Moving AA from 80/20 to 85/15 (new title)

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icedtea
Posts: 742
Joined: Tue May 12, 2009 9:12 pm

Moving AA from 80/20 to 85/15 (new title)

Post by icedtea » Mon Apr 22, 2013 4:17 pm

I have a few questions regarding my portfolio. Any input on these, I'd really appreciate it. I think I have a good handle on things overall but I could use some feedback. I've included details on my portfolio down the page.

1. I am interested in increasing my holdings of international stocks to 35% of my total equities. But my 401k allows me to do in-service withdrawals for direct rollovers to my Roth, so I'm contributing as much as I can to my 401k pretax (maxing for the year), then my after tax 401k, so I can do the rollovers. I don't intend to have any money to invest in my taxable account this year. So, should I just add an international fund to my Roth or Rollover IRAs? I'm also maxing my Roth contribution (halfway there so far).

2. I currently only have international equities in my taxable account, as implied above. I was told a while ago that I should put the most tax efficient funds in taxable, and to try to get my international funds in taxable so I can take advantage of the foreign tax credit. I also read this on the Bogleheads wiki. That said, I've read on the forum that once you have over $300 FTC, you have to fill out form 1116, which is a real headache. Should I continue to allocate my international funds in my taxable? I haven't exceeded the $300 FTC limit yet but I'm sure I will eventually.

3. You'll notice I have only a bond fund in my aftertax 401k. I've been contributing exclusively to the bond fund so as to keep my taxable gains down. Instead, as I contribute more and more to the bond fund in my 401k, I can offset this by exchanging bonds in my Roth or Rollover IRA with Total Stock Market Admiral. I was actually thinking about setting up a regular exchange with Vanguard so that this happens every time I contribute to my 401k. Then, at the end of the year, I'd do an in-service withdrawal of the after tax balance and roll it over to my Roth, moving the funds to maintain my AA. Does this sound sensible to you? I have the option of doing up to 3 in-service withdrawals per year so I could do them more frequently.

4. Most importantly, I've been sticking with an 80/20 AA lately, and I'm contemplating moving slightly more aggressive to 85/15. I'm 31 yrs old. I've been reading a lot about AA and I think I'm ready to put more into stocks. I have the risk capacity and I think the tolerance. I know this is a personal decision but if anyone has input on this, let me know. The reality is, a massive market drop will hurt my stomach no matter what. But I don't think I'm any more likely to sell if the market tanks if I have 85% vs 80% stocks. Either way, I won't sell.

My Portfolio:

Age: 31
Debt: None
Property: Renter

Taxable
FTSE All World Ex-US (VFWAX): 21,000
Total Intl Index Admiral (VTIAX): 94,000
Total Stock Index Admiral (VTSAX): 167,000

Rollover IRA
Total Stock Index Admiral (VTSAX): 14,000
Total Bond Index Admiral (VBTLX): 36,000

Roth IRA
Total Stock Index Admiral (VTSAX): 39,000
Total Bond Index Admiral (VBTLX): 32,500

PreTax 401k
PreTax including company match (100% vested in Aug 2013):
BlackRock US Debt Index Fund: 12,000
BlackRock Russell 1000 Index: 29,000
BlackRock Russell 2000 Index: 19,000

AfterTax 401k
BlackRock US Debt Index: 9,750

Other:
Sallie Mae MMA: 5500
BankofAmer savings/checking: 2500
I-Bonds: 5000
US Series EE Treasury Bonds: 2,000

Total: 488k
Total in my investment portfolio: 483k (I count everything except 5k liquid for more immediate needs)

AA: 79.3% stocks, 20.7% bonds
30% of equities are international stocks

Target AA: 80/20

Thanks,
Iced Tea
Last edited by icedtea on Tue Apr 23, 2013 9:08 pm, edited 1 time in total.

icedtea
Posts: 742
Joined: Tue May 12, 2009 9:12 pm

Re: Portfolio checkup: adding intl stock fund to Roth?

Post by icedtea » Tue Apr 23, 2013 12:35 pm

bumping this for a reply, thanks

jimmyrules712
Posts: 474
Joined: Thu Jan 06, 2011 11:36 pm

Re: Portfolio checkup: adding intl stock fund to Roth?

Post by jimmyrules712 » Tue Apr 23, 2013 2:26 pm

icedtea wrote:I have a few questions regarding my portfolio. Any input on these, I'd really appreciate it. I think I have a good handle on things overall but I could use some feedback. I've included details on my portfolio down the page.

1. I am interested in increasing my holdings of international stocks to 35% of my total equities. But my 401k allows me to do in-service withdrawals for direct rollovers to my Roth, so I'm contributing as much as I can to my 401k pretax (maxing for the year), then my after tax 401k, so I can do the rollovers. I don't intend to have any money to invest in my taxable account this year. So, should I just add an international fund to my Roth or Rollover IRAs? I'm also maxing my Roth contribution (halfway there so far).

2. I currently only have international equities in my taxable account, as implied above. I was told a while ago that I should put the most tax efficient funds in taxable, and to try to get my international funds in taxable so I can take advantage of the foreign tax credit. I also read this on the Bogleheads wiki. That said, I've read on the forum that once you have over $300 FTC, you have to fill out form 1116, which is a real headache. Should I continue to allocate my international funds in my taxable? I haven't exceeded the $300 FTC limit yet but I'm sure I will eventually.

