making asset allocation changes

[DEC-1982]

I am new at this, and would like some advice/feedback.


Let's say I have this target asset allocation.
Stocks 60-65
Bonds 25-30
Cash 5-10

For simplicity, assume the stocks and bonds are all in a tax-deferred IRA. There should be little or no tax consequences for making changes.

If the stock % goes to 59.9 or lower, I would need to increase the stock allocation. Is this a time when people would make a change for my situation?

Do I then increase it to 62.5%, the middle of the band, or just some number in the 60-65 band?

 

[Independent]

I don't think there is any "right" way to do this. People seem to use whatever rules are convenient for them.

Some would say "I have a target allocation of 60/40. I don't re-balance until I'm off by at least 5 points (stocks below 55 or above 65) and then I jump back to 60/40."

Others would say "I have a target allocation of 60/40. I re-balance every [year, quarter, month] and jump back to the 60/40."

I suppose somebody could back test and say one or the other has been slightly better, but that result would probably be sensitive to the exact paths of prior returns that are unlikely to be repeated.

I'm not sure how cash fits into long term asset allocations.

 

[meleana]

I don't think there is any "right" way to do this. People seem to use whatever rules are convenient for them.

Some would say "I have a target allocation of 60/40. I don't re-balance until I'm off by at least 5 points (stocks below 55 or above 65) and then I jump back to 60/40."

Others would say "I have a target allocation of 60/40. I re-balance every [year, quarter, month] and jump back to the 60/40."

I suppose somebody could back test and say one or the other has been slightly better, but that result would probably be sensitive to the exact paths of prior returns that are unlikely to be repeated.

I'm not sure how cash fits into long term asset allocations.

I would think you have to target all your assets in asset allocation and re balancing. So cash would be part of it.

 

[prudent_one]

I prefer not using bands for allocations, but specific numbers (and whole numbers as well). Then I do not rebalance until there is a 5% variance from my target. So if my target is 65% stocks, I do not rebalance until it gets to either 60% or 70%.


If you move back to the middle of your band, and you measure in tenths of a percent, you will potentially trigger rebalancing again with just a 2.6% swing.

 

[RunningBum]

There are no hard and fast rules. It's your money, so it's up to you.

Some people adjust on a calendar basis. For example, after end of year distributions are done, if you are still working and thus don't need this for living expenses you could invest the money where your allocation is short. If you are retired and need to draw money, you would take it from where the allocation is over. If you only do it once a year and have already done it (or found it in balance and left it alone), you would leave it alone for now. Some do it twice a year or even once a quarter, I guess.

Others do it in a range. Anytime their allocation falls x% off, they will re-allocate it to get it back even. So in your case, you might say that 62.5% is your stock allocation, and if you want to adjust if it falls more than 2.5% out of range, you buy stocksto get it back to 62.5%. 2.5% might be too small of a number, especially if you do have to take cap gains or pay broker fees. If you're just moving around between mutual funds with no transaction costs in tax-deferred and aren't running into any frequent trader issues, you could do this. There are probably studies that show what % seems to have worked best, but that's based on the past.

Some do it by a strict set of rules, some are loose. I'm more loose. If I'm drawing money out, or have extra funds to invest, I'll adjust it that way. I always look at the end of year after distributions and see if it needs adjustment, but I may wait until after the first if I have to take cap gains to adjust. I also look every month or two and might make an adjustment then, or might not.

Bottom line, do what you want with your money. I think if you find you're getting down to 40% stocks or up to 80% you need a better methodology (outside of a major crash or sudden boom), but otherwise it's not really worth worrying about too much. If you are 5% low on stocks and stocks do 5% better over the next year, you've shorted yourself a whole 1/4 of a %. $250 on $100K.

 

[W2R]

I rebalance once a year, during the first week in January right after I withdraw the following year's spending money. My portfolio can get all out of balance when I do that, so it's a good time to rebalance.

Other than that annual rebalance, I rebalance during the year whenever my portfolio strays too far from my 45% equity asset allocation. That is, when equities fall below 42.5% or above 47.5%. That almost never happens.

