Need to rebalance, but how?

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Need to rebalance, but how?

Postby Shaoya » Sat Feb 09, 2013 12:28 pm

I'd like to re-balance our portfolio, but what is the optimal way to do it? In reviewing our portfolio, after the recent stock market run-up, I realized that we've surpassed our equity/bond allocation by ~3%. My (soon-to-be-written!) IPS says I should re-balance when our AA is out of whack by 2.5% or more.

Two questions:

1. What criteria do Bogleheads use to trigger a re-balance? Calendar? Percentage bands?

2. Should I just exchange equities into one of our bond fund (which one?) or should I branch out to diversify in some other way? [I'm still learning about how asset classes correlate (or don't) so any help here is appreciated.]

Any suggestions on this, as well as any other comments on our situation below, would be greatly appreciated.

Thank you! - Shaoya

Investments Portfolio as of 2-7-13
(VG = Vanguard; value ~$400K)
Current AA Desired AA
Equities 68% Equities 65%
Bonds 32% Bonds 35%

Taxable

25.1% VG Total Stock Market Index Adm (VTSAX) (0.09%)
18.1% VG Total Int'l Stock Index Adm (VGTSX) (0.34%)

Tax-advantaged

Roth IRA
8.7% VG Inflation-Protect Sec (VIPSX) (0.22%)
8.3% VG Total Bond Market – Admiral (VBTLX) (0.22%)
3.7% VG Short-Term Bond Market (VFSTX) (0.24%)
4.5% VG Windsor II Inv. (VWNFX) (0.39%)
1.4% VG Total Stock Mkt Idx - Admiral (VTSAX) (0.09%)
3.6% VG FTSE All-World Except US (VFWIX) (0.40%)
3.4% VG REIT Index (VGSIX) (0.24%)

Her 457b - Deferred Compensation - ING (No employer match)
8.3% VG Total Bond Market Index Fund – Institutional Shares (VBTIX) (0.07%)
1.6 VG Institutional Index Fund – Institutional (VIIIX) (0.04%)

His 457 - Oregon Growth Savings Plan (No employer match)
2.9% Intermediate Bond Option (0.09%)
4.4% Large Company Value Stock Option (0.395%)

529 Funds - Oregon College Savings Plan for two kids, (Classes of 2030 & 2032)
2.1% VG International Stock Index (VGTSX) (0.38%)
2.8% TIAA-CREF Equity Index Fund (TINRX) (0.32%)

~100.0%


Debt

Mortgage –30 year fixed at 3.87% (refi’d Nov 2010)
Credit card debt – none
Student – 1.6% fixed @ $130 a month ($13K remaining)
Car – no debt
Emergency Fund – 6-9 months living expenses in Ally Savings (0.90%) & CD (1.48%) (not included in portfolio)

Tax Filing Status
Married, filing jointly – 15% Fed in 2011; 9% Oregon (2011)
Age
Hers – 37
His – 40
Son (b. 2008), Daughter (b. 2010)

Stable jobs in local/state government with an annual gross income of ~$111K. Expect this to increase incrementally (not dramatically) relative to inflation later in our careers. Intend to stay in our current house/city indefinitely.

Monthly Investment


We allocate $2316 (~25% of gross monthly income) from salaries across five accounts in these proportions:

Pre-tax

457b Plans:

[*]$500 to Vanguard Institutional Index Fund – Institutional (VIIIX) (0.04%)
[*]$500 to Large Company Value Stock Option (0.39%) [blend of Black Rock Russell 1000 Value Index; Dodge & Cox Stock Fund (DODGX); MFS Value (MEIIX); LSV Value Equity (LSVEX). = (0.39%)]

Post-tax
[*]$400 to college funds [$100 to each child's 529's, each with two funds: TIAA-CREF Equity Index Fund (TINRX) (0.32%) &
VG International Stock Index (VGTSX) (0.38%)
& $200 to taxable VG Total Stock Market Index (VTSAX) (0.09%)

[*]$458 to Her Roth IRA - VG REIT Index (VGSIX) (0.24%)
[*]$458 to His Roth IRA - Total Stock Mkt Idx Inv (VTSMX) (0.18%)
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Re: Need to rebalance, but how?

