Age 44, Time to rebalance, but...

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Age 44, Time to rebalance, but...

Postby dozer183e » Wed May 22, 2013 3:21 am

Greetings, I am 44, wife is 42. We have been contributing to various retirement accounts over the last 15 years or so without much attention to Asset Allocation, except for the fact I have been trying to remain more in stocks because time was on our side. Now we are approx 20 years away from retirement, and I am paying more attention, and learning alot here.

Our current combined retirement (~200k) AA: (in tax-advantaged retirement savings)

86% Stocks
14% Bonds

Stocks:
81% US
19% International

Much of what I have been reading around here leads me to believe my target AA should be

70% Stocks
30% Bonds.

with 25-30% of stocks in International.

I tend to be a bit more aggressive than conservative in my investments, the big dips in the market over the last 10 years did not cause me to blink an eye much. But now I'm getting older and my nest egg is growing and feel it is time to re-allocate a bit.

The age rule for bonds suggest my allocation should be 40-45% Bonds, but I don't feel comfortable losing that much potential growth in stocks, plus with the interest rate increase looming, it is tough for me to buy lots of bonds right now. I even have a hard time thinking to re-allocate to 80-20, let alone 70-30.

Any comments, thoughts on all of this?
Last edited by dozer183e on Wed May 22, 2013 6:55 am, edited 1 time in total.
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Re: Age 44, Time to rebalance, but...

Postby The Wizard » Wed May 22, 2013 5:37 am

86% stocks is high, yes.
You don't say if your investments are all tax sheltered or not, but moving down toward 70% stocks sounds good to me.
Perhaps move 2-3% chunks at a time each month till you get there, since I don't feel a stock crash is imminent...
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Re: Age 44, Time to rebalance, but...

Postby jsl11 » Wed May 22, 2013 5:41 am

Asset allocation is not about maximizing growth. It is about controlling risk. When you start out, your only concern is growth, because you have little to preserve. When you get to retirement and have enough, for many (most?) people, the emphasis shifts to preservation of capital, because that is more important to you than additional growth. In other words, why take more risk than you need to? Along the way, as you start to achieve a sizeable portfolio, capital preservation becomes more important and growth becomes less so. The transition should not occur all at one. In 2008 many people nearing retirement had not yet reduced their equity allocation, and were looking for more growth. Well, we all know what happened. Many of those people had to delay retirement.

If you are not happy with what bonds offer these days, neither is anyone else. You can keep duration short, but then you lose out on yield. CDs purchased at a bank, not a broker, may be a good alternative. A high yield savings account is another. Stay within FDIC or NCUA insurance limits.

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Re: Age 44, Time to rebalance, but...

Postby DaleMaley » Wed May 22, 2013 6:17 am

I was 100% stocks from 1979 until 1990.

In 1999, at age 44, I switched to 90:10 using Total Bond Fund for bonds. I remember I did not like the idea of starting to invest in bond funds, but I planned on transitioning to a lower risk portfolio when I got to the retirement phase.

Each year in December, I do an annual financial plan review. In December 2007, at age 52, I decided it was time to reduce risk and switch to a 60:40 portfolio. So in Jan 2008, I switched to 60:40. I did not know that in the Fall of 2008, we would experience the Sub-Prime Mortgage Crash. During this downturn, I enjoyed the lower volatility of a 60:40 portfolio (compared to 90:10) in this Bear market.

When I was deciding on whether or not to switch from 90:10 to 60:40 in Dec 2007, I remember using Larry Swedroe's advice of "Do Not Take More Risk Than You Have the Ability, Willingness, or Need to Take." By living below my means so I could invest 15% to 30% of my gross income for 30 years, I had accumulated a significant nest egg. Although I had the ability and willingness to take more risk, I no longer had a strong need to take more risk.

Since WWII, we have averaged a Bear market about every 8 years. As you get older, it is a lot easier to ride out these periodic Bear markets with a lower risk portfolio. If you are lucky to live long enough to be retired for 30 years, you will see about 4 of these Bear markets during retirement (30/8 = 3.75).
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Re: Age 44, Time to rebalance, but...

Postby Valuethinker » Wed May 22, 2013 7:14 am

dozer183e wrote:Greetings, I am 44, wife is 42. We have been contributing to various retirement accounts over the last 15 years or so without much attention to Asset Allocation, except for the fact I have been trying to remain more in stocks because time was on our side. Now we are approx 20 years away from retirement, and I am paying more attention, and learning alot here.