3. You'll notice I have only a bond fund in my aftertax 401k. I've been contributing exclusively to the bond fund so as to keep my taxable gains down. Instead, as I contribute more and more to the bond fund in my 401k, I can offset this by exchanging bonds in my Roth or Rollover IRA with Total Stock Market Admiral. I was actually thinking about setting up a regular exchange with Vanguard so that this happens every time I contribute to my 401k. Then, at the end of the year, I'd do an in-service withdrawal of the after tax balance and roll it over to my Roth, moving the funds to maintain my AA. Does this sound sensible to you? I have the option of doing up to 3 in-service withdrawals per year so I could do them more frequently.

4. Most importantly, I've been sticking with an 80/20 AA lately, and I'm contemplating moving slightly more aggressive to 85/15. I'm 31 yrs old. I've been reading a lot about AA and I think I'm ready to put more into stocks. I have the risk capacity and I think the tolerance. I know this is a personal decision but if anyone has input on this, let me know. The reality is, a massive market drop will hurt my stomach no matter what. But I don't think I'm any more likely to sell if the market tanks if I have 85% vs 80% stocks. Either way, I won't sell.

My Portfolio:

Age: 31
Debt: None
Property: Renter

Taxable
FTSE All World Ex-US (VFWAX): 21,000
Total Intl Index Admiral (VTIAX): 94,000
Total Stock Index Admiral (VTSAX): 167,000

Rollover IRA
Total Stock Index Admiral (VTSAX): 14,000
Total Bond Index Admiral (VBTLX): 36,000

Roth IRA
Total Stock Index Admiral (VTSAX): 39,000
Total Bond Index Admiral (VBTLX): 32,500

PreTax 401k
PreTax including company match (100% vested in Aug 2013):
BlackRock US Debt Index Fund: 12,000
BlackRock Russell 1000 Index: 29,000
BlackRock Russell 2000 Index: 19,000

AfterTax 401k
BlackRock US Debt Index: 9,750

Other:
Sallie Mae MMA: 5500
BankofAmer savings/checking: 2500
I-Bonds: 5000
US Series EE Treasury Bonds: 2,000

Total: 488k
Total in my investment portfolio: 483k (I count everything except 5k liquid for more immediate needs)

AA: 79.3% stocks, 20.7% bonds
30% of equities are international stocks

Target AA: 80/20

Thanks,
Iced Tea
I'm no expert, so don't make any descisions on just my opinions.

1. Yes
2. I guess it depends if the headache of filling out the form is worth the money you save
3. You can do this, however I think most people would say it's not necesary. I would think maybe rebalancing things once per quarter is plenty often enough, You could probably do twice a year and be fine. There's no harm in doing, just extra work with little benefit.
4. 80/20 is already pretty risky for your age. Only you can decide what your risk tolerance is, however just keep in mind that you're not likely to see a huge improvement in returns by going to 80/15, yet you will see a noticable increase in volatility.

My only other thoughts are I see some opportunities for simplification in your portfolio. Considered changing your IRAs to look like this?
Rollover IRA
Total Bond Index Admiral (VBTLX): 50,000

Roth IRA
Total Stock Index Admiral (VTSAX): 53,000
Total Bond Index Admiral (VBTLX): 18,500

icedtea
Posts: 742
Joined: Tue May 12, 2009 9:12 pm

Re: Portfolio checkup: adding intl stock fund to Roth?

Post by icedtea » Tue Apr 23, 2013 8:26 pm

jimmyrules712 wrote: I'm no expert, so don't make any descisions on just my opinions.

1. Yes
2. I guess it depends if the headache of filling out the form is worth the money you save
3. You can do this, however I think most people would say it's not necesary. I would think maybe rebalancing things once per quarter is plenty often enough, You could probably do twice a year and be fine. There's no harm in doing, just extra work with little benefit.
4. 80/20 is already pretty risky for your age. Only you can decide what your risk tolerance is, however just keep in mind that you're not likely to see a huge improvement in returns by going to 80/15, yet you will see a noticable increase in volatility.

My only other thoughts are I see some opportunities for simplification in your portfolio. Considered changing your IRAs to look like this?
Rollover IRA
Total Bond Index Admiral (VBTLX): 50,000

Roth IRA
Total Stock Index Admiral (VTSAX): 53,000
Total Bond Index Admiral (VBTLX): 18,500
Thanks for the reply. For #3 above, you're right in that it may not matter much whether I rebalance often or not. This last quarter I didn't rebalance at all and figured I'd see what would happen with my AA as I kept buying more bonds in my 401k. I went from 81% stocks in early Feb to just over 79% by mid-April. Obviously, I would've stayed a bit above my target AA had I kept moving stock fund shares to bonds in my Rollover or Roth. But regardless, I stayed roughly around my target AA without constant tinkering. I'd say I could do a quarterly rebalance as needed and be fine.

For #4, Do you know of any studies I could check out on this?

Good point about simplifying my Rollover and Roth holdings. I think that layer of complexity came about for a specific reason some time ago, but I don't remember what that reason is now. Probably good to consolidate, as you suggested.

