you sell during a "good day" the stock might just as easily move up the >next< day, too, and then you still would have sold "too soon," right? And the stocks you >could< have bought with the Health Care proceeds will also be potentially having "good days" while you are trying to time the sale of Health Care. Just sell it off in a mechanical fashion and disregard the price. Over 8 or 12 sell dates, odds are good things will even out.

Fixating on share price movements is an angst-inducing and potentially very expensive hobby with zero benefit to your investments. I know you have better things to do with your time.

 

[Goldenmom]

Hey Samclem,
I will approach the HC "sells" in a mechanical fashion as you suggest.

I went to my Vanguard account and selected "Exchange" and "Sell by Shares" to find my total HC shares per account and they are as follows:

My IRA:
215

Husband's IRA
1830

Husband's Solo 401(k)
111

On the arbitrary sell date each month, I divide each of the 3 share totals (215, 1830, and 111) by 9 and sell that many shares.

For example, 215 shares divided by 9 = 23 shares. Each month I will sell 23 shares of HC from my IRA. I repeat the process on the same day each month with the other 2 accounts. Is this correct?

What are your thoughts regarding dollar cost averaging vs. lump sum investing our daughter's money into her balanced account?

Thanks again to you and all who took the time to reply. This is a wonderful forum with such helpful members!