Asset Allocation clarification

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Asset Allocation clarification

Postby gvsucavie03 » Mon Jul 15, 2013 2:53 pm

Bogleheads:

Just to be sure I have this correct (and yes, I know this is a very rudimentary question that shows a level of investing ignorance) -

Asset Allocation is how your total portfolio is distributed between the various asset classes (equities, fixed income, cash equivalents, sectors, commodities, etc.) AND how you actually distribute your contributions to the entire portfolio on a monthly basis? If I decide on a simple 3-fund portfolio in my IPS, I'm not only balancing 1/3 to each fund, but also distributing 1/3 of my monthly investment amount to each fund, correct?

Again, sorry if this is overly simplistic. I know how important AA is and I want to fully understand it.
gvsucavie03
 
Posts: 604
Joined: Sat Feb 16, 2013 9:30 am

Re: Asset Allocation clarification

Postby YDNAL » Mon Jul 15, 2013 3:15 pm

gvsucavie03 wrote:Asset Allocation is how your total portfolio is distributed between the various asset classes (equities, fixed income, cash equivalents, sectors, commodities, etc.) AND how you actually distribute your contributions to the entire portfolio on a monthly basis? If I decide on a simple 3-fund portfolio in my IPS, I'm not only balancing 1/3 to each fund, but also distributing 1/3 of my monthly investment amount to each fund, correct?

Yes, no.
1. Establish the Asset Allocation (most important Equity/Fixed split).
2. Monthly contributions are used [mostly] to rebalance back to the intended AA. For instance, in the 3 fund portfolio you mention, if Total Stock market increases 10% and Total International decreases 10% in one month, future contributions should be aimed to bring these back to balance.
    Roughly for illustration, a 50/50 split:
    a. $100 x 110% = $110
    b. $100 x 90% = $90
    c. The next $20 should go to (b).
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
YDNAL
 
Posts: 13415
Joined: Tue Apr 10, 2007 5:04 pm
Location: Biscayne Bay

Re: Asset Allocation clarification

Postby gvsucavie03 » Mon Jul 15, 2013 3:21 pm

YDNAL wrote:Yes, no.
1. Establish the Asset Allocation (most important Equity/Fixed split).
2. Monthly contributions are used [mostly] to rebalance back to the intended AA. For instance, in the 3 fund portfolio you mention, if Total Stock market increases 10% and Total International decreases 10% in one month, future contributions should be aimed to bring these back to balance.
    Roughly for illustration, a 50/50 split:
    a. $100 x 110% = $110
    b. $100 x 90% = $90
    c. The next $20 should go to (b).


Is there a method to automate this balancing act? For example, if I set up direct deposits to Vanguard IRA accounts, is there a way to automate this process or do Bogleheads using a strategic AA figure it out monthly and not use direct deposit with fixed amounts going to each fund?
gvsucavie03
 
Posts: 604
Joined: Sat Feb 16, 2013 9:30 am

Re: Asset Allocation clarification

Postby gvsucavie03 » Mon Jul 15, 2013 3:23 pm

I've also read on the wiki that rebalancing should be more seldom (annually/biannually or if a severe deviation occurs towards one of the asset classes).

Sorry if I'm being a pain... just trying to fully understand the BH approach.
gvsucavie03
 
Posts: 604
Joined: Sat Feb 16, 2013 9:30 am

Re: Asset Allocation clarification

Postby ogd » Mon Jul 15, 2013 3:40 pm

gvsucavie03 wrote:Is there a method to automate this balancing act? For example, if I set up direct deposits to Vanguard IRA accounts, is there a way to automate this process or do Bogleheads using a strategic AA figure it out monthly and not use direct deposit with fixed amounts going to each fund?

The simple method is to use a single all-in-one fund like LifeStrategy Moderate Growth or Target Retirement.

Some 401ks offer automatic balancing tools, but I don't think this is the case for an IRA. in any event, I don't think they can work across accounts with different tax characteristics, which is normally the primary reason to avoid all-in-one funds.