Iced Tea

jimmyrules712
Posts: 474
Joined: Thu Jan 06, 2011 11:36 pm

Re: Moving AA from 80/20 to 85/15 (new title)

Post by jimmyrules712 » Tue Apr 23, 2013 9:25 pm

I didn't have time to do additional searching to confirm the data behind this chart, but I've seen this referenced around here a bit as a reason why some bonds is a good thing.

Image

That being said, I don't think you'll see a huge difference between 15% and 20% either way. Flip a coin, make a decision, and stick with it. Just don't decide to change to a more conservative allocation right after a big market drop and thus lock in your losses.

icedtea
Posts: 742
Joined: Tue May 12, 2009 9:12 pm

Re: Moving AA from 80/20 to 85/15 (new title)

Post by icedtea » Tue Apr 23, 2013 10:45 pm

jimmyrules712 wrote: That being said, I don't think you'll see a huge difference between 15% and 20% either way. Flip a coin, make a decision, and stick with it. Just don't decide to change to a more conservative allocation right after a big market drop and thus lock in your losses.
Good advice, thanks.

As for simplifying my Roth and Rollover while adding an international fund as well, I think this is what I'll do. This brings me to about 35% international.

Rollover IRA
Total Bond Index Admiral (VBTLX): 50,000

Roth IRA
Total Stock Index Admiral (VTSAX): 34,000
Total Intl Stock Index Admiral (VTIAX): 19,000
Total Bond Index Admiral (VBTLX): 18,500

jimmyrules712
Posts: 474
Joined: Thu Jan 06, 2011 11:36 pm

Re: Moving AA from 80/20 to 85/15 (new title)

Post by jimmyrules712 » Wed Apr 24, 2013 8:32 am

icedtea wrote:
jimmyrules712 wrote: That being said, I don't think you'll see a huge difference between 15% and 20% either way. Flip a coin, make a decision, and stick with it. Just don't decide to change to a more conservative allocation right after a big market drop and thus lock in your losses.
Good advice, thanks.

As for simplifying my Roth and Rollover while adding an international fund as well, I think this is what I'll do. This brings me to about 35% international.

Rollover IRA
Total Bond Index Admiral (VBTLX): 50,000

Roth IRA
Total Stock Index Admiral (VTSAX): 34,000
Total Intl Stock Index Admiral (VTIAX): 19,000
Total Bond Index Admiral (VBTLX): 18,500
That's exactly what I would do, then you can do all your rebalancing in one place.

Hopefully someone else chimes in...

retiredjg
Posts: 33255
Joined: Thu Jan 10, 2008 12:56 pm

Re: Moving AA from 80/20 to 85/15 (new title)

Post by retiredjg » Wed Apr 24, 2013 11:34 am

icedtea wrote:So, should I just add an international fund to my Roth or Rollover IRAs? I'm also maxing my Roth contribution (halfway there so far).
I would add an international fund to your rollover IRA. A few times a year, exchange something (probably total stock market) into international. It appears that will only work for one year. Then you'll have to sell the bond index - causing a readjustment somewhere else (probably the 401k).

2. I currently only have international equities in my taxable account, as implied above. I was told a while ago that I should put the most tax efficient funds in taxable, and to try to get my international funds in taxable so I can take advantage of the foreign tax credit. I also read this on the Bogleheads wiki. That said, I've read on the forum that once you have over $300 FTC, you have to fill out form 1116, which is a real headache. Should I continue to allocate my international funds in my taxable? I haven't exceeded the $300 FTC limit yet but I'm sure I will eventually.
This is a moot point if you are not contributing to taxable. You have no way to get more international if you don't add money to the account. Well, you can use the dividends from each fund to buy more international a couple of times a year, but I doubt that will amount to much.

3. You'll notice I have only a bond fund in my aftertax 401k. I've been contributing exclusively to the bond fund so as to keep my taxable gains down. Instead, as I contribute more and more to the bond fund in my 401k, I can offset this by exchanging bonds in my Roth or Rollover IRA with Total Stock Market Admiral. I was actually thinking about setting up a regular exchange with Vanguard so that this happens every time I contribute to my 401k. Then, at the end of the year, I'd do an in-service withdrawal of the after tax balance and roll it over to my Roth, moving the funds to maintain my AA. Does this sound sensible to you? I have the option of doing up to 3 in-service withdrawals per year so I could do them more frequently.
It seems there is an easier way to do this.

Since the bond fund in the after tax 401k can go to a bond fund in the Roth IRA, there is no change in stock to bond ratio when you do the rollovers. Why is there a need to do offsets while the money is accumulating? I may not be "getting it", but I think you are making extra work for yourself. How can adding $10k of bonds during normal accumulation throw your stock to bond ratio out of whack enough to fix it? Especially in a portfolio this large? You should be sending new money to your accounts in the ratio you are trying to maintain. Are you not counting the money that goes to the after-tax account in that ratio? Do you want to post your contributions each year to see if someone else can figure an easier way to do it?

