Reluctant Rebalancing to Bonds in January

[Ready]

I rebalanced earlier this week to keep my 60/40 AA in tact. I purchased the Vanguard International Bond Fund (VTABX) to get some exposure to foreign bonds that I previously did not have.

However, of my 40% that is fixed income, only 24% is in bonds. The rest is in CDs earning 3% or greater. With PenFed paying 3%, CDs are looking more attractive than bonds, since most short to intermediate term high credit quality bonds are paying less than 3% these days. I don't want to be completely out of bonds, but I don't want to be at 40% either, so this feels like a good compromise.

 

[pb4uski]

I've moved to the 2% 3 year and 3% 5 year PenFed CDs and into the Guggenheim and iShares target maturity bond portfolios (as a substitute for CDs) for my fixed income allocation until interest rates normalize. I'm getting reasonable yields and have mitigated the interest rate risk in my fixed income allocation.

 

[mickeyd]

I just balanced back to 60/40 from 66/34. After calculating what the number was, I took a day to think about it and then sold a bunch of equity funds and bought more VG Intermediate Term Bond fund (my FI instrument of choice). It was a pretty big chunk and I had to swallow hard, but that's what an IPS/AA is supposed to do~find your comfort point when you are not pressed to make a rash decision.

I'm still sleeping well.

 

[sonomaguy]

Just to throw an additional wrench in the analysis - I have not heard anyone mention the fact they choose not to rebalance because of tax considerations...

realizing gains and paying taxes on those gains my cost more than you would benefit by having an ideal AA.

I would tend to "drift" towards my desired AA by harvesting losses if possible and if not, take a slower approach of investing dividends/other free cash flow into underbalanced assets.

At some point there is a tradeoff - I've been very good about harvesting losses for the past decade and because of the strong market for the past few years I am overweight risk and with no unrealized tax losses - and my AA continues to get further from my optimal....I still choose to simply reinvest dividends into bonds rather than realize gains and pay the taxes.

I'm not saying this is best, but just remember that sometimes rebalancing comes at the cost of being somewhat tax inefficient.

 

[Ready]

Just to throw an additional wrench in the analysis - I have not heard anyone mention the fact they choose not to rebalance because of tax considerations...

realizing gains and paying taxes on those gains my cost more than you would benefit by having an ideal AA.

I would tend to "drift" towards my desired AA by harvesting losses if possible and if not, take a slower approach of investing dividends/other free cash flow into underbalanced assets.

At some point there is a tradeoff - I've been very good about harvesting losses for the past decade and because of the strong market for the past few years I am overweight risk and with no unrealized tax losses - and my AA continues to get further from my optimal....I still choose to simply reinvest dividends into bonds rather than realize gains and pay the taxes.

I'm not saying this is best, but just remember that sometimes rebalancing comes at the cost of being somewhat tax inefficient.

Hopefully you can avoid all this by doing your rebalancing within a tax deferred account. Of course if you're at retirement age and taking MRD's, I guess at some point you still have to deal with the taxes.

 

[target2019]

My asset allocation has gotten to 57.6% stocks, thanks to the good stock performance in 2013. On Jan 2, my plan calls for trimming this back to 50% stocks. It will involve moving money from the total stock market VG fund to the total bond market fund.

The outlook for bonds sure doesn't seem good, but my plan doesn't allow me to make decisions based on my forecast.

Thoughts?

Would it be possible to modify your plan to allow a certain percentage tactical move? For example, you would rebalance to 55 only and allow a period of time in case the market corrects and you're back to 50 percent.

 

[Lsbcal]

I always wonder why one might have been so brilliant when making up the original ISP that no mid course revisions would be needed.

My prognostications:
stocks are OK for now -- the Fed is encouraging risk taking, the PE's are not too rich (I'll try posting a chart at the end of the month)
intermediate bonds are OK for now -- spreads are reasonable, yield curve is steep
short term bonds are OK for now -- the Fed is hardly about to invert the yield curve

I'm sticking with 65/35 for the time being. Might regret it some day.

 

[kgtest]

I don't even wan't to touch bonds. I am new to investing though and young and probably naive. I am high growth with a bit of risk...trying to achieve like 90/10 for my AA. Bonds are what led me to this forum. As in I had a 50/50 AA before I found this forum and realized that's only for the retired folks, and those that do not want to reach retirement.