Personally I lump larger amounts and allocate them manually, for this reason and because I don't like small tax lots anyway (most of my investments are taxable).
User avatar
ogd
 
Posts: 2199
Joined: Fri Jun 15, 2012 12:43 am

Re: Asset Allocation clarification

Postby gvsucavie03 » Mon Jul 15, 2013 3:57 pm

ogd wrote:The simple method is to use a single all-in-one fund like LifeStrategy Moderate Growth or Target Retirement.


This is where I want to start with both of our Roth IRA's (2030 TR), then move into 2-3 funds in each account to ease balancing and have control.

Currently my IPS states (all Vanguard funds):
52.5% TSM
25% TBM
22.5% TISM

I'd put TSM and TBM in one IRA, then TISM and the remaining TSM in the other.

I probably won't need taxable accounts because I have a 403(b) available after I max out Roth IRAs.
gvsucavie03
 
Posts: 604
Joined: Sat Feb 16, 2013 9:30 am

Re: Asset Allocation clarification

Postby YDNAL » Mon Jul 15, 2013 4:23 pm

gvsucavie03 wrote:
YDNAL wrote:Yes, no.
1. Establish the Asset Allocation (most important Equity/Fixed split).
2. Monthly contributions are used [mostly] to rebalance back to the intended AA. For instance, in the 3 fund portfolio you mention, if Total Stock market increases 10% and Total International decreases 10% in one month, future contributions should be aimed to bring these back to balance.
    Roughly for illustration, a 50/50 split:
    a. $100 x 110% = $110
    b. $100 x 90% = $90
    c. The next $20 should go to (b).

Is there a method to automate this balancing act? For example, if I set up direct deposits to Vanguard IRA accounts, is there a way to automate this process or do Bogleheads using a strategic AA figure it out monthly and not use direct deposit with fixed amounts going to each fund?

The example I used is extreme - though not impossible. But, yes, the way for ongoing rebalancing is called a Target Date (or LifeStrategy) fund.
Link: https://personal.vanguard.com/us/funds/ ... ?WT.srch=1
Link: https://personal.vanguard.com/us/funds/ ... rategyList

There is even a Balanced Index fund for U.S. Equities/Fixed (excludes non-U.S.).
Link: https://personal.vanguard.com/us/funds/ ... IntExt=INT

I've also read on the wiki that rebalancing should be more seldom (annually/biannually or if a severe deviation occurs towards one of the asset classes).

We should rebalance to control risk - and the calendar has nothing to do with risk. If the Equity/Fixed split if off... fix it!
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
YDNAL
 
Posts: 13415
Joined: Tue Apr 10, 2007 5:04 pm
Location: Biscayne Bay

Re: Asset Allocation clarification

Postby Jay69 » Mon Jul 15, 2013 4:46 pm

Sounds like you may have a few accounts to deal with, most of us do.

The trick is not to make it a burden.

This is my example,

We have 5 accounts to deal with and use a 3 fund approach, going to be 4 funds when I get around to it.

His rIRA holds International stock
Her tIRA holds US stocks
His work 401 holds bonds
Her work 401 holds bonds
His tIRA holds bonds/us and international stocks, it the largest account and where we rebalance.

We have a 6th account, her rIRA that holds the EM fund, at some point I expect that will be brought into the mix as well.

With the drop in bonds and the rise in equities and with both of our work place accounts buying bonds this year has led to a year where rebalancing was almost automatic.

Next years plans is to fill up the IRA's quarterly and rebalance at that point when I look at it.

Keep it simple, if you can get by with one fund across all accounts until you get to a point where the fees warrant a change then go for it. Also keep in mind trading cost. In our case we have more than enough free trades so its not an issue.
"Out of clutter, find simplicity” Albert Einstein
User avatar
Jay69
 
Posts: 1801
Joined: Thu Feb 17, 2011 10:42 pm

Re: Asset Allocation clarification

Postby FNK » Mon Jul 15, 2013 4:48 pm

For now, I've settled into this pattern: every quarter, I update The Spreadsheet and do the rebalancing that it tells me to do. New contributions follow my desired AA.
User avatar
FNK
 
Posts: 1353
Joined: Tue May 17, 2011 8:01 pm

Re: Asset Allocation clarification

Postby gvsucavie03 » Mon Jul 15, 2013 8:08 pm

Do you always rebalance with new money going in or is that quite difficult when your net worth is substantial? When do you pull the "sell" trigger when your AA is off?