Postby Boglenaut » Sat Feb 09, 2013 12:30 pm

I do most of my re-balancing just by redirecting new contributions. Only rarely, like 2008/9 do I need to do a rebalnce not related to new contributions.

I do most of my rebalancing in my 401K because it is not generating taxable gains.
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Re: Need to rebalance, but how?

Postby Shaoya » Sat Feb 09, 2013 12:34 pm

Thanks, Boglenaut, Yes, my intention is to rebalance inside of tax-advantage accounts. Any suggestions on the best way to do this?
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Re: Need to rebalance, but how?

Postby livesoft » Sat Feb 09, 2013 12:35 pm

I would use rebalancing to simplify your portfolio.

For example, you could make that 457b account all one fund and put that account in "set-and-forget" mode by never contributing to the equity fund in that account again.

In the Roth IRA, you could get rid of the Total Stock Market fund, too.
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.
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Re: Need to rebalance, but how?

Postby dbr » Sat Feb 09, 2013 12:39 pm

The above for one.

You can also just exchange/buy-sell funds in a tax advantaged account.

As pointed out, you have too many different funds. I would simplify. The REIT, the Windsor II, and the ST bonds in the Roth could go, for example.

I think a 2.5% band is a little too tight for my taste although there is a theoretical argument for constant rebalancing if not for costs incurred to do so.
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Re: Need to rebalance, but how?

Postby Toons » Sat Feb 09, 2013 12:40 pm

Gradually by investing new monies or redirecting dividends and capital gains .
Rarely sell investments to achieve desired asset allocation :happy
Been buying bond funds for a couple years now to get to proper asset allocation :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Re: Need to rebalance, but how?

Postby retiredjg » Sat Feb 09, 2013 1:12 pm

Shaoya wrote:I'd like to re-balance our portfolio, but what is the optimal way to do it?

I don't believe you need to rebalance your portfolio at all. You are close enough to your target in my opinion. You could rebalance right back in target, but it will have moved by the next business day, so why bother? I'd consider 5% rebalancing bands instead of 2.5% rebalancing bands which are much too narrow in my opinion.


1. What criteria do Bogleheads use to trigger a re-balance? Calendar? Percentage bands?

Bogleheads, from what I've read here, use one or the other or both. What do you feel comfortable with?


2. Should I just exchange equities into one of our bond fund (which one?) or should I branch out to diversify in some other way? [I'm still learning about how asset classes correlate (or don't) so any help here is appreciated.]

You could do this if you want (but again, I don't see a need to do it). I doubt it makes much difference which one you pick.

Another approach is simply change the contributions in one of the 457 accounts. Just change the ratio a tick toward bonds. That will likely bring things closer to your target.


Any suggestions on this, as well as any other comments on our situation below, would be greatly appreciated.

Your portfolio is more complex than it needs to be. If you want, you could reduce the number of funds you have by a lot. Is there a reason you have so many? Do you like what you have or would you like something simpler?
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Re: Need to rebalance, but how?

Postby Default User BR » Sat Feb 09, 2013 1:44 pm

I use Swedroe-style 5/25 allocation ranges (built into the Big Spreadsheet). I try to use new money to keep things in balance where possible. For instance, by 401(k) contributions have been 100% fixed-income for a while. I haven't needed to do a true "sell one buy another" rebalance in some time.


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Re: Need to rebalance, but how?

Postby Aptenodytes » Sat Feb 09, 2013 2:04 pm

To add another vote for above advice,

First, simplify your holdings
Second, direct new contributions to lagging assets and you won't need to rebalance for a very long time.
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Re: Need to rebalance, but how?

Postby Shaoya » Sun Feb 10, 2013 5:22 pm

Food for thought & consideration. As always, your suggestions are very much appreciated. Thank you! - Shaoya :happy
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