4. Most importantly, I've been sticking with an 80/20 AA lately, and I'm contemplating moving slightly more aggressive to 85/15. I'm 31 yrs old. I've been reading a lot about AA and I think I'm ready to put more into stocks. I have the risk capacity and I think the tolerance. I know this is a personal decision but if anyone has input on this, let me know. The reality is, a massive market drop will hurt my stomach no matter what. But I don't think I'm any more likely to sell if the market tanks if I have 85% vs 80% stocks. Either way, I won't sell.
You are 31 years old and you already have half a million dollars. What's the point? Your savings rate is what will determine how much money you have in the end. Your stock to bond ratio will also affect this, but there is essentially no difference in the return of 85/15 vs 80/20 (look at the chart - how much does that line go up between those two points?) But also look at how much increased risk there is between the two points (look at the chart - how much move to the right occurs between the 2 points?). Is the tiny bit of increased return worth the not-huge-but-not-tiny-either increased risk?

I realize this is just my personal preference, but it seems to me a portfolio is more efficient (makes more money for the risk taken) at 80/20 than at 85/15. I know the difference is small and I know that chart represents only one time period. That's just where I put the line in my mind because you have to put it somewhere. Investing great Ben Graham chose 25% bonds as the minimum a portfolio should have. You'll have to choose where you want to put the line.

But you really should ask yourself "what's the point?"

retiredjg
Posts: 33255
Joined: Thu Jan 10, 2008 12:56 pm

Re: Moving AA from 80/20 to 85/15 (new title)

Post by retiredjg » Wed Apr 24, 2013 11:39 am

icedtea wrote:As for simplifying my Roth and Rollover while adding an international fund as well, I think this is what I'll do. This brings me to about 35% international.

Rollover IRA
Total Bond Index Admiral (VBTLX): 50,000

Roth IRA
Total Stock Index Admiral (VTSAX): 34,000
Total Intl Stock Index Admiral (VTIAX): 19,000
Total Bond Index Admiral (VBTLX): 18,500
On 2nd and 3rd thought, I think this is probably a better idea than what I suggested above. Might as well get that rollover into the back pasture.

Dulocracy
Posts: 2275
Joined: Wed Feb 27, 2013 1:03 pm
Location: Atlanta, GA

Re: Moving AA from 80/20 to 85/15 (new title)

Post by Dulocracy » Wed Apr 24, 2013 12:17 pm

Normally, I would say that at your age, you can afford to wait out any ups and downs in the market. With the amount that you have accumulated, however, I am not sure that the risk is worth it. I have an aggressive portfolio with more in the way of stock than in bonds than most would recommend, but that is because I did not truly get started until 34. In Larry Swedroe's terms, I need the risk. I need the risk because I need a higher anticipated return to make up for lost time. You, on the other hand, do not have the same need for that risk. I think that the "age minus 10 in bonds" is what I would be doing if I were in your shoes. I would not take on the additional risk at this time considering your situation.

As a side note, you did not mention an emergency fund. You did mention having $5k if needed. Ideally, an emergency fund would be able to cover 6 months or more of your expenses. While you are doing very well, I would not operate without building up the emergency fund.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

Default User BR
Posts: 7501
Joined: Mon Dec 17, 2007 7:32 pm

Re: Moving AA from 80/20 to 85/15 (new title)

Post by Default User BR » Wed Apr 24, 2013 4:09 pm

jimmyrules712 wrote:I didn't have time to do additional searching to confirm the data behind this chart, but I've seen this referenced around here a bit as a reason why some bonds is a good thing.
Does it? It really shows why some allocation stocks is a good thing. From somewhere around 60/40 on up, the chart is pretty linear.


Brian

retiredjg
Posts: 33255
Joined: Thu Jan 10, 2008 12:56 pm

Re: Moving AA from 80/20 to 85/15 (new title)

Post by retiredjg » Wed Apr 24, 2013 5:41 pm

Default User BR wrote:Does it? It really shows why some allocation stocks is a good thing. From somewhere around 60/40 on up, the chart is pretty linear.

Brian
Linear, yes. But the slope is not 1.

Have we had this conversation before?

Default User BR
Posts: 7501
Joined: Mon Dec 17, 2007 7:32 pm

Re: Moving AA from 80/20 to 85/15 (new title)

Post by Default User BR » Wed Apr 24, 2013 6:25 pm

retiredjg wrote:
Default User BR wrote:Does it? It really shows why some allocation stocks is a good thing. From somewhere around 60/40 on up, the chart is pretty linear.
Linear, yes. But the slope is not 1.
Yes, but a small amount of bonds doesn't make that big of a difference, or I should say the difference between 90-100 is similar to that between 80-90. To get a real difference, you need to move down below 60.


Brian
Last edited by Default User BR on Thu Apr 25, 2013 1:26 am, edited 1 time in total.

icedtea
Posts: 742
Joined: Tue May 12, 2009 9:12 pm

Re: Moving AA from 80/20 to 85/15 (new title)

Post by icedtea » Wed Apr 24, 2013 9:11 pm

retiredjg wrote: Since the bond fund in the after tax 401k can go to a bond fund in the Roth IRA, there is no change in stock to bond ratio when you do the rollovers. Why is there a need to do offsets while the money is accumulating? I may not be "getting it", but I think you are making extra work for yourself. How can adding $10k of bonds during normal accumulation throw your stock to bond ratio out of whack enough to fix it? Especially in a portfolio this large? You should be sending new money to your accounts in the ratio you are trying to maintain. Are you not counting the money that goes to the after-tax account in that ratio? Do you want to post your contributions each year to see if someone else can figure an easier way to do it?
I'm not sending new money in the ratio I'm trying to maintain because I'm trying to minimize taxable gains from my after tax contributions. This is why I'm contributing entirely to bonds. Whatever fund(s) I contribute to as far as after tax 401k are the same fund(s) I need to contribute to pretax. That's the way my 401k works. So the way I'm heading, I'll contribute 17.5k pre tax plus about 28k after tax in the year. This, along with the employer match, will keep me within the yearly total contribution limits set by the IRS. That said, if I just rebalance once per quarter as needed after buying another 7k in bonds, I think you're right, my AA shouldn't move too much, so that should work fine.