My bond performance was terrible from 2010-2012 and with that 50/50 asset allocation I was seeing like 3.5% return in my entire portfolio while I saw on this forum people were laughing all the way to the bank with like 15% returns during the same time.

Bonds were killing me, but that is my perspective.

 

[Neongreen]

Your AA is an agreement with yourself that you would rebalance during times like this.

Thinking it's better to stay in stocks right now sounds like market timing.

Stick to your plan. Good luck!

 

[akck]

I'd think about a slight modification to my.AA and look a shorter bond fund. Should rates go up your loss period will be shorter than the total bond fund. Your cost to do this would be to locking in a lower return for a few years.

 

[Huston55]

As many have already said, I'd put some of your fixed income allocation into CDs. That is part of our plan. We're on the cusp of RE and will convert from 60/35/5 to 60/25/15 to have the cash buffer. (This is based on the technique that Galeno posted some time back - Thx Galeno.). The cash buffer (~4-5 yrs) gives me more confidence to stick to our AA; and, frankly, to finally take the RE leap.

BTW- a late 'welcome back' Al. Didn't realize you had returned until I saw this thread.

 

[nun]

I still have bonds in Wellesley, but most of my fixed income is now in TIAA-Traditional getting 4.3% and a stable value fund producing 2.6%. I now have the chance to convert my DC plan to the state's DB plan and when I do that I'll go almost entirely equities with the rest of my money.

 

[mrfeh]

Where can you get 5yr CD at 3%?

penfed.org

 

[mrfeh]

Considering that 10-yr Treasury rates were almost 3% (2.98%) in September and above 2.8% at the moment, I don't see how an 0.2% increase can cause a "disaster".

In other words - maybe a bunch of the rise is baked in?

I think this is the case. We've already seen a big increase in the 10-year interest rate (from 1.6 to 2.8) this year. When tapering begins, I expect rates to rise a bit, but not a lot.

 

[TromboneAl]

Thanks for the thoughts. I will stick with my plan -- just wanted to make sure I wasn't missing something.

 

[F4mandolin]

Not me......keeping more cash than I need at this time. At "some" point in the future I think I will move pretty well everything into something like the Wellington so I don't have to think about it. Still waiting to find out if we can afford to move back to the UK......will need more cash if that happens. If we can't quite afford to move back I will stick most of that loose cash into stocks and adjust with the G fund in the TSP.

 

[Hermit]

Thanks for the thoughts. I will stick with my plan -- just wanted to make sure I wasn't missing something.

That's what I did a couple of days ago. I was looking at it as balancing away from being too heavy in stocks. To me there is a lot of difference in a low return in bonds and very large swings that are possible in stocks. The best I can do is stay balanced. The last time I did a major re-balance was in late 2008 into stocks. Buying stocks wasn't popular at the time, but it worked for me.

 

[veremchuka]

There is no good choice IMO.

Equities are a bit high but not necessarily over priced. That said, they have been rising since early Nov. 2012 with nothing more than a one time 5 or 6% pullback. We are long overdue but it is the strongest time of the year for equities. If it was March I'd be much more nervous about adding anything to equities based upon the end of the favorable period and the tapering fears.

I'm at 50/50 up from 30/70 or 35/65 but I now realize that was way too low an equity allocation. I wish I was at 60/40 but I should have come to the realization 2 years ago not now. It's all in tax deferred and tax free so there's no cost to rebalance but my problem is I'm just getting to my preferred AA or maybe 10% low on the equity side.

There is no good choice IMO.

 

[Buckeye]

My asset allocation has gotten to 57.6% stocks, thanks to the good stock performance in 2013. On Jan 2, my plan calls for trimming this back to 50% stocks. It will involve moving money from the total stock market VG fund to the total bond market fund.

The outlook for bonds sure doesn't seem good, but my plan doesn't allow me to make decisions based on my forecast.

Thoughts?

It was time for us to get back to 60/40 after 2.5 years of not re-balancing. Luckily, PenFed CD rate increases came along just at the right time.

 

[Live And Learn]

Alas, I have the opposite problem. I want to work my way to 60/40 and I am at 50/50 now. To get there I'd need to sell some bonds (at a loss !) and buy stock (at record high prices). I'm trying to convince myself that 50/50 is just fine !!