I guess what I'm looking for is that tangible, real-world application of AA (or dollar-cost averaging converging with asset allocation in real life).

What would be improper with just setting fixed contributions based on my AA and trading every so often to rebalance? Is that going to get expensive in a more modest portfolio?
gvsucavie03
 
Posts: 604
Joined: Sat Feb 16, 2013 9:30 am

Re: Asset Allocation clarification

Postby FNK » Mon Jul 15, 2013 8:15 pm

My situation:
- all my investments are tax advantaged (so there's no tax overhead to selling)
- almost everything is commission-free (Vanguard!)
- most new money is 401(k) contributions

It's easier to just rebalance occasionally than to tweak contribution percentages.
User avatar
FNK
 
Posts: 1353
Joined: Tue May 17, 2011 8:01 pm

Re: Asset Allocation clarification

Postby livesoft » Mon Jul 15, 2013 8:35 pm

Many folks practice a so-called "bands" or "range" of professed Asset Allocation. For example, equities are between 55% and 65% of a portfolio with a nominal value of 60%. This would be 60% plus-or-minus 5%. Thus, there would be no need to rebalance if one had 64% equities or 55% equities or 65% equities.

Then with that range of allocation, one can also decide how often they look to see if their portfolio is within range. Some folks won't look more than once a quarter or once a year while others might look daily. Looking daily might sound ridiculous, but the reality is that if you were in range yesterday, you are going to be in range today unless something dramatic happened in the stock market. Thus "looking daily" could be restated as "looking on a ReallyBadDay or a ReallyGoodDay" and these days might occur less than 6 times a year.

In the meantime, new money going in could probably go anywhere and keep one within range. However, if one is above their nominal desired weight (say 60%), then it might make more sense to put the new money into the underweighted asset class (say fixed income). That said, I don't think it will really matter that much if one's range is 55% to 65% and one is at 62% equities where one puts the money.

For myself, I really like the RBD (ReallyBadDay) strategy of buying equities and/or tax-loss harvesting and/or rebalancing into equities on a so-called ReallyBadDay in the stock market even if my portfolio is within range.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 33309
Joined: Thu Mar 01, 2007 9:00 pm

Re: Asset Allocation clarification

Postby gvsucavie03 » Mon Jul 15, 2013 8:55 pm

I just did a search on RBD and you seem to be famous on this approach :happy

So basically, if there's some sort of 200pt market drop like we saw a month or so ago, you say "blue light is on" and put more into equities (as long as it aligns with your IPS and keeps you within your AA range)? That seems more like taking an advantage of an opportunity rather than being reactionary and completely changing philosophy.
gvsucavie03
 
Posts: 604
Joined: Sat Feb 16, 2013 9:30 am

Re: Asset Allocation clarification

Postby livesoft » Mon Jul 15, 2013 9:02 pm

gvsucavie03 wrote:I just did a search on RBD and you seem to be famous on this approach :happy

So basically, if there's some sort of 200pt market drop like we saw a month or so ago, you say "blue light is on" and put more into equities (as long as it aligns with your IPS and keeps you within your AA range)? That seems more like taking an advantage of an opportunity rather than being reactionary and completely changing philosophy.

That is basically it (though not quite), but there are no guarantees that an RBD is a positive opportunity. It does force me to purchase equities when many posters on the forum are asking "Should I sell?"
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 33309
Joined: Thu Mar 01, 2007 9:00 pm

Re: Asset Allocation clarification

Postby gvsucavie03 » Mon Jul 15, 2013 9:06 pm

One more, because I feel like I'm in good hands so far....