You are 31 years old and you already have half a million dollars. What's the point? Your savings rate is what will determine how much money you have in the end. Your stock to bond ratio will also affect this, but there is essentially no difference in the return of 85/15 vs 80/20 (look at the chart - how much does that line go up between those two points?) But also look at how much increased risk there is between the two points (look at the chart - how much move to the right occurs between the 2 points?). Is the tiny bit of increased return worth the not-huge-but-not-tiny-either increased risk?

I realize this is just my personal preference, but it seems to me a portfolio is more efficient (makes more money for the risk taken) at 80/20 than at 85/15. I know the difference is small and I know that chart represents only one time period. That's just where I put the line in my mind because you have to put it somewhere. Investing great Ben Graham chose 25% bonds as the minimum a portfolio should have. You'll have to choose where you want to put the line.

But you really should ask yourself "what's the point?"
Fair points here, thanks. What do other investors on this forum with 85/15 or 90/10 portfolios say to this? I know there are quite a few out there who are very well informed and make the decision to be relatively more aggressive.

Iced Tea

icedtea
Posts: 742
Joined: Tue May 12, 2009 9:12 pm

Re: Moving AA from 80/20 to 85/15 (new title)

Post by icedtea » Wed Apr 24, 2013 9:16 pm

Dulocracy wrote: As a side note, you did not mention an emergency fund. You did mention having $5k if needed. Ideally, an emergency fund would be able to cover 6 months or more of your expenses. While you are doing very well, I would not operate without building up the emergency fund.
I count $5k as my immediate needs fund. My emergency fund, the way I view it, is included in my AA and covers a full 6-9 months. If I needed to tap into it, I'd sell stock funds from my taxable account and then shift the same amount of bonds from my Roth or Rollover to stocks. Effectively, I'd be selling bonds for whatever the emergency is. Then, over time I can send more money back into my bonds to rebalance, when the money is available. This is something I picked up on the forum, actually. Make sense?

retiredjg
Posts: 33255
Joined: Thu Jan 10, 2008 12:56 pm

Re: Moving AA from 80/20 to 85/15 (new title)

Post by retiredjg » Wed Apr 24, 2013 9:50 pm

icedtea wrote:Whatever fund(s) I contribute to as far as after tax 401k are the same fund(s) I need to contribute to pretax. That's the way my 401k works.
I thought that is how they were all supposed to work, but I thought you were telling us yours was different. Guess that was not your intention.

If you put $17k into bonds and rollover/rebalance, $17k into bonds and rollover/rebalance, and $17k into bonds and rollover/rebalance each year, in a portfolio your size it should not do much to change the stock to bond ratio unless the market is changing rapidly in one direction. Or so I would think.

If you are using 5% bands, you could rebalance back to -4% your bond target, do your contributions to bonds for 4 months and probably not end up over your upper bond target before rollover/rebalance. I'm speculating here. Have you tried it?

retiredjg
Posts: 33255
Joined: Thu Jan 10, 2008 12:56 pm

Re: Moving AA from 80/20 to 85/15 (new title)

Post by retiredjg » Wed Apr 24, 2013 9:53 pm

icedtea wrote:
Dulocracy wrote: As a side note, you did not mention an emergency fund. You did mention having $5k if needed. Ideally, an emergency fund would be able to cover 6 months or more of your expenses. While you are doing very well, I would not operate without building up the emergency fund.
I count $5k as my immediate needs fund. My emergency fund, the way I view it, is included in my AA and covers a full 6-9 months. If I needed to tap into it, I'd sell stock funds from my taxable account and then shift the same amount of bonds from my Roth or Rollover to stocks. Effectively, I'd be selling bonds for whatever the emergency is. Then, over time I can send more money back into my bonds to rebalance, when the money is available. This is something I picked up on the forum, actually. Make sense?
Dulocracy, since you are new, this may be a new concept to you. It is reported to work well for larger portfolios. Here's a link that discusses this idea.

Wiki article link: Placing Cash Needs in a Tax-Advantaged Account

Dulocracy
Posts: 2275
Joined: Wed Feb 27, 2013 1:03 pm
Location: Atlanta, GA

Re: Moving AA from 80/20 to 85/15 (new title)

Post by Dulocracy » Wed Apr 24, 2013 10:07 pm

icedtea wrote:
I count $5k as my immediate needs fund. My emergency fund, the way I view it, is included in my AA and covers a full 6-9 months. If I needed to tap into it, I'd sell stock funds from my taxable account and then shift the same amount of bonds from my Roth or Rollover to stocks. Effectively, I'd be selling bonds for whatever the emergency is. Then, over time I can send more money back into my bonds to rebalance, when the money is available. This is something I picked up on the forum, actually. Make sense?
That makes perfect sense. I have actually read about that strategy (I think on this site as well?). I was just alarmed at the $5k for immediate needs, but no mention of the E.F. Looks like you have that covered! :sharebeer
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

