Had planned on new AA...

[steady saver]

Hi all,
I had planned on starting the process of shifting our roughly 80/20 AA before the first of the year (and before the recent drop). I wanted to start being systematic which I have never been when it comes to our AA.

In our portfolio, roughly 20% is in cash.
The 80% is divided between our taxable, individual Fidelity account at around 49%, with the remaining 51% or so in our 401K.

I had planned to start working down to an overall 60/40 AA over time.

The issue of dividends hasn't even entered the picture. I don't know where I stand on that at the moment.

DH and I are both 56 (okay, I'm almost 56). DH is retiring within the next few months (no hard date set yet) and we want to keep our cash to live on until he turns 59 1/2...

One challenge in rebalancing is that so much of our money is tied up in the taxable account. I can sell a couple of stocks within our taxable account before year end b/c they are losses. All of the rest have had sizable gains over the years.

So a couple of questions are:
1. What would you do with the cash from the sale of these two stocks? I am just so accustomed to buying stocks (and in more recent years as index funds) that non-stock side of the equation is still really new territory for me. It's a whole new world...I know I could just stay in more cash, but my brain is telling me to "go shopping! The stocks are on sale!" That mentality obviously doesn't help me in my goal to downregulate my risk exposure...

2. Looking at this from a longer term perspective, can you offer some thoughts/advice? Do I simply hang on until we hit 59 1/2 and then start selling off the stocks in my 401K? Gee, I thought I had a handle on this but I am clearly muddled with this rebalancing thing.

Many thanks!

 

[RunningBum]

1. You are trying to go from 80/20 to 60/40, so why wouldn't you buy more of whatever is currently part of the 20? Bonds, bond funds, CD, MMs, etc.

2. Why do you have to wait until 59 1/2 to sell stocks from your 401K? Why can't you move from stocks to bonds/other in that account? The 401K is a good place to hold non qualifying dividend producers.

 

[Big_Hitter]

mine got automatically rebalanced

 

[steady saver]

1. You are trying to go from 80/20 to 60/40, so why wouldn't you buy more of whatever is currently part of the 20? Bonds, bond funds, CD, MMs, etc.

2. Why do you have to wait until 59 1/2 to sell stocks from your 401K? Why can't you move from stocks to bonds/other in that account? The 401K is a good place to hold non qualifying dividend producers.

Running Bum you are exactly right, of course. It is that "sale" mentality that makes it hard for me to put that money in something more conservative.
As far as rebalancing within the 401K, duh. You are correct again. I think the combination of having too little sleep, too busy of a week, and a sharp drop in the 80 part of my 80/20 portfolio discombobulated me a bit. Thanks for setting me back on the straight and narrow. Okay, well at least back on the general path. Old habits die a slow death.

I will regroup...

 

[Lsbcal]

A few thoughts.

First, concentrating on what your AA should be is a great thought!

I set our AA to be the max risk we will take. That is done after reviewing several runs of the VPW spreadsheet (see Bogleheads for more on VPW). So I don't have any spare money sitting around waiting for an opportunity which must be timed. The AA is 60/40 and if it gets to about 61/39 I sell some equity to get back to 60/40. That way I never take any more risk then originally set. Further, I've decided not to rebalance should stocks fall below 60%, i.e. will not buy into a declining market. Caveat: I do have a Plan B market timing scheme which has not triggered since the buy in 2009, so it's a buy-hold most of the time.

Recently I've bought a lot of TIPS in the retirement accounts. The 5 year TIPS are paying around 1.0% real presently. So that eliminates some rate rise and inflation uncertainty. The rest of the FI side is short term bonds (VFSUX). The short bonds are a long term strategy as a stepping stone to true cash (checking account) and are about 9% of the portfolio.

My whole effort is to find a mechanical way of managing risk. Still I worry a bit. I'm just not the type to set and forget.

 

[HI Bill]

If the markets haven't rebalanced your portfolio for you, I'd have a really hard time selling equities at 15-20% depreciated values to buy bonds. You'd be locking in your losses. I know many folks here do their rebalancing annually, or semi-annually, regardless of market status, but I think rebalancing in a depressed market will only make those 'paper losses' permanent.

 

[steady saver]

If the markets haven't rebalanced your portfolio for you, I'd have a really hard time selling equities at 15-20% depreciated values to buy bonds. You'd be locking in your losses. I know many folks here do their rebalancing annually, or semi-annually, regardless of market status, but I think rebalancing in a depressed market will only make those 'paper losses' permanent.

You make a good point. I'm going to look inside my 401K and see what tweaks I can make now, without doing a major overhaul all at once in this downtime. One thing I know I can do is sell me two losses in my individual account.

Thanks for your thoughts.

 

[RunningBum]

If you're reinvesting dividends, you could stop that for stocks and stock funds, and use the dividends to buy bonds. That would give a small movement away from equities.