How does one word this into an IPS? I saw a post you (livesoft) did in '11 and it was quite technical regarding specific funds. It sounds a little out of my comfort range, but yet I do want to seize the day if it comes around.
gvsucavie03
 
Posts: 604
Joined: Sat Feb 16, 2013 9:30 am

Re: Asset Allocation clarification

Postby livesoft » Mon Jul 15, 2013 9:39 pm

Perhaps you read this thread from 2011: viewtopic.php?p=1027970#p1027970 where RBD and IPS are mentioned.
A possible definition of an RBD was technically defined in the same thread, but I have written a computer program to tell me when an RBD has occurred. I do not distribute this program since it is worth lots of money.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 33309
Joined: Thu Mar 01, 2007 9:00 pm

Re: Asset Allocation clarification

Postby gvsucavie03 » Tue Jul 16, 2013 7:51 pm

livesoft wrote:Perhaps you read this thread from 2011: viewtopic.php?p=1027970#p1027970 where RBD and IPS are mentioned.
A possible definition of an RBD was technically defined in the same thread, but I have written a computer program to tell me when an RBD has occurred. I do not distribute this program since it is worth lots of money.


Yes, this was the thread I read and I do see what your "RBD" approach might look like. I also looked at the "Lazy Rebalancing Calculator" to figure out rebalance allocation, so I'll take that into consideration when we get there.

I don't think we'll be in any major financial position soon to have to worry about it too much. We'll be starting with the TR funds, then move into individual funds later.
gvsucavie03
 
Posts: 604
Joined: Sat Feb 16, 2013 9:30 am

Re: Asset Allocation clarification

Postby Jay69 » Wed Jul 17, 2013 8:16 am

livesoft wrote:Perhaps you read this thread from 2011: viewtopic.php?p=1027970#p1027970 where RBD and IPS are mentioned.
A possible definition of an RBD was technically defined in the same thread, but I have written a computer program to tell me when an RBD has occurred. I do not distribute this program since it is worth lots of money.



And here I thought you were going to sell a book on how to make millions in the stock market :moneybag
"Out of clutter, find simplicity” Albert Einstein
User avatar
Jay69
 
Posts: 1801
Joined: Thu Feb 17, 2011 10:42 pm

Re: Asset Allocation clarification

Postby Phineas J. Whoopee » Wed Jul 17, 2013 12:41 pm

Jay69 wrote:
livesoft wrote:Perhaps you read this thread from 2011: viewtopic.php?p=1027970#p1027970 where RBD and IPS are mentioned.
A possible definition of an RBD was technically defined in the same thread, but I have written a computer program to tell me when an RBD has occurred. I do not distribute this program since it is worth lots of money.



And here I thought you were going to sell a book on how to make millions in the stock market :moneybag

Selling a book on how to make millions in the stock market seems to be one of the best ways to make millions from the stock market. Plus you don't have to take all those pesky risks. :wink:
PJW
User avatar
Phineas J. Whoopee
 
Posts: 2553
Joined: Sun Dec 18, 2011 7:18 pm

Re: Asset Allocation clarification

Postby livesoft » Wed Jul 17, 2013 12:53 pm

But I've already made millions in the stock market, so I don't need to write that pesky book either. :)
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 33309
Joined: Thu Mar 01, 2007 9:00 pm

Re: Asset Allocation clarification

Postby Phineas J. Whoopee » Wed Jul 17, 2013 1:12 pm

livesoft wrote:But I've already made millions in the stock market, so I don't need to write that pesky book either. :)

:) Who said anything about writing? My post was only about selling. :)
PJW
User avatar
Phineas J. Whoopee
 
Posts: 2553
Joined: Sun Dec 18, 2011 7:18 pm

Re: Asset Allocation clarification

Postby Default User BR » Wed Jul 17, 2013 1:46 pm

livesoft wrote:A possible definition of an RBD was technically defined in the same thread, but I have written a computer program to tell me when an RBD has occurred.

Based on your wide lead in the post count, I believe that YOU are a computer program.