Dulocracy
Posts: 2275
Joined: Wed Feb 27, 2013 1:03 pm
Location: Atlanta, GA

Re: Moving AA from 80/20 to 85/15 (new title)

Post by Dulocracy » Wed Apr 24, 2013 10:11 pm

retiredjg wrote:
icedtea wrote:
Dulocracy wrote: As a side note, you did not mention an emergency fund. You did mention having $5k if needed. Ideally, an emergency fund would be able to cover 6 months or more of your expenses. While you are doing very well, I would not operate without building up the emergency fund.
I count $5k as my immediate needs fund. My emergency fund, the way I view it, is included in my AA and covers a full 6-9 months. If I needed to tap into it, I'd sell stock funds from my taxable account and then shift the same amount of bonds from my Roth or Rollover to stocks. Effectively, I'd be selling bonds for whatever the emergency is. Then, over time I can send more money back into my bonds to rebalance, when the money is available. This is something I picked up on the forum, actually. Make sense?
Dulocracy, since you are new, this may be a new concept to you. It is reported to work well for larger portfolios. Here's a link that discusses this idea.

Wiki article link: Placing Cash Needs in a Tax-Advantaged Account
I should have kept reading so as to be able to respond to both this and the other post all in one. Suffice it to say that, while I do not use this strategy, I am familiar with it and understand it.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

letsgobobby
Posts: 11421
Joined: Fri Sep 18, 2009 1:10 am

Re: Moving AA from 80/20 to 85/15 (new title)

Post by letsgobobby » Thu Apr 25, 2013 12:43 am

Not much expected diffrerence between 80/20 and 85/15. My concern is more about the lack of discipline that it shows. Why now? The stock market is up 150% in the last four years.

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by Liquid » Thu Apr 25, 2013 5:41 am

letsgobobby wrote:Not much expected diffrerence between 80/20 and 85/15. My concern is more about the lack of discipline that it shows. Why now? The stock market is up 150% in the last four years.
When the market is performing poorly there tend to be more "switching to more conservative AA" posts.

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by Sandman62 » Thu Apr 25, 2013 6:32 am

Liquid wrote:When the market is performing poorly there tend to be more "switching to more conservative AA" posts.
In the midst of the current well-performing market, I'd like to become more conservative - but moreso due to retirement horizon and lowering need for risk.

I'm 50 and currently at 75/25, but with contributions moving us towards 70/30. With mid 600k portfolio, pensions to cover 80+% of expenses and no debt and a goal of retiring at 55, I don't feel the need to be so risky and am thinking we should be moving closer to 60/40.

But how does one do this given the current bond market? Just avoid long term bonds? Or use money market funds (which earn practically nothing, but at least don't lose)? Or sit tight and wait for a bond bubble burst - which just goes against my non-market-timing philosophy?

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by retiredjg » Thu Apr 25, 2013 7:22 am

I Bonds, EE Bonds, CDs, intermediate term bonds, short term bonds, tax-exempt bonds.... :happy

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by icedtea » Thu Apr 25, 2013 10:36 pm

retiredjg wrote: I thought that is how they were all supposed to work, but I thought you were telling us yours was different. Guess that was not your intention.

If you put $17k into bonds and rollover/rebalance, $17k into bonds and rollover/rebalance, and $17k into bonds and rollover/rebalance each year, in a portfolio your size it should not do much to change the stock to bond ratio unless the market is changing rapidly in one direction. Or so I would think.

If you are using 5% bands, you could rebalance back to -4% your bond target, do your contributions to bonds for 4 months and probably not end up over your upper bond target before rollover/rebalance. I'm speculating here. Have you tried it?
Are you saying if I stick with an 80/20 AA, I'd start by rebalancing to 84/16, contribute to bonds for 4m, then rebalance again to 84/16, and so on? If I did that and the market spiked upward for a time, wouldn't my AA potentially move even higher? Maybe I'm not following correctly. I could see starting at 82/18...

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by icedtea » Thu Apr 25, 2013 10:38 pm

Liquid wrote:
letsgobobby wrote:Not much expected diffrerence between 80/20 and 85/15. My concern is more about the lack of discipline that it shows. Why now? The stock market is up 150% in the last four years.
When the market is performing poorly there tend to be more "switching to more conservative AA" posts.
These are fair points. Will give this some more thought.

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by letsgobobby » Fri Apr 26, 2013 12:18 am

Sandman62 wrote:
Liquid wrote:When the market is performing poorly there tend to be more "switching to more conservative AA" posts.
In the midst of the current well-performing market, I'd like to become more conservative - but moreso due to retirement horizon and lowering need for risk.

I'm 50 and currently at 75/25, but with contributions moving us towards 70/30. With mid 600k portfolio, pensions to cover 80+% of expenses and no debt and a goal of retiring at 55, I don't feel the need to be so risky and am thinking we should be moving closer to 60/40.

But how does one do this given the current bond market? Just avoid long term bonds? Or use money market funds (which earn practically nothing, but at least don't lose)? Or sit tight and wait for a bond bubble burst - which just goes against my non-market-timing philosophy?
Do not let your beliefs about the future direction of a given market (the bond market) leave you taking more risk than you want or need to take.

