Changing allocation: Fast or gradual?

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Topic Author
samjuno
Posts: 102
Joined: Fri Sep 21, 2007 10:55 pm

Changing allocation: Fast or gradual?

Post by samjuno »

Last month I posted this info on M*:

Age: 62 (employed)
Taxable investments: 0
Spouse:0
Pension:0
Debts: 0 (except for mortgage of approx. $73k@ 6.25%)
Lifestyle: very frugal
Income: less than $35k

Future Social Security: under $1k/month unless I wait till 70

Emergency funds: almost 9 months of living expenses in CDs , savings accounts & I-bonds over 5yrs. old.

Living expenses: approx. $2400/month (not expected to decrease with retirement).

Target allocation: 60/40 (formerly) & 55/45 (after reading the above books).

Target portfolio (assuming your 4% withdrawal rate & drawing social security at 70): $440,000 (unattainable).

403b is with current employer & automatic contributions are made a bit beyond the matching limit.

403b:
16% TIAA TraditionalAnnuity(expense ratio?)
29% CREF Stock (.47)
6% CREF Equity Index (.41)
11% CREF Global (.52)
3% CREF Bond Market (.45)
7% CREF Inflation-Linked Bond (.45)
8% TIAA Real Estate (.79)

Roth IRAs:
2% Vanguard Health Care(.25)
3% Dodge & Cox Stock (.52)
4% Dodge & Cox Balanced (.53)
4% Dodge & Cox International (.77)
3% D&C Income (.44)

US Bonds:
3% I- Bonds

Total: 100%
............................................
Laura was kind enough to suggest the following adjustments:

403b
16% TIAA Traditional (like a bond)
9% CREF Bond Market (.45)
22% CREF Inflation-Linked Bond (.45)
5% TIAA Real Estate (.79)
28% CREF Equity Index (.41)

Roth
16% Vanguard Total Intl Stock Market (includes developed and emerging markets)

Taxable
3% I-bonds
.........................
I have since reduced my TIAA Real Estate holdings to 5% & opened a Roth in Vanguard's Total International Index fund. So far, I have transfered a small amt. from the Health Care fund, but found myself paralyzed to totally close it since it has been gaining recently.

My question is how fast should one adjust one's allocation? I'm having a difficult time thinking of pulling out of my Dodge & Cox funds esp.since they are down.

I'm also debating whether I should start the 10 year transfer out of the TIAA annuity. But that's probably a topic for a separate post.

Appreciate feedback on this.

-sam
peter71
Posts: 3769
Joined: Tue Jul 24, 2007 8:28 pm

Post by peter71 »

hi sam,

you might also want to get a different perspective on the TIAA accounts from the retirees over on the M* board. as you may know pretty much everyone there loves TIAA RE and while, all else equal, I definitely prefer passive to active, there's additional differences between CREF-equities and CREF-stock that may be worth taking into account.

all best,
pete

p.s. the TIAA Traditional Account is just whatever they decide to give you whenever they decide to give it (with a minimum of 3%), so technically there's no ER but that isn't particularly meaningful.
rich
Posts: 933
Joined: Fri Mar 16, 2007 6:51 pm

Re: Changing allocation: Fast or gradual?

Post by rich »

If you can ignore the behavior component (which most people can't including me) then the optimal allocation is the optimal allocation period. Hence you should move to the optimal allocation immediately (I'm assuming no tax consequences).

However, if you are like most people and will regret it if your non-optimal allocation outperforms, then you should move incrementally.
Best regards, | Rich
Valuethinker
Posts: 49036
Joined: Fri May 11, 2007 11:07 am

Re: Changing allocation: Fast or gradual?

Post by Valuethinker »

samjuno wrote: I have since reduced my TIAA Real Estate holdings to 5% & opened a Roth in Vanguard's Total International Index fund. So far, I have transfered a small amt. from the Health Care fund, but found myself paralyzed to totally close it since it has been gaining recently.

My question is how fast should one adjust one's allocation? I'm having a difficult time thinking of pulling out of my Dodge & Cox funds esp.since they are down.

I'm also debating whether I should start the 10 year transfer out of the TIAA annuity. But that's probably a topic for a separate post.