Our current combined retirement (~200k) AA: (in tax-advantaged retirement savings)

86% Stocks
14% Bonds

Stocks:
81% US
19% International

Much of what I have been reading around here leads me to believe my target AA should be

70% Stocks
30% Bonds.

with 25-30% of stocks in International.

I tend to be a bit more aggressive than conservative in my investments, the big dips in the market over the last 10 years did not cause me to blink an eye much. But now I'm getting older and my nest egg is growing and feel it is time to re-allocate a bit.

The age rule for bonds suggest my allocation should be 40-45% Bonds, but I don't feel comfortable losing that much potential growth in stocks, plus with the interest rate increase looming, it is tough for me to buy lots of bonds right now. I even have a hard time thinking to re-allocate to 80-20, let alone 70-30.

Any comments, thoughts on all of this?


1. reformulate it as 'taking gains off the table' ie selling stocks after they have reached new highs.

The question then becomes what to do with the cash? Well reinvest it in ST to IT bond funds. Also build your position in ibonds (a long term thing).

This takes us to 2:

2. you are freeing up capital for the (almost inevitable) next market setback, where you will rebalance, buying more stocks at a cheaper price

3. the third point is that if you consider your portfolio dropping back down to the March 2009 low, then doing 1 seems a lot more attractive.
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Re: Age 44, Time to rebalance, but...

Postby englishgirl » Wed May 22, 2013 7:34 am

If you have a hard time thinking about 80:20 even, but you feel you "should" be at 70:30, then why not try out 80:20 first? Changing AA does not have to be an instant thing. And you don't have to actually move the money - you could direct all new contributions to bonds for a while to bump up your percentages.
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Re: Age 44, Time to rebalance, but...

Postby dozer183e » Wed May 22, 2013 7:40 am

The Wizard wrote:86% stocks is high, yes.
You don't say if your investments are all tax sheltered or not, but moving down toward 70% stocks sounds good to me.
Perhaps move 2-3% chunks at a time each month till you get there, since I don't feel a stock crash is imminent...


Original Post edited to state that this is in tax-advantaged accounts. Spread between Roth IRAs, Rollover IRA, 403(b) etc. We do have taxable savings, but that is intended for use before retirement, so I don't calculate as part of my retirement savings.

Perhaps I can do the small chunks like you suggest, as well as change my new contribution allocation to about 50/50 until I reach the right ratio.

jsl11 wrote:Asset allocation is not about maximizing growth. It is about controlling risk. .... The transition should not occur all at one.


Thanks for the wise words. I'll probably start a slow transition like suggested above. Currently new contributions go to Vanguard Target Retirement 2040 Fund (vforx) of which 10% goes to Vanguard Total Bond Market Index Fund (vbmfx). I could redirect part of new contributions to the same or another bond fund. What about adding one of these:
Vanguard Inflation-Protected Securities Fund (vipsx)
Vanguard Long-Term Bond Index Fund (vbltx)
Vanguard Long-Term Treasury Fund (vustx)

Valuethinker wrote:
The question then becomes what to do with the cash? Well reinvest it in ST to IT bond funds. Also build your position in ibonds (a long term thing).


Oh, I wasn't considering those, but possibly that could be an option.
ibonds: I will need to do more research


Valuethinker wrote:... if you consider your portfolio dropping back down to the March 2009 low, then doing 1 seems a lot more attractive.

point noted! my port is now more than 3x the size it was in March 09 and don't want to go back!
Thanks all
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Re: Age 44, Time to rebalance, but...

Postby The Wizard » Wed May 22, 2013 9:07 am

dozer183e wrote:...Perhaps I can do the small chunks like you suggest, as well as change my new contribution allocation to about 50/50 until I reach the right ratio.

Perhaps, but as English Girl said, it's probably easier/better to direct ALL new contribs to the asset class that needs it.
This is what I did for past two years before retiring in March: no new money went into stocks...
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Re: Age 44, Time to rebalance, but...

Postby JW Nearly Retired » Wed May 22, 2013 10:27 am

dozer183e wrote: Greetings, I am 44, wife is 42. We have been contributing to various retirement accounts over the last 15 years or so without much attention to Asset Allocation, except for the fact I have been trying to remain more in stocks because time was on our side. Now we are approx 20 years away from retirement, and I am paying more attention, and learning alot here.

Our current combined retirement (~200k) AA: (in tax-advantaged retirement savings)

86% Stocks
14% Bonds

Stocks:
81% US
19% International

You probably should start inching your bonds up. On the other hand, it's worth noting that you are already close to what Vanguard thinks is suitable for someone about 20 years away from retirement. Their TR 2035 fund has 85.4% stocks, with about 30% of them international.

