When should I sell some stocks funds/Rebalance to preserve potential future losses?

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Jesteroftheswamp
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When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by Jesteroftheswamp »

I have a portfolio of about 90% stocks and 10% bonds. I have never rebalanced as I have always kept it within my desired 90/10 range by adding money where and when appropriate from my bi-weekly paychecks. Lately, as the market has done really well over the six or so years I have been investing, I am wondering if it is time to take some of my gains.

Now, I do not necessarily need these gains any time in the near future, and I have a very sizeable liquid emergency fund, retirement, etc. However lately I have been asking myself, how risk averse am I really? I always thought I could mentally withstand a down market, but lately, I find myself worried the market will drop. Again, I don't need these funds any time soon, but when is it typically advisable to take some gains?

Lastly, when it comes to rebalancing, do people typically balance with "new money" i.e. from their paycheck, if possible, before selling from one asset class to fund another? Or is it advised when rebalancing to sell from one asset class to buy another?

Thanks for the help!
jebmke
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by jebmke »

The market will drop. If you are can't handle a drop, you have too much stock, gains or no gains.

I always tried to re-balance with new money as much as possible. But what you are describing isn't re-balancing, it is a change in your target.
When you discover that you are riding a dead horse, the best strategy is to dismount.
Chris K Jones
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by Chris K Jones »

Do you have an investment policy statement? It is one of the suggestions here. It helps me a lot. All of these questions are answered prior to any market swings or turbulence. Putting it together took time, but it really helped me. Once you write it, you just follow your plan.

On the other hand, how long is your investment horizon? If you are younger and won't need the money for a couple of decades or more, 90/10 is probably just fine.

I still have an income, so I use new funds to buy the lagging asset. This usually means me buying bonds. I set 5% bands for my asset allocation. So in my 60/40 allocation, stocks stay between 55 and 65% of assets. When stocks exceed 65%, I sell enough stocks to get back into the band. I hope this helps.

Best wishes.
Last edited by Chris K Jones on Wed May 05, 2021 5:25 pm, edited 1 time in total.
livesoft
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by livesoft »

So you are asking when should you change your Asset Allocation to 85/10 or 80/20?
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Jesteroftheswamp
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by Jesteroftheswamp »

jebmke wrote: Wed May 05, 2021 5:16 pm The market will drop. If you are can't handle a drop, you have too much stock, gains or no gains.

I always tried to re-balance with new money as much as possible. But what you are describing isn't re-balancing, it is a change in your target.

True, maybe I need to go down to an 80/20. How should I accomplish this?
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Wiggums
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by Wiggums »

jebmke wrote: Wed May 05, 2021 5:16 pm The market will drop. If you are can't handle a drop, you have too much stock, gains or no gains.

I always tried to re-balance with new money as much as possible. But what you are describing isn't re-balancing, it is a change in your target.
+1

I don’t pay any attention to the market noise. The market spends a lot of time marching higher. It is completely reasonable to sell some stock to buy bonds. I.e., change your asset allocation to add more bonds.

You can buy bonds with new money or sell equities and buy bonds.

Are you in an all in one fund like TDF or lifestategy fund?
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by jebmke »

Jesteroftheswamp wrote: Wed May 05, 2021 5:35 pm
jebmke wrote: Wed May 05, 2021 5:16 pm The market will drop. If you are can't handle a drop, you have too much stock, gains or no gains.

I always tried to re-balance with new money as much as possible. But what you are describing isn't re-balancing, it is a change in your target.

True, maybe I need to go down to an 80/20. How should I accomplish this?
Before making moves, you should work through what your risk tolerance is. IMO 80/20 and 90/10 are not significantly different in risk profiles. How much are you willing to see evaporate before your very eyes?

I'm old enough to remember a single day when the market dropped 22%.
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by bertilak »

Jesteroftheswamp wrote: Wed May 05, 2021 5:05 pm I have a portfolio of about 90% stocks and 10% bonds. I have never rebalanced as I have always kept it within my desired 90/10 range by adding money where and when appropriate from my bi-weekly paychecks. Lately, as the market has done really well over the six or so years I have been investing, I am wondering if it is time to take some of my gains.
This does sound like re-allocating, not rebalancing. None the less it is a legitimate thing to do and involves the same activities.