Brian
Default User BR
 
Posts: 7503
Joined: Mon Dec 17, 2007 8:32 pm

Re: Asset Allocation clarification

Postby MoonOrb » Wed Jul 17, 2013 2:01 pm

My IPS sets out what my AA is and says how frequently I'll rebalance: annually, unless I've reached a 5% band. I have my automatic deposits into my accounts designed to get me as close as possible to my desired AA.

Between my wife and I, we have 8 different "accounts," or buckets, I guess you could say: Roth IRAs, IRAs, 401k plans (x2), plus a profit sharing plan and a taxable account. This makes rebalancing into the desired AA a bit of a pain, since I would prefer to do all of the rebalancing within the tax-advantaged accounts so it can be done without tax consequences. It's not like we just have one account with 3 or 4 funds in it.

To actually make things happen the way I want things to happen, I created a spreadsheet on googledocs that tracks the current value of each bucket and tells me the difference between the "desired" amount of each asset class (based on my AA) and the actual amount of each asset class (based on current market data). The NAVs for each fund update automatically, but to keep things current I must, every so often, input the amounts of shares I have in each particular fund. This is a little tedious, but it's probably about a half hour of work each month. I just log into my accounts online, note the amount of shares held in each fund, and then plug the numbers into the spreadsheet.

Based on this I've sometimes changed my contribution percentages to more heavily weight asset classes where I'm lagging the desired amount and under weight contributions to classes where I'm running above pace. I do this because largely because I find it to be more convenient to try to keep the AA at a relatively constant level than if I needed to make greater adjustments either annually or if I hit a band. But this is a personal preference, not based on any perceived pecuniary advantage. A main reason I do this is because one of my international funds is wholly in a taxable account, so the only way to bring the amount up to the desired level is to purchase more of that fund, since I don't want to liquidate other taxable funds to rebalance.
MoonOrb
 
Posts: 472
Joined: Thu Jan 24, 2013 7:58 pm

Re: Asset Allocation clarification

Postby gvsucavie03 » Wed Jul 17, 2013 3:48 pm

MoonOrb wrote:My IPS sets out what my AA is and says how frequently I'll rebalance: annually, unless I've reached a 5% band. I have my automatic deposits into my accounts designed to get me as close as possible to my desired AA.

Between my wife and I, we have 8 different "accounts," or buckets, I guess you could say: Roth IRAs, IRAs, 401k plans (x2), plus a profit sharing plan and a taxable account. This makes rebalancing into the desired AA a bit of a pain, since I would prefer to do all of the rebalancing within the tax-advantaged accounts so it can be done without tax consequences. It's not like we just have one account with 3 or 4 funds in it.

To actually make things happen the way I want things to happen, I created a spreadsheet on googledocs that tracks the current value of each bucket and tells me the difference between the "desired" amount of each asset class (based on my AA) and the actual amount of each asset class (based on current market data). The NAVs for each fund update automatically, but to keep things current I must, every so often, input the amounts of shares I have in each particular fund. This is a little tedious, but it's probably about a half hour of work each month. I just log into my accounts online, note the amount of shares held in each fund, and then plug the numbers into the spreadsheet.

Based on this I've sometimes changed my contribution percentages to more heavily weight asset classes where I'm lagging the desired amount and under weight contributions to classes where I'm running above pace. I do this because largely because I find it to be more convenient to try to keep the AA at a relatively constant level than if I needed to make greater adjustments either annually or if I hit a band. But this is a personal preference, not based on any perceived pecuniary advantage. A main reason I do this is because one of my international funds is wholly in a taxable account, so the only way to bring the amount up to the desired level is to purchase more of that fund, since I don't want to liquidate other taxable funds to rebalance.


Wow, great info! I'll be adjusting my IPS based on what you, livesoft and some of the others have said as well as things I'm reading.