I am ten years younger than you and 15% more conservative already (60/40). I think you should take risk of the table, be thankful for the 150% stock gains of the last four years, and buy the "bonds" Jan suggests.

If you buy I bonds by April 30 you'll get 1.76% for the first six months.

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by icedtea » Fri Apr 26, 2013 7:04 am

[quote="letsgobobby"
If you buy I bonds by April 30 you'll get 1.76% for the first six months.[/quote]

I do plan to buy more I bonds this year. I picked up my first batch at the end of last year. If I wait till after April 30th, do we have any idea what the rate will be? I'll do some research on this.

Edit: Found the info I need here http://www.bogleheads.org/forum/viewtop ... 1&t=115278 I'll see what I can buy now. I don't have much money readily available in my checking/savings and it usually takes 3-5 days to move money from my online savings to my regular bank account. Regardless, I also don't have much in way of funds that I can commit to I bonds right now. Almost everything is in the market, and with what I have left, I want some available immediately, without penalty, if I need it. Was originally planning to buy more I bonds in Nov/Dec.

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by retiredjg » Fri Apr 26, 2013 10:19 am

icedtea wrote:Are you saying if I stick with an 80/20 AA, I'd start by rebalancing to 84/16, contribute to bonds for 4m, then rebalance again to 84/16, and so on? If I did that and the market spiked upward for a time, wouldn't my AA potentially move even higher? Maybe I'm not following correctly. I could see starting at 82/18...
Yes, that is what I'm saying. And since $17k is only about 3.5% of your portfolio, starting at 82/18 is probably far enough. The point is not to stay ON 80/20, but somewhere AROUND 80/20.

Do you have rebalance bands in mind or are you trying to stay on the number? If you have a number in mind, what is it?

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by icedtea » Fri Apr 26, 2013 6:20 pm

retiredjg wrote:
icedtea wrote:Are you saying if I stick with an 80/20 AA, I'd start by rebalancing to 84/16, contribute to bonds for 4m, then rebalance again to 84/16, and so on? If I did that and the market spiked upward for a time, wouldn't my AA potentially move even higher? Maybe I'm not following correctly. I could see starting at 82/18...
Yes, that is what I'm saying. And since $17k is only about 3.5% of your portfolio, starting at 82/18 is probably far enough. The point is not to stay ON 80/20, but somewhere AROUND 80/20.

Do you have rebalance bands in mind or are you trying to stay on the number? If you have a number in mind, what is it?
Thanks. My bands have always been +- 5%

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by retiredjg » Fri Apr 26, 2013 8:08 pm

icedtea wrote:Thanks. My bands have always been +- 5%
I would think, except during rapid market change, you could stay in your bands during 4 months of contributing only to bonds. Then adjust in the 401k and start over. That's what I think I would do.

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by LH » Fri Apr 26, 2013 11:06 pm

I would be very hesitant to move to a more aggressive allocation.

It's the opposite of the normal, becoming more conservative.

It corresponds to stock market going up.

I would step back, wait a year, think about it, do nothing for now, now hurry.

A Human timing, versus a human doing something for all the right reasons, is indistinguishable, but most often, it's timing, with expectant failure and/or capitulation. This includes you, this includes me.

Good luck, stay the course.

LH

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by icedtea » Sat Apr 27, 2013 8:15 am

retiredjg wrote:
icedtea wrote:Thanks. My bands have always been +- 5%
I would think, except during rapid market change, you could stay in your bands during 4 months of contributing only to bonds. Then adjust in the 401k and start over. That's what I think I would do.
I agree. I'm going to start by doing my first in service withdrawal and rolling the funds into my Roth in an allocation to rebalance my overall AA to 82/18. Then I'll keep investing in bonds exclusively and monitor my AA as needed.

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by icedtea » Wed May 29, 2013 6:40 pm

OP here. Just wanted to provide an update and pose a related question.

I ended up doing the in-service withdrawal from my 401k (about $10,500 after tax money plus about $100 in taxable gains). This amount constituted all the after tax 401k contributions I've made since Jan 1, 2013 plus some gains, mitigated since I only invested in a bond fund. I moved the full amount to my Roth IRA at Vanguard and invested 100% of it into Total International Stock Admiral.

I also exchanged my $15k Total Stock Admiral to Total Bond Admiral in my Rollover (tradtl) IRA so I now only have a bond fund in that account.

I then exchanged $15k from my Total Bond Admiral in my Roth IRA and bought $11k of Total Stock Admiral and $4k of Total Intl Stock Admiral.

In sum, my AA went to 82/18 and my international stock to stock ratio went to about 32% / 68%, as planned.

Earlier in this thread, a few of us talked about my approach to contributing after tax money to my 401k all in a bond fund in order to keep taxable gains down, and then once every 4-6 months transferring the money to my Roth IRA, and rebalancing to around 82/18, then repeat. This approach still makes sense to me, but I do have a question about it.

It took some time for ING to provide me with the check for my last in-service withdrawal. Then it took a few days for the money to be processed by Vanguard. In that time, the US and international stock markets went up quite a bit. Had I been investing in stock index funds with every 401k contribution instead of bonds, I'd have been buying stock funds at relatively lower prices than I ended up buying in May. But I also would have had more taxable gains. So do these things cancel each other out, or would I be better off continuing to buy the bond fund in my 401k but also regularly exchanging bonds in my Roth IRA to stocks?