If it is all in an IRA or other tax-advantaged account then you don't need to worry about tax issue -- just sell some stock and buy some bonds. Easy-peasy!

If it is a taxable account then it requires some care to minimize taxes. Pay attention to individual tax-lots you own and sell the ones with the lowest cap gains. If you have any with cap losses, sell them and use the losses to offset some of the gains.

In any case, set yourself a new AA target and use your technique of directing new money to where it is needed to move towards your new goal. It doesn't need to be accomplished all in one fell swoop.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
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Jesteroftheswamp
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by Jesteroftheswamp »

Chris K Jones wrote: Wed May 05, 2021 5:23 pm Do you have an investment policy statement? It is one of the suggestions here. It helps me a lot. All of these questions are answered prior to any market swings or turbulence. Putting it together took time, but it really helped me. Once you write it, you just follow your plan.

On the other hand, how long is your investment horizon? If you are younger and won't need the money for a couple of decades or more, 90/10 is probably just fine.

I still have an income, so I use new funds to buy the lagging asset. This usually means me buying bonds. I set 5% bands for my asset allocation. So in my 60/40 allocation, stocks stay between 55 and 65% of assets. When stocks exceed 65%, I sell enough stocks to get back into the band. I hope this helps.

Best wishes.
I am 35. Shouldn't need the money anytime soon unless some absolute catastrophe somehow eradicates my emergency fund, which would currently last me years. I will use some of that fund for a down payment on a house but will have AT LEAST 6 months in emergency.

I was veering towards using new money to buy bonds and increase my bond holding %, however I really wonder if I should take some of my stock gains to buy the bonds. I don't need the money, but psychologically I would feel poor if something dropped. I know my feelings are completely irrational as a lot of my self-worth is tied to my money, which makes it hard.
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Jesteroftheswamp
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by Jesteroftheswamp »

jebmke wrote: Wed May 05, 2021 5:45 pm
Jesteroftheswamp wrote: Wed May 05, 2021 5:35 pm
jebmke wrote: Wed May 05, 2021 5:16 pm The market will drop. If you are can't handle a drop, you have too much stock, gains or no gains.

I always tried to re-balance with new money as much as possible. But what you are describing isn't re-balancing, it is a change in your target.

True, maybe I need to go down to an 80/20. How should I accomplish this?
Before making moves, you should work through what your risk tolerance is. IMO 80/20 and 90/10 are not significantly different in risk profiles. How much are you willing to see evaporate before your very eyes?

I'm old enough to remember a single day when the market dropped 22%.

So I just looked at my Vanguard account, and I took my total holdings, and subtracted it by 22%. After physically seeing that number, I feel like I can tolerate that level of drop, assuming of course the market gets back on track at some point. I am currently 35.
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by asset_chaos »

Only you can set your risk tolerance. But you did take the trouble to post "I find myself worried the market will drop", which may indicate your risk tolerance has changed from when you set it to 90:10. Maybe 70:30 is the new you; only you can say. If you do decide less risk is more comfortable, you don't have to move to a new allocation all at once. If fact, gradual change may be better because (1) it can be done without cost, (2) you can stop if you decide that part way to the new target is really where you're comfortable, and (3) gradual changes to one's portfolio just seem more prudent than precipitate ones. To gradually change to a new portfolio policy allocation, the easy things to do are to add all new savings to bonds and to redirect all stock dividends to bonds. The slightly more complicated potential step is to check if you can sell some stocks with long term gains and stay in the zero long term capital gains tax bracket. Of course, if all/most stocks are in tax deferred accounts, then you can set a schedule to exchange so much of the stock fund into the bond fund, at whatever pace you like.
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by Karamatsu »

