Rebalancing Strategies

[yummy_tacos]

Hi everyone! We're not sure how to go about rebalancing this portfolio. Any advice? (Slightly more specific questions below).

Emergency Funds:
We have 5-6 months at current spending levels (which are a tad high).

Debt:
Mortgage - 4.75% interest - 390% of current retirement money (We're looking into refinancing this closer to 3%...)
Student Loan - 2% interest - 14% of current retirement money
(Credit Cards - Paid in full monthly)

Tax:
Married filing Jointly
In 2011, our effective Federal Income Tax Rate was 9.8%
We have no state income tax

Age:
We're both in our late 20’s

Desired Asset allocation:
80% Stocks, 20% Bonds
35% of Stocks in International

New Annual Contributions
9% of current total to His 401(k)
13% of current total to the Roth IRAs

Current Retirement Assets (mid-high 5 figures)

His 401(k) @ Transamerica Retirement Solutions (nee Diversified Investments)
16.7% Dodge and Cox Income - DODIX - 0.43% Expense Ratio
38.4% Vanguard Institutional Index - VINIX - 0.04% Expense Ratio

Her Roth IRA @ Vanguard
27.1% Vanguard Total International Stock Index Admiral - VTIAX - 0.18% Expense Ratio
9.2% Vanguard Extended Market Index Investor - VEXMX - 0.28% Expense Ratio

His Roth IRA @ Vanguard
8.6% Vanguard Total Stock Market Index Investor - VTSMX - 0.18% Expense Ratio

Total Accounts: 100%

IRAs are maxed out for 2012, all remaining cash is for monthly expenses, emergency fund, and immediate short-term goals.

Funds available in 401(k)

Short Bonds/Stable/MMkt
American Century Capital Preservation Fund Investor Class - CPFXX - (0.48% Expense Ratio)
Stable Pooled Fund* - n/a - (0.48% Expense Ratio)

Interm./Long-Term Bonds
Dodge & Cox Income - DODIX - (0.43% Expense Ratio)

Large-Cap Stocks
JHancock3 Disciplined Value R6 - JDVWX - (0.82% Expense Ratio)
Vanguard Institutional Index Instl - VINIX - (0.04% Expense Ratio)
Columbia Select Large Cap Growth Z - UMLGX - (0.86% Expense Ratio)

Small/Mid-Cap Stocks
JPMorgan Mid Cap Value Instl - FLMVX - (0.76% Expense Ratio)
Baron Growth Instl - BGRIX - (1.06% Expense Ratio)
Ivy Mid Cap Growth I - IYMIX - (1.05% Expense Ratio)
Artisan Small Cap Value Investor - ARTVX - (1.20% Expense Ratio)

International Stocks
Allianz NFJ International Value Instl - ANJIX - (0.88% (0.9%?) Expense Ratio)*
Calamos International Growth I - CIGIX - (1.16% Expense Ratio)
Janus Global Research I - JRGIX - (0.97% Expense Ratio)
Templeton Foreign Smaller Companies Adv - FTFAX - (1.3% Expense Ratio)

Multi-Asset/Other
Vanguard STAR Inv - VGSTX - (0.34% Expense Ratio)

* Depending on where I'm looking, the Net Expense Ratio for this fund changes slightly...

Questions

We're struggling to come up with a good strategy for how to do the rebalancing. We don't know what's a good strategy for how to shuffle funds around to hit our balance - there doesn't seem to be much advice that addresses the actual mechanics of that. It seems that trying to consolidate a single index fund in just one of our investment accounts is preferable--that way we can upgrade to e.g. Admiral shares when there's enough money there. However, it seems that no matter how we do that, we're going to end up with one or two accounts which have to be split across our investment accounts. How do we decide which ones to "split up" like that? Should it be the ones with the highest expense ratio? The lowest? Perhaps by class (e.g. Bonds, or international stocks, or...?). Or take into consideration future contributions?

Our current plan is to rebalance every 6 months, but we could also consider only doing it yearly. We're not sure which to shoot for.

[Aptenodytes]

You ask one question explicitly and another implicitly. Implicitly you are asking for advice on which funds to use. I won't address that. Explicitly you ask how to rebalance, assuming your fund choice is OK. That one is easy.

If your AA is acceptable as stated, I don't see any need to shift your funds around. Direct new contributions to the categories that are too low. E.g. right now your bond allocation is too low. So all the new contributions to his 401K should go to the bond fund. For her Roth, the international needs new money more than the domestic, so put the new money there. For his Roth, there's just one fund so put it all in domestic.

If there comes a time when channeling new money isn't enough, then rebalance. Shift between domestic and bond in his 401K as needed; shift between international and domestic in her Roth as needed.

Right now you are within what most people would consider acceptable tolerances.

The implicit question probably needs to be addressed at this point, because you have three different funds to represent domestic stocks, and they have different investment strategies. Your AA does not call for separate categories of domestic stocks, but your holdings do. That's a contradiction you need to resolve in order to rebalance intelligently.

[retiredjg]

Your desired target is:

52.0% US Stocks, 28% International Stocks, and 20% Bonds. Right now, you are at:

56.2% US Stocks, 27.1 International Stocks and 16.7% bonds,

You are not far off target at all. A rebalance is not really needed if you are comfortable with 5% bands. By that, I mean, being comfortable with 5% over or under your target . In this case, that would be a range of 47% to 57% for US stocks and you are in that range.

I just picked a common size band (5%) that keeps your risk level pretty close to target and which allows market ups and downs without constant rebalancing.