This year, after I withdrew my 2016 spending money, my portfolio was balanced almost perfectly so for the first time I didn't have to rebalance. As of yesterday my equity percentage was down to a little over 43%. So if the market continues to tank, I'll probably rebalance at some point.

It helps me to have these criteria written down. It takes emotion out of the decision which always works best for me, both financially and in lowering associated stress levels.

 

[ERD50]

I'll echo others that there does not appear to be any right/wrong way to do it - bands, % change, calendar, whatever.

Further, the back testing that I've seen indicates it doesn't really even matter much if you re-balance or not, let alone when/how you do it.

It seems like a good idea to pick an AA you are comfortable with and stick to it, so pull it back in-line as it drifts, but the reality is, it probably won't make any difference, and the slight difference could be positive or negative. I'm lazy, so I've tended to just ignore it lately.

What did they say in the 60's? "If it feels good, do it"?

-ERD50

 

[Fedup]

I rebalance when the market is deemed too high or too low, to me of course. Too high, I move more out to cash. Too low, I move more to equity.


Sent from my iPad using Early Retirement Forum

 

[Midpack]

There is no absolute right/best way, or (most) everyone here would know it - academics have looked at it endlessly.

FWIW I have specific AA targets and use the 5/25 rule**. I only review quarterly, so I wouldn't know or care if my AA was out of line during a quarter. And even if I find allocations outside the 5/25 rule, I may not act if the tax consequences don't make sense (e.g. delay rebalance into next year if it levels out dividends/CG and thereby taxes).

** The 5/25 Rule - A Wealth of Common Sense

 

[DEC-1982]

I thank everybody for their feedback. There were a lot of good points for me to consider.

I may do it both ways, at the beginning of the year (at annual withdrawal time), and every time the allocation is off by some percentage.
I still plan to consider cash because this is a total portfolio.

I don't want to change every time the allocation drops by 2.5%. Using a set level rather than a band and using an offset from that level makes sense. But I need to think about whether 5% change is right for me, although I may still go with the collective wisdom.

I think I will write the criteria down, so that DW or I can follow it. It definitely adds discipline to the process, especially as the years go by.

I just read the 5/25 article from Swedroe, and I will have to consider it. I see why 25 comes into the picture. Some people say you should let your winners run, but I am uncomfortable with the healthcare portion becoming too large. With the 25 rule, I would have reduced it by now.

Thanks again, and I will continue to watch this thread.

 

[pb4uski]

I have a specific targets rather than bands. My targets are 60/34/6. My investment policy with respect to rebalancing is:

Our intent is to rebalance where actual asset allocation differs substantially from target asset allocation. Rebalancing is typically done late in each calendar year and is done in concert with annual year end tax planning. Rebalancing is also sometimes done opportunistically during the year if stock markets seem particularly under or overvalued but only if the overall asset allocation differs substantially from target asset allocation. Our policy discourages market timing.

I didn't rebalance at year end this year because we were traveling... I'll probably do it next week. For the first time I'll be selling bonds and buying stocks for non-trivial amounts.

I'm also thinking about increasing my international emerging markets target from 2% to 3% and making a commensurate reduction to my international developed markets target as a fine tuning of my targets.

 

[DEC-1982]

I have a specific targets rather than bands. My targets are 60/34/6. My investment policy with respect to rebalancing is:

That is a very well written policy pb4uski. I will "steal" significant bits of it for my own policy, which I plan to write this 3-day weekend.

 

[Lsbcal]

If you are spending from fixed income, some of the rebalancing takes care of itself in a poor year.

I don't chase stocks down. This is because should we get in a multi-year declining market like in the 1930's, I'm not going rebalance into that. Retirement is a special case in my opinion. Waiting a few months after the decline has hit bottom will not hurt and might even help. This worked in 2009 when I rebalanced at the beginning of July rather in January as many do.

Also I do rebalance out of stocks if they hit my upper allocation limit. This is a risk mitigation approach.

Rebalancing is such a small part of investing. But there is no harm in doing something that is comforting, I think.