I think this may be something worth paying attention to:
I was veering towards using new money to buy bonds and increase my bond holding %, however I really wonder if I should take some of my stock gains to buy the bonds. I don't need the money, but psychologically I would feel poor if something dropped. I know my feelings are completely irrational as a lot of my self-worth is tied to my money, which makes it hard.
What good is money if you're suffering psychologically? The equity market index is guaranteed to drop. It may be a crash or it may just be a long, grinding bear, but it will happen. I always plan for a 50% drop in the equity index, maybe not all in one day, but... 1987 (-20%), 1990 (-18%), 2000 (-78% for the tech-heavy NASDAQ), 2001-2002 (-50%), 2007-2009 (-50%), 2010 (-9%), 2011 (-22%), 2015 (-10%), 2018 (-20%), 2020 (-34%). And then there was Japan's bubble. It's easy to look back at these events and think, "Well, everything recovered," but (a) it is not so easy at the time, especially when you hold individual stocks, and (b) it isn't true. Everything doesn't recover. Companies go bankrupt, stocks get delisted, some that are "too big to fail" can go into some form of conservatorship as taxpayers reward corporate greed and corruption. Some of the institutional issues that fell during the 2008 crisis, like those by FNMA, still haven't fully recovered. The view that everything recovers is partly a result of survivorship bias (fed by the financial media that wants people to think speculation is safe), and partly because (especially here) we tend to focus on indexes, which really do recover, or at least have so far. Index funds are our friends.

So anyway, if I could send my younger self just one bit of investment advice, it would be to allocate my age in bonds, and mostly treasuries, using one or more funds, with automatic reinvestment of dividends. I avoided bonds for the longest time because I didn't really understand them and all everybody talked about (from the 80's onwards) was stocks, but I would be in a much better position if I'd heeded the age-in-bonds advice I was given the day I opened my account at Schwab.

So all that said, what I'd recommend you do is look at your equity allocation, 90% right now, and try to imagine how you would feel if equities dropped 50%. So your portfolio would lose 45% of its value. Figure out what that would be in dollars, not just percentages. Think of how many years you worked to accumulate that. Now it's completely lost, and you could lose the rest tomorrow. When you are in the middle of it, there is no end in sight, the financial media pundits will be screaming (literally in some cases) totally contradictory "advice" (they don't care if you buy or sell, they just want you to trade so they can skim profits), and if you're leveraged in any way at all, banks/brokers/lenders will be calling you to demand more collateral. Will you be able to sleep well or will you worry? Will you think, "Maybe I should sell now to make sure I can hold onto what I have left?" Will you think, "What if this is like Japan and the market doesn't recover for 20 years?" A lot of us were going through that in 2008-2009, I can tell you that. So if you think it will stress you out to lose 45% of your money, quite possibly forever, then the time to dial back your equity holdings is now, before it's too late.

Do the experiment, try to make it as real as possible, and be honest with yourself. You mentioned that you thought you could handle a 20% loss, which is good. What about 40%? Take whatever percentage drop you think you can handle without worry (again, it's better to think in dollar terms at first -- or perhaps "years of savings," because dollars and years are real things, things you worked hard at; percentages are just numbers), multiply by two, and that's a good place to start for your equity allocation. My advice is to start with your age (35) in bonds. It's the simplest possible rule, yet somehow, probably because people generally live into their 70's and 80's now, it seems to capture just the right balance. But of course you can adjust. When equities are doing well people start hedging... Age-10, etc. But remember what you're going for is psychological/emotional/spiritual stability... contentment, in a word. It can't be bought.
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by climber2020 »

Jesteroftheswamp wrote: Wed May 05, 2021 5:35 pm True, maybe I need to go down to an 80/20. How should I accomplish this?
I wrote down a plan when I first started investing that tells me to get more conservative at certain portfolio balance milestones.

When I hit $X, then I go to 80/20.
When I hit $Y, then I go to 70/30.