If you want to rebalance back to target, say just for the experience of doing it, I would only take a little from the 500 Index and add it to the Bond Fund in your 401k. That is the easiest approach. Your bonds are 3.3% below target. If your portfolio is $50k, then simply move 3.3% of it ($1,650) from 500 Index to Dodge and Cox in the 401k. It does not matter if you get exactly back to exactly 20%. Just somewhere in the neighborhood is good enough - the market will change it the next day anyway.

Another approach is to simply send a little more new money to the bond fund for awhile. If your current contributions to the 401k are 60% 500 Index and 40% Dodge and Cox, change it 50/50 for a few months and see if that brings your bond allocation back up. Or change it to 20/80 for a more dramatic change in a shorter time. Then change it back when the bond fund gets to a place you are comfortable with.

Not in your question, but here is a way to avoid a lot of rebalancing. First you set your portfolio to target (or near target). Then you send your contributions in at the same target ratios.

And example, say you are putting $17,500 in a 401k and $5,500 in each of 2 IRAs. That's a total of $28,500 a year.

Send 20% ($5,700 to bonds), 28% ($7,980) to international, and $14,820 to US stocks ($11,856 to 500 Index and $2964 to Extended Market). You can round these numbers to something convenient if you want.

401k $17,500 - $5700 to bonds, $11,800 to 500 Index
Her Roth IRA - all to International ah....here's the problem...you do need another fund in one account to make this work
His Roth IRA -


See if this works better for you:

Flip Flop the funds in the IRAs to:

Her Roth IRA
27.1% total International
9.2% Total Stock

His roth IRA
8.6% Extended Market
0% Total International

And do this for your contributions:

401k - $17,500 - $5700 to bonds, $11,800 to 500 Index
Her Roth IRA - all $5,500 to International
His roth IRA - $2960 to Extended Market, $2540 to International

If your international gets too high or too low, exchange it with the Total Stock Market in the same account.

Your concern about using fewer funds to get to Admiral Status is unnecessary. You can do that and be off target (but maybe only in the amount of extended market you have). Or you can add another fund and stay closer to target.

With a portfolio under $100k, it probably does not matter. Your contributions are growing the portfolio faster at this point that your funds are growing it. Right now, if you have your stock to bond ratio halfway right, it doesn't really matter that much what you are invested in because your portfolio will grow 20% or so just based on what you are saving.

If you really want to get to Admiral funds faster, drop the extended market for the time being. That should make it work.

[YDNAL]

Hi everyone! We're not sure how to go about rebalancing this portfolio. Any advice? (Slightly more specific questions below).

Easy... send new money to the Fund that needs it - based on your target. Question for you: are you sure about your target?

New Annual Contributions
9% of current total to His 401(k)
13% of current total to the Roth IRAs

Questions

We're struggling to come up with a good strategy for how to do the rebalancing. We don't know what's a good strategy for how to shuffle funds around to hit our balance - there doesn't seem to be much advice that addresses the actual mechanics of that.

Sure, I just told you, use new money - you don't have "to shuffle funds around."

[retiredjg]

Your AA does not call for separate categories of domestic stocks, but your holdings do. That's a contradiction you need to resolve in order to rebalance intelligently.

Interesting. I see your point and I don't really disagree, but I see it entirely differently.

I look at TSM as mud to put in all the holes. If you have an empty space (assuming you have "placed" all your bonds and international) you just fill it with TSM mud as a place holder. Any extra money can flow into there or you can take from there if you need to top off some other stock fund within the same account. Doing it this way does not change your domestic large, mid, small ratios so it doesn't require any jiggering anywhere else.

Or if you need to top off bonds, you can take from the TSM mud and top off the bonds (within the same account) without changing your domestic large, mid and small cap ratios elsewhere.

I do everything by hand. I suspect you use a spreadsheet. I can see how your approach might make more sense if you use a spreadsheet.

[retiredjg]

New Annual Contributions
9% of current total to His 401(k)
13% of current total to the Roth IRAs

I realize I didn't use the right numbers for my example. I suspect the conclusion would be the same, but it would be helpful to know the dollars here - percentages don't tell us how much is going into each account.

[YDNAL]

New Annual Contributions
9% of current total to His 401(k)
13% of current total to the Roth IRAs

I realize I didn't use the right numbers for my example. I suspect the conclusion would be the same, but it would be helpful to know the dollars here - percentages don't tell us how much is going into each account.

Percentages tell you...

Current Retirement Assets (mid-high 5 figures)

$11,000 (2 Roths maximum) / 13% = $84,615.38 ("current mid-high 5-figure retirement assets").
$7,615 to 401K = $84,615.38 x 9%

Give or take a potential few hundreds here/there.

Seriously, the question is how to rebalance and the answer is to use new money.

[retiredjg]

Percentages tell you...

Seriously, the question is how to rebalance and the answer is to use new money.

That's only true if both Roth IRAs get maxed. Maybe that is stated, but I didn't remember seeing that mentioned. However, if it is there, I bet you'll let me know.

I agree that new money is a good approach. I don't really see a need to rebalance as much as a need to not let things go farther in that direction.

[retiredjg]

I'll save you the trouble...it does say that IRAs were maxed for last tax year. It's reasonable, but not a forgone conclusion, that will continue.

[YDNAL]

I'll save you the trouble...it does say that IRAs were maxed for last tax year. It's reasonable, but not a forgone conclusion, that will continue.

See?... I told you.

It really doesn't matter - plus I was joking with you. With a 5-figure portfolio (my guess is $85K), were OP is contributing 22% of that value annually, (s)he needs to use this new money to rebalance, etc. and move to other/bigger things - like maxing contributions to the 401K after other goals are met.

IRAs are maxed out for 2012, all remaining cash is for monthly expenses, emergency fund, and immediate short-term goals.