Appreciate feedback on this.

-sam
Sam

When you are moving equity fund to equity index fund, I wouldn't sweat it too hard. Just do it. The reason being that your only worry is the *difference* in performance between two funds.

So the healthcare fund might do 5% better than the fund you are switching into, but 5% of 2% is the sweet side of nothing. Going from Dodge & Cox to an international index fund will have the same effect.

It's also worth knowing as humans we hate to take a loss. We tend to sell our winners, and run our losers. That's human nature I am afraid. (to be scientific 'human beings are risk averse in the domain of losses').

TIAA I can't help you with. 5% is a perfectly fine weighting in the real estate fund.

usually when faced with an imponderable in finance, I 'minimise regret' and 'split the difference'. I do half now, and then wait on the other half for a while.

For example, I had a stock that went from $10,000 to $30,000. I sold half my holding then. The rest is now back to where I bought it :( . Still I am up $10,000.
Last edited by Valuethinker on Fri Oct 05, 2007 12:58 pm, edited 1 time in total.
Valuethinker
Posts: 49036
Joined: Fri May 11, 2007 11:07 am

Re: Changing allocation: Fast or gradual?

Post by Valuethinker »

samjuno wrote:
Appreciate feedback on this.

-sam
PS you have done admirably well on savings for a person on such a relatively low income, in my opinion at least.
Topic Author
samjuno
Posts: 102
Joined: Fri Sep 21, 2007 10:55 pm

Re: Changing allocation: Fast or gradual?

Post by samjuno »

Valuethinker wrote:
When you are moving equity fund to equity index fund, I wouldn't sweat it too hard. Just do it. The reason being that your only worry is the *difference* in performance between two funds.

So the healthcare fund might do 5% better than the fund you are switching into, but 5% of 2% is the sweet side of nothing. Going from Dodge & Cox to an international index fund will have the same effect.


When you put it that way it makes contemplating the move easier.

Rich wrote:
If you can ignore the behavior component (which most people can't including me) then the optimal allocation is the optimal allocation period. Hence you should move to the optimal allocation immediately (I'm assuming no tax consequences).

However, if you are like most people and will regret it if your non-optimal allocation outperforms, then you should move incrementally.
I think I'm more of an incrementalist, since it seems many of my moves out of a position have been followed by regret: after years of poor performance, I finally moved everything out of CREF's Growth Fund earlier this year & now it's been their best performing fund YTD. :(

Valuethinker wrote:
PS you have done admirably well on savings for a person on such a relatively low income, in my opinion at least.


After such a late start, I've tried my best not to get too discouraged. Keep reminding myself that there are degrees of destitution. Appreciate the encouraging words.

peter71 wrote:
you might also want to get a different perspective on the TIAA accounts from the retirees over on the M* board.


I find the new M* format intimidating, but I guess I'll give it another try.

Thanks all for your feedback.

-sam
Topic Author
samjuno
Posts: 102
Joined: Fri Sep 21, 2007 10:55 pm

One year later:

Post by samjuno »

Bit the bullet today and transferred everything out of DODFX (Dodge & Cox Int'l) into DODGX (D&C Stock). Figured both funds were so down, that the move merely reduced my international exposure/risk. Still hanging on to DODIX ( D&C Income) more out of inertia than confidence.

Also, transfered out of VGHCX (Vanguard Health Care) into my already established VTENX (Vanguard's Target Retirement 2010). I harvested some gains out of VGHCX earlier, so only a paltry amt. (<$1k) was left.

Now I'm down to only two D&C funds and three Vanguard funds (VGTSX, VFSTX & VTENX) in my shrinking Roth IRA.

I would like to ultimately transfer everything into VTENX, but I'm down around 37% in both VGSTX & DODGX, & I can't bring myself to finalize those losses.

I know I should have acted a year ago......after getting valuable advice from Laura and others here. Now I just want to simplify.

My one fear is that if I don't move out of VFSTX (Vanguard's short term Investment Grade Bond) my 5% loss will keep growing & that was part of my emergency fund.

I don't even want to think about my 403b.........

-Sam
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