Instead of doing it gradually, I chose to make the transaction in one or two large moves from stocks to bonds (in tax deferred accounts, so no capital gains). The last thing I need is to hit my number and the stock market crashes the following week before I'm able to de-risk my assets.
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by Jesteroftheswamp »

asset_chaos wrote: Thu May 06, 2021 2:50 am Only you can set your risk tolerance. But you did take the trouble to post "I find myself worried the market will drop", which may indicate your risk tolerance has changed from when you set it to 90:10. Maybe 70:30 is the new you; only you can say. If you do decide less risk is more comfortable, you don't have to move to a new allocation all at once. If fact, gradual change may be better because (1) it can be done without cost, (2) you can stop if you decide that part way to the new target is really where you're comfortable, and (3) gradual changes to one's portfolio just seem more prudent than precipitate ones. To gradually change to a new portfolio policy allocation, the easy things to do are to add all new savings to bonds and to redirect all stock dividends to bonds. The slightly more complicated potential step is to check if you can sell some stocks with long term gains and stay in the zero long term capital gains tax bracket. Of course, if all/most stocks are in tax deferred accounts, then you can set a schedule to exchange so much of the stock fund into the bond fund, at whatever pace you like.
I def want to add some new money into bonds, but I really feel like in reallocating I want to take some gains from stock index funds. This particular account is a taxable account - any suggestions for doing that?

Thanks!
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by Jesteroftheswamp »

Karamatsu wrote: Thu May 06, 2021 5:03 am I think this may be something worth paying attention to:
I was veering towards using new money to buy bonds and increase my bond holding %, however I really wonder if I should take some of my stock gains to buy the bonds. I don't need the money, but psychologically I would feel poor if something dropped. I know my feelings are completely irrational as a lot of my self-worth is tied to my money, which makes it hard.
What good is money if you're suffering psychologically? The equity market index is guaranteed to drop. It may be a crash or it may just be a long, grinding bear, but it will happen. I always plan for a 50% drop in the equity index, maybe not all in one day, but... 1987 (-20%), 1990 (-18%), 2000 (-78% for the tech-heavy NASDAQ), 2001-2002 (-50%), 2007-2009 (-50%), 2010 (-9%), 2011 (-22%), 2015 (-10%), 2018 (-20%), 2020 (-34%). And then there was Japan's bubble. It's easy to look back at these events and think, "Well, everything recovered," but (a) it is not so easy at the time, especially when you hold individual stocks, and (b) it isn't true. Everything doesn't recover. Companies go bankrupt, stocks get delisted, some that are "too big to fail" can go into some form of conservatorship as taxpayers reward corporate greed and corruption. Some of the institutional issues that fell during the 2008 crisis, like those by FNMA, still haven't fully recovered. The view that everything recovers is partly a result of survivorship bias (fed by the financial media that wants people to think speculation is safe), and partly because (especially here) we tend to focus on indexes, which really do recover, or at least have so far. Index funds are our friends.

So anyway, if I could send my younger self just one bit of investment advice, it would be to allocate my age in bonds, and mostly treasuries, using one or more funds, with automatic reinvestment of dividends. I avoided bonds for the longest time because I didn't really understand them and all everybody talked about (from the 80's onwards) was stocks, but I would be in a much better position if I'd heeded the age-in-bonds advice I was given the day I opened my account at Schwab.

So all that said, what I'd recommend you do is look at your equity allocation, 90% right now, and try to imagine how you would feel if equities dropped 50%. So your portfolio would lose 45% of its value. Figure out what that would be in dollars, not just percentages. Think of how many years you worked to accumulate that. Now it's completely lost, and you could lose the rest tomorrow. When you are in the middle of it, there is no end in sight, the financial media pundits will be screaming (literally in some cases) totally contradictory "advice" (they don't care if you buy or sell, they just want you to trade so they can skim profits), and if you're leveraged in any way at all, banks/brokers/lenders will be calling you to demand more collateral. Will you be able to sleep well or will you worry? Will you think, "Maybe I should sell now to make sure I can hold onto what I have left?" Will you think, "What if this is like Japan and the market doesn't recover for 20 years?" A lot of us were going through that in 2008-2009, I can tell you that. So if you think it will stress you out to lose 45% of your money, quite possibly forever, then the time to dial back your equity holdings is now, before it's too late.