Does Bogleheads Guide to Investing cover this and examples of different ways to achieve AA?
gvsucavie03
 
Posts: 604
Joined: Sat Feb 16, 2013 9:30 am

Re: Asset Allocation clarification

Postby MoonOrb » Wed Jul 17, 2013 4:47 pm

Hey OP, I can't speak for the Bogleheads guide, but here are the parts of the wiki that I used to design the approach that I took:

http://www.bogleheads.org/wiki/Principl ... _Placement

http://www.bogleheads.org/wiki/Rebalancing
MoonOrb
 
Posts: 472
Joined: Thu Jan 24, 2013 7:58 pm

Re: Asset Allocation clarification

Postby gvsucavie03 » Wed Jul 17, 2013 7:45 pm

MoonOrb wrote:Hey OP, I can't speak for the Bogleheads guide, but here are the parts of the wiki that I used to design the approach that I took:

http://www.bogleheads.org/wiki/Principl ... _Placement

http://www.bogleheads.org/wiki/Rebalancing


I don't think I have any tax implications for quite a while... we'll probably only need rIRAs and tIRAs and/or my 403b.

I've been through just about all the wiki pages, and the reason for my post was that I never had a concrete answer on how to make the AA/rebalancing thing actually happen (new cash in or actually moving $ from one fund/account to another or a combination of both).

I'd really like to set my monthly investing on auto-pilot and periodically rebalance within our rIRAs by transferring funds. Isn't selling from the high side to put into the low side in effect the same thing as adding $ towards the low (assuming my tax/account situation)? I'm pretty sure I read that you can transfer money from one IRA to another as long as it is reinvested before the 60 days is up (I would never take that long...) to avoid the withdraw penalty and taxes.

Again, sorry I'm showing my youthful "spots" when it comes to the nuts and bolts of investing. Just trying to fully understand.
gvsucavie03
 
Posts: 604
Joined: Sat Feb 16, 2013 9:30 am

Asset Allocation and The Bogleheads Guide to Investing

Postby Taylor Larimore » Wed Jul 17, 2013 8:37 pm

Does Bogleheads Guide to Investing cover this and examples of different ways to achieve AA?

gvsucavie03:

Chapter 8 in our Bogleheads' Guide to Investing is titled: Asset Allocation: The Cornerstone of Successful Investing. At the end of the chapter we suggest eight different portfolios depending on the investors' stage in life and whether the investor is using Vanguard or funds with another company.

If you are interested in studying asset-allocation in depth, you might consider All About Asset Allocation by Boglehead, Rick Ferri. Excerpts from both books can be read HERE.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 19922
Joined: Tue Feb 27, 2007 9:09 pm
Location: Miami FL

Re: Asset Allocation and The Bogleheads Guide to Investing

Postby gvsucavie03 » Wed Jul 17, 2013 9:12 pm

Taylor Larimore wrote:
Does Bogleheads Guide to Investing cover this and examples of different ways to achieve AA?

gvsucavie03:

Chapter 8 in our Bogleheads' Guide to Investing is titled: Asset Allocation: The Cornerstone of Successful Investing. At the end of the chapter we suggest eight different portfolios depending on the investors' stage in life and whether the investor is using Vanguard or funds with another company.

Best wishes.
Taylor


Thank you so much. You've built quite a fantastic thing here and I really appreciate what you and the other A. Board members have done for the "average" person wanting to succeed in the world of personal finance.
gvsucavie03
 
Posts: 604
Joined: Sat Feb 16, 2013 9:30 am

Re: Asset Allocation clarification

Postby spotty_dog » Wed Jul 17, 2013 10:19 pm

Bernstein made a good case, I think it was in the Investor's Manifesto, for doing a full-bore rebalance only every 1-2 years. I have chosen annual rebalancing just because it's easier to remember "rebalance on my birthday" than "rebalance on my birthday in even-numbered years".

In the interim I keep a spreadsheet and assign new contributions to under-weight asset classes. If you didn't feel like the hassle of a spreadsheet or if it were psychologically unwise for you to keep such close tabs on your portfolio, then it would be totally fine just to make all your contributions according to your ideal allocation -- ie. always contribute in a 70/30 ratio (or whatever), or contribute to equity three times for every one time you contribute to fixed income, or whatever works out.

