(snip)
One might say there are 3 general ways of rebalancing which are really based on the "when" of rebalancing:
1. Rebalance with every new addition to the portfolio.
2. Rebalance at a set time every year: your birthday, January, etc.
3. Rebalance when certain percentage trigger points are reached, such as Larry Swedroe's 5/25 rule. (snip)
Back to 'when' to rebalance:
If one contributes to their portfolio every paycheck or monthly or quarterly, then one can check their asset allocation and put the new money to work in the asset class that is underweighted from their written asset allocation plan. This is relatively simple to do now that you all have your portfolios set up in the M* portfolio tool and can easily "X-ray" it. This is also reasonably tax-efficient and you are not selling any investments to create a tax liability. This would be a classic buy undervalued securities or buy low strategy. It can be very difficult to be buying REITs now or small cap value. These asset classes have gone down the most in the past year.
Another method is to check whether rebalancing is needed based on some calendar date. I personally do not like this method because lots of opportunities can be missed in between. If something drops alot but goes back up before your 'rebalance date', then you may have missed a chance to buy low. However, I think this is certainly the simplist way.
Another method is to use trigger points. Swedroe advocates a 5/25 rule where one rebalances when as asset class percentage is changed by more than 5% of the total portfolio value or by more than 25% of its target value. Here's an example: You want 30% fixed income. So your target range is really 25% to 35% of fixed income for your total portfolio value. You do not need to rebalance if your fixed income percentage falls within this range. However, if your asset allocation calls for 12% fixed income, then a 7% to 19% range would be too large, since 25% of 12% is 3%, then the range would be 12% plus or minus 3% or 9% to 15% of fixed income.
With all the rebalancing that you might do, you should take taxes into account. You do not want to be creating a tax liability if you can avoid it. If you can't avoid it, you want to try to avoid short-term capital gains and get long-term capital gains. Rebalancing in a 401(k) or IRA has no tax consequences, so look at those accounts first. (snip)
Homework: Present here on this thread, the last act of rebalancing that you did.
After a lot of delay I am finally trying to get my portfolio to actually reflect my target asset allocation of 70% fixed income with the other 30% split more or less evenly between stocks and REITs. I have submitted several trades online in both my Roth IRA and my 457 plan that should get me a lot closer when they take effect on Monday.
The first thing I did, several months ago now, was find out which REIT index funds are available through my Roth IRA custodian. (No REIT funds are available in my 457 plan.
) I requested a copy of the prospectus and after reading it decided to buy the fund, so yesterday I sent in an online order to buy 1000 shares of VGSIX in my Roth. That is most of the money that was in the account, and by a fortunate coincidence is also about 13% of my total portfolio, which is right around the correct amount for my target AA.
Then, last night and today, I checked the balances in my 457 plan.
I had a large amount of Fidelity Contrafund (FCNTX), an approximately equal amount of "Stable Value Fund" (which I've never been able to find a ticker symbol for or much information about
), plus smaller amounts of PTTRX (called a bond fund but actually mostly cash), a small-cap index, a mid-cap index, and a Euro-pacific index fund. Some months ago after much number crunching, I came to the reluctant conclusion that there isn't any way I can hit the target allocation in my 457 using only the pre-selected funds
. There is a self-directed brokerage option but it has extra fees and restrictions and I'm not sure it would be worth the hassle
. About the closest I can get is Vanguard Target Retirement Income (VTINX), which is where I have been sending all my new contributions since March.
I have also been procrastinating on making these changes because the values of the funds had gone down so much and I didn't want to "lock in" my losses. But recently I thought of a way to trick myself
into doing what I should have done anyway, which is to reduce my stock allocation and increase bonds by the only readily available means, namely buying more VTINX. So, I looked up the price on FCNTX, and by checking my back statements was able to determine that I had bought about 1/4 of the shares I have when the price was lower than it was when the market closed yesterday ($47.80). "Well", says I to myself, "I won't be losing any money if I sell those"
. Then I looked again and found I had bought about half of my shares when the price was over $60, in fact for most of that time the price was over $65, and thought "it's no use holding my breath waiting for it to go back that high again"
. The small and mid-cap funds were also down to about half what I had paid for them as one-time purchases
. So, I sent in a trade order to sell all of the small-cap and mid-cap index fund shares plus about 3/4 of the FCNTX and about 3/4 of the Stable Value, and buy more VTINX. I decided to keep some of the Stable Value to balance the volatility of the remaining Fidelity Contrafund. If FCNTX goes up over $55, I'll swap half the remaining amount (and half of the remaining Stable Value) into VTINX, and if it gets back up to $60 (or I get sick of waiting for it to), I'll get rid of the last of both.
The Europacific index fund, also a one-time purchase, is worth about 3/4 what I paid for it, so I decided to hang onto it for a while to see if it gets back up to where I started. But if it doesn't within a reasonable time (whatever that is) it's outta there.
Then I ran a portfolio Xray. Before today's trades, I had about 60% of my portfolio in stocks: 55.8% in the stock funds, plus some of the VTINX is in stocks also. The Xray says that after the trades on Monday I should be down to about 44% stock, including the REIT fund which isn't broken out separately (about 32% U.S and 12% Europacific). The bonds will be just under 40% and cash about 15%.
That's not quite what I was aiming at, but it's a lot closer than I am now.
Next, I think I need to see if there is a TIPS index fund, or if I can buy individual TIPS in my Roth IRA. If so, I will split the money going into the Roth between bonds and REITs to increase the bond allocation and hold the REIT allocation about level. According to all the number crunching I did earlier this year, based on historical data a REIT allocation anywhere between 5% and 25% of the total portfolio (with stocks for the rest of the 30% non-fixed) will give me the return and standard deviation I'm aiming for, and it should be easy to stay within that range by directing the incoming money to bonds or REITs as required.
New money to the 457 plan will continue to go 100% to VTINX. The limit on the 457 is about five times the limit on the Roth, so eventually I may not be able to keep my allocation where I want it by just by by buying REITs and bonds in the Roth. If that happens, I suppose I could reduce my 457 contributions and buy more I-bonds on payroll deduction to be earmarked for retirement spending, but I'll worry about that if & when I get there.