Do the experiment, try to make it as real as possible, and be honest with yourself. You mentioned that you thought you could handle a 20% loss, which is good. What about 40%? Take whatever percentage drop you think you can handle without worry (again, it's better to think in dollar terms at first -- or perhaps "years of savings," because dollars and years are real things, things you worked hard at; percentages are just numbers), multiply by two, and that's a good place to start for your equity allocation. My advice is to start with your age (35) in bonds. It's the simplest possible rule, yet somehow, probably because people generally live into their 70's and 80's now, it seems to capture just the right balance. But of course you can adjust. When equities are doing well people start hedging... Age-10, etc. But remember what you're going for is psychological/emotional/spiritual stability... contentment, in a word. It can't be bought.
Thanks for the feedback, it has definitely given me some things to think about! Can you explain a little what you mean by people hedging, age -10, when equities are doing well? If I follow through with changing my asset allocation, do you recommend selling some stock index funds and using the proceeds to buy bonds?
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by Karamatsu »

Oh, sorry. The traditional advice is "age in bonds," but when equities are doing well, I guess we all get a little greedy/starstruck, and you start seeing posts about things like "age minus ten." In your case, at age 35, that would mean 25% in bonds (35-10) instead of the more traditional 35%. As for the mechanics of rebalancing, it depends on what choices you have, but fundamentally the idea is to reduce equity exposure and increase exposure to bonds, so selling the first to buy the second seems like the most direct way. People with lots of cash might consider just buying more bonds to change the balance, but not many people have that much cash lying around!

It's always a little painful to sell shares at a high because realizing gains means realizing taxes. If you're in the US, you should only sell shares that you've held for more than a year (so they're taxed at the long-term rate instead of the short-term rate). Sometimes you can also reduce taxes by using "specific identification" and carefully choosing which lots you sell based on the cost basis of each lot. If we were closer to the end of the year, you could also consider selling half of the shares in December and the other half in January, splitting the gains across two years. So there are strategies like that.

The other thing to be aware of is that bond fund yields are very low right now. When/if rates start to recover, the bond fund share prices will drop, so just be mentally prepared for that. Yields will also rise but dropping share prices tend to command more attention. I you haven't bought your limit in I-Bonds yet ($10K/year), that would be a good choice. Right now they yield 3.54% and won't lose value. Otherwise, just FWIW, what I do is 40% inflation-indexed (SCHP), 40% intermediate treasuries (SCHR), and 20% investment-grade corporate (VCIT).

Take your time and find the balance you're comfortable with, the one that will let you sleep at night no matter what happens in the markets, then if you have a rule, like "age in bonds" or "age minus ten," etc, try to stick with it. Consistency pays off in the end!
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by golfer292 »

Karamatsu wrote: Thu May 06, 2021 5:03 am I think this may be something worth paying attention to:
I was veering towards using new money to buy bonds and increase my bond holding %, however I really wonder if I should take some of my stock gains to buy the bonds. I don't need the money, but psychologically I would feel poor if something dropped. I know my feelings are completely irrational as a lot of my self-worth is tied to my money, which makes it hard.
What good is money if you're suffering psychologically? The equity market index is guaranteed to drop. It may be a crash or it may just be a long, grinding bear, but it will happen. I always plan for a 50% drop in the equity index, maybe not all in one day, but... 1987 (-20%), 1990 (-18%), 2000 (-78% for the tech-heavy NASDAQ), 2001-2002 (-50%), 2007-2009 (-50%), 2010 (-9%), 2011 (-22%), 2015 (-10%), 2018 (-20%), 2020 (-34%). And then there was Japan's bubble. It's easy to look back at these events and think, "Well, everything recovered," but (a) it is not so easy at the time, especially when you hold individual stocks, and (b) it isn't true. Everything doesn't recover. Companies go bankrupt, stocks get delisted, some that are "too big to fail" can go into some form of conservatorship as taxpayers reward corporate greed and corruption. Some of the institutional issues that fell during the 2008 crisis, like those by FNMA, still haven't fully recovered. The view that everything recovers is partly a result of survivorship bias (fed by the financial media that wants people to think speculation is safe), and partly because (especially here) we tend to focus on indexes, which really do recover, or at least have so far. Index funds are our friends.