If you prefer the rebalancing bands concept, I think Swedroe does a good job describing these in his Right Financial Plan book.
spotty_dog
 
Posts: 93
Joined: Thu Jul 26, 2012 10:06 am

Re: Asset Allocation clarification

Postby MoonOrb » Thu Jul 18, 2013 3:24 am

gvsucavie03 wrote:
I don't think I have any tax implications for quite a while... we'll probably only need rIRAs and tIRAs and/or my 403b.

I've been through just about all the wiki pages, and the reason for my post was that I never had a concrete answer on how to make the AA/rebalancing thing actually happen (new cash in or actually moving $ from one fund/account to another or a combination of both).

I'd really like to set my monthly investing on auto-pilot and periodically rebalance within our rIRAs by transferring funds. Isn't selling from the high side to put into the low side in effect the same thing as adding $ towards the low (assuming my tax/account situation)? I'm pretty sure I read that you can transfer money from one IRA to another as long as it is reinvested before the 60 days is up (I would never take that long...) to avoid the withdraw penalty and taxes.

Again, sorry I'm showing my youthful "spots" when it comes to the nuts and bolts of investing. Just trying to fully understand.


With regard to tax considerations, if you don't have a taxable account, your life gets easier when you rebalance because you have fewer tax issues to worry about.

If the main question you have is about *how* to rebalance, then yes--you have it. You can rebalance either by adding new contributions or rebalance by buying/selling within your accounts.

One thing to think about is the extent to which you'll be able to rebalance if you have to rely on new contributions to do it. This would be especially difficult if you rebalanced when you hit a band, for example. So if you have only one type of fund in each account, rebalancing can be a pain. If it's feasible it's nice to have one account that has sufficient amounts of all of the kinds of funds you have so you can pretty much rebalance just by shifting around the funds in one account.

In my case, I didn't follow a template in a book--I just started with the advice in the wiki pages I linked, then I put paper to pencil and tried to game out all of the different possibilities for how to set up my AA given the array of fund options and accounts I had. Then I figured out a plan for contributions so future deposits would go into the accounts in the same proportion as my AA. It took a number of tries to come up with something that made sense, but eventually I figured it out.

One key is to start with your 403b/401k type plans first since you typically have the fewest fund options with those plans. I identified the few really good funds that our 401ks were offering and started there. Then I went on down the line, trying to arrange everything so I could get Admiral shares whenever possible and put bond funds in a tIRA and international funds in a taxable account. I recommend getting a calculator, a legal pad, a pencil and then just some elbow grease and thinking to work it out.

If I would break it down into steps it would look like:

1. Decide upon asset allocation
2. Get current balances of all investable monies
3. Learn investment options for 401ks
4. Allocate assets per my desired AA by spreading them among 401ks, tIRAs, rIRAs, and taxable accounts.
5. Prioritize picking 401k funds first because 401ks have very limited options for okay funds
6. Once assets in 401k are set, then decide how to allocate left over monies among the various accounts: prioritize making rebalancing easy by splitting largest account into domestic stock, bond, and international funds. Place bond funds into tIRA. Place international funds in taxable account.
7. Once asset allocation is current, figure out how to allocate each month's contributions to match AA as closely as possible. See if it makes sense to have, say, an international fund in my 401k even if it's not an ideal fund--so that each month I can contribute something to the foreign stock part of my AA. So if every month I knew I had a total of $1000 to invest, and I wanted an AA that was 50% domestic stock, 25% int'l stock, and 25% bond, I'd structure each month's automatic contributions so that $500 went to domestic stock funds, $250 went to int'l stock, and $250 to bonds. Then each month I check against my spreadsheet to see how closely I'm tracking my desired AA.


One option when you have considered a number of alternatives is to post in the Help with Individual Investments forum.
MoonOrb
 
Posts: 472
Joined: Thu Jan 24, 2013 7:58 pm


Return to Investing - Theory, News & General

Who is online

Users browsing this forum: 3CT_Paddler, Ged, IlikeJackB, Nukeboilermaker, Pizzasteve510, sschullo and 50 guests