The major reason to hold bonds at your age is to make it psychologically easier not to bail during the next market crash. Good sign you didn't do that in 2008 but your retirement account was probably a lot smaller then. After you have really big money in the account, and watch it be cut in half or more, what then? Are you entirely certain you can hang on?

A lessor but still big reason is there is no law of physics that says the market can't stay down way longer than your need for the money can be deferred. If equities are about all you have, at some point you will be forced to dump them at fire sale prices. Vast numbers of investors in the 1930's had this happen.

For what it's worth, my personal (just about retired) threshold is 40% bonds. At this level I imagine I can't possibly lose more than about half my nest egg in a crash/depression. With some belt-tightening wife and I could live with that if we had to.
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Re: Age 44, Time to rebalance, but...

Postby WHL » Wed May 22, 2013 11:17 am

I'm 31 with roughly 26% of my assets in bonds. I had let it slip down to about 20% but rebalanced last week and got things in order. AA is definitely a personal choice of needs but I wouldn't feel comfortable with less bonds than I'm currently holding.
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Re: Age 44, Time to rebalance, but...

Postby jsl11 » Wed May 22, 2013 11:35 am

JW Nearly Retired wrote:You probably should start inching your bonds up. On the other hand, it's worth noting that you are already close to what Vanguard thinks is suitable for someone about 20 years away from retirement. Their TR 2035 fund has 85.4% stocks, with about 30% of them international.
I would not use the allocation of the TR funds as an indication of "what Vanguard thinks". For one thing, these allocations have changed in the past. The other consideration is that Vanguard operates in a competitive market. Accordingly, Vanguards TR funds must perform favorably compared to other company's TR funds. Thus, I would argue that Vanguard's allocations are selected for competitive reasons, not necessarily as an indicator of what Vanguard thinks is best for the typical or average investor of a particular age.
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Re: Age 44, Time to rebalance, but...

Postby inbox788 » Wed May 22, 2013 11:46 am

I haven't seen anything about the size of the account. While a fixed percentage is easy and appropriate for most folks, those on the extreme might think differently. If you're 60, and all you have under $100,000 saved or invested, you can be ultraconservative and think you can't afford to lose a dime, so put 100% in bonds, or you can think you have nothing to lose, and put it all in stocks. Now on the other extreme, if you have 50/50 allocation at age 65, with $1m on bonds and $1m on stocks, any amount beyond that I consider my kids inheritance. I could spend it, or try to grow it. In either case 100% stocks on all retirement funds beyond $2m is my rule of thumb. So this extra stock allocation cancels any age based rebalancing.
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Re: Age 44, Time to rebalance, but...

Postby Dandy » Wed May 22, 2013 2:42 pm

you are wise to consider reducing your equity exposure as you get closer to retirement age and your portfolio gets large. The tough part is where to put you fixed oncome dollars - such low yields and rising risks. You are lucky if you have access to a stable value fund.

You can rebalance by changing you future allocations instead of exchanging out of equities now if that makes sense or makes the process more gradual.
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Re: Age 44, Time to rebalance, but...

Postby JW Nearly Retired » Wed May 22, 2013 3:27 pm

jsl11 wrote:
JW Nearly Retired wrote:You probably should start inching your bonds up. On the other hand, it's worth noting that you are already close to what Vanguard thinks is suitable for someone about 20 years away from retirement. Their TR 2035 fund has 85.4% stocks, with about 30% of them international.
I would not use the allocation of the TR funds as an indication of "what Vanguard thinks". For one thing, these allocations have changed in the past. The other consideration is that Vanguard operates in a competitive market. Accordingly, Vanguards TR funds must perform favorably compared to other company's TR funds. Thus, I would argue that Vanguard's allocations are selected for competitive reasons, not necessarily as an indicator of what Vanguard thinks is best for the typical or average investor of a particular age.
Jeff

I am shocked you think Vanguard isn't trying to do the best thing for their investors. :shock:
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Re: Age 44, Time to rebalance, but...

Postby dozer183e » Fri May 31, 2013 5:56 am

Thanks for all the advice.

I am working towards moving my portfolio to 70/30. Today I am at 85/15. I will purchase a Vanguard bond fund from stock fund and make future contributions to it, which will get me to 80/20 initially, and eventually to 70/30.

Right now my bonds are all in Vanguard Total Bond Market. Should I consider with new bond puchases to add TIPS or an intermediate corporate bond fund as Bogle suggests?
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