So anyway, if I could send my younger self just one bit of investment advice, it would be to allocate my age in bonds, and mostly treasuries, using one or more funds, with automatic reinvestment of dividends. I avoided bonds for the longest time because I didn't really understand them and all everybody talked about (from the 80's onwards) was stocks, but I would be in a much better position if I'd heeded the age-in-bonds advice I was given the day I opened my account at Schwab.

So all that said, what I'd recommend you do is look at your equity allocation, 90% right now, and try to imagine how you would feel if equities dropped 50%. So your portfolio would lose 45% of its value. Figure out what that would be in dollars, not just percentages. Think of how many years you worked to accumulate that. Now it's completely lost, and you could lose the rest tomorrow. When you are in the middle of it, there is no end in sight, the financial media pundits will be screaming (literally in some cases) totally contradictory "advice" (they don't care if you buy or sell, they just want you to trade so they can skim profits), and if you're leveraged in any way at all, banks/brokers/lenders will be calling you to demand more collateral. Will you be able to sleep well or will you worry? Will you think, "Maybe I should sell now to make sure I can hold onto what I have left?" Will you think, "What if this is like Japan and the market doesn't recover for 20 years?" A lot of us were going through that in 2008-2009, I can tell you that. So if you think it will stress you out to lose 45% of your money, quite possibly forever, then the time to dial back your equity holdings is now, before it's too late.

Do the experiment, try to make it as real as possible, and be honest with yourself. You mentioned that you thought you could handle a 20% loss, which is good. What about 40%? Take whatever percentage drop you think you can handle without worry (again, it's better to think in dollar terms at first -- or perhaps "years of savings," because dollars and years are real things, things you worked hard at; percentages are just numbers), multiply by two, and that's a good place to start for your equity allocation. My advice is to start with your age (35) in bonds. It's the simplest possible rule, yet somehow, probably because people generally live into their 70's and 80's now, it seems to capture just the right balance. But of course you can adjust. When equities are doing well people start hedging... Age-10, etc. But remember what you're going for is psychological/emotional/spiritual stability... contentment, in a word. It can't be bought.
Well written. Good advice for everyone, especially those in later stages of life.
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asset_chaos
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Re: When should I sell some stocks funds/Rebalance to preserve potential future losses?

Post by asset_chaos »

Jesteroftheswamp wrote: Sat May 08, 2021 1:20 am
asset_chaos wrote: Thu May 06, 2021 2:50 am Only you can set your risk tolerance. But you did take the trouble to post "I find myself worried the market will drop", which may indicate your risk tolerance has changed from when you set it to 90:10. Maybe 70:30 is the new you; only you can say. If you do decide less risk is more comfortable, you don't have to move to a new allocation all at once. If fact, gradual change may be better because (1) it can be done without cost, (2) you can stop if you decide that part way to the new target is really where you're comfortable, and (3) gradual changes to one's portfolio just seem more prudent than precipitate ones. To gradually change to a new portfolio policy allocation, the easy things to do are to add all new savings to bonds and to redirect all stock dividends to bonds. The slightly more complicated potential step is to check if you can sell some stocks with long term gains and stay in the zero long term capital gains tax bracket. Of course, if all/most stocks are in tax deferred accounts, then you can set a schedule to exchange so much of the stock fund into the bond fund, at whatever pace you like.
I def want to add some new money into bonds, but I really feel like in reallocating I want to take some gains from stock index funds. This particular account is a taxable account - any suggestions for doing that?

Thanks!
Only the one I made above. Sell up to the top of the zero long term capital gains tax bracket. If your income is too high for that, well there are worse problems than a high income. This is the dilemma of rebalancing: pay a known price now for a benefit of unknown size at an unknown future time. If you have to pay tax on the stock sale, that is the price you have to pay for your comfort. And only you can decide what price is worth it.
Regards, | | Guy
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