I realize this all depends on the performance of the funds at hand. Ie. If the Total Intl Stock Admiral fund had dropped regularly over the last 4 months, the situation would be different.

But if one believes the stock market will grow over time, which is why we invest to begin with, then should I be taking an approach that may leave me missing stock rallies?

Thanks,
Iced Tea

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by sometimesinvestor » Wed May 29, 2013 6:58 pm

For what its worth from my experience If you are single and go over the 300 limit (its 600 for joint ) and you use tax software (which for most versions does not handle the foreign tax credit particularly well) mostly because you have to enter numbers manually which usually involves going to the fund website where you will get needed info that probably did not come with the 1099. Bottom line the first year you have the issue arise there is a learning curve (you most s likely willwant to look at the irs example found in the instructions for the form. The experience will cost you a minimum of about a half hour. Less in future years as you will know where to look etc. For me the value of my time when I am doing my taxes is about $25 per hour (I actually don't hate the task all that much)so I fill out the form. .If you have a different view that my affect your decisions on where to locate international.

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by TomatoTomahto » Wed May 29, 2013 7:06 pm

icedtea wrote:OP here. Just wanted to provide an update and pose a related question.

I ended up doing the in-service withdrawal from my 401k (about $10,500 after tax money plus about $100 in taxable gains). This amount constituted all the after tax 401k contributions I've made since Jan 1, 2013 plus some gains, mitigated since I only invested in a bond fund. I moved the full amount to my Roth IRA at Vanguard and invested 100% of it into Total International Stock Admiral.
I'm a bit late to the party, but wanted to mention that I keep my international equities in a taxable account so that I can deduct the foreign taxes on my own tax return.

EDITED TO ADD: sometimeinvestor and I were typing at the same time. I find the tax difference material.

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by icedtea » Wed May 29, 2013 7:13 pm

TomatoTomahto wrote:
icedtea wrote:OP here. Just wanted to provide an update and pose a related question.

I ended up doing the in-service withdrawal from my 401k (about $10,500 after tax money plus about $100 in taxable gains). This amount constituted all the after tax 401k contributions I've made since Jan 1, 2013 plus some gains, mitigated since I only invested in a bond fund. I moved the full amount to my Roth IRA at Vanguard and invested 100% of it into Total International Stock Admiral.
I'm a bit late to the party, but wanted to mention that I keep my international equities in a taxable account so that I can deduct the foreign taxes on my own tax return.

EDITED TO ADD: sometimeinvestor and I were typing at the same time. I find the tax difference material.
Thanks, I'd do the same but in order to do that in my taxable, I'd have to sell some Total Stock Market Admiral to buy Intl. The tax associated with this isn't worth it, in my opinion. Thus, I've bought more international shares in my Roth IRA. Note, I'm not investing at all this year in my taxable, since I'm taking advantage of in-service withdrawals from my 401k and rolling over to my Roth.

If anyone else has thoughts on my previous question, see my last post just a couple above this one.

Thanks!

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by pkcrafter » Wed May 29, 2013 7:36 pm

4. Most importantly, I've been sticking with an 80/20 AA lately, and I'm contemplating moving slightly more aggressive to 85/15.
Bad move--sounds like Recency Bias.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by icedtea » Wed May 29, 2013 9:54 pm

pkcrafter wrote:
4. Most importantly, I've been sticking with an 80/20 AA lately, and I'm contemplating moving slightly more aggressive to 85/15.
Bad move--sounds like Recency Bias.


Paul
Thanks for the comment Paul. I decided a few weeks ago not to move to 85/15.

I'm starting to realize that adding my second to last post to this thread several weeks later may be complicating things, as I'm getting replies now that aren't related directly to my latest question (see underlined text a few posts above). I'll give it some more time, but may choose to create a new thread on this.

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by retiredjg » Thu May 30, 2013 9:11 am

icedtea wrote:But I also would have had more taxable gains. So do these things cancel each other out, or would I be better off continuing to buy the bond fund in my 401k but also regularly exchanging bonds in my Roth IRA to stocks?
Hard to say which is better. You have decided to reduce the earnings on your after-tax contributions by putting 401k money into bonds. I think that is reasonable. Others might do it differently. If the money had been in stocks, it would have been out of the market during the transfer and missed a bit of a run-up. Since the money was in bonds, it did not miss a bit of a run-up. Seems to me it worked out fine.
But if one believes the stock market will grow over time, which is why we invest to begin with, then should I be taking an approach that may leave me missing stock rallies?
I don't think you are missing the stock rallies. You have stocks. They just are not in your 401k. As long as you are staying somewhere near your target, you have the amount of stocks you want. If your stock percentage is dropping too low, just adjust it. But that seems unlikely during a rising market.

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by icedtea » Thu May 30, 2013 1:05 pm

retiredjg wrote:
icedtea wrote:But I also would have had more taxable gains. So do these things cancel each other out, or would I be better off continuing to buy the bond fund in my 401k but also regularly exchanging bonds in my Roth IRA to stocks?
Hard to say which is better. You have decided to reduce the earnings on your after-tax contributions by putting 401k money into bonds. I think that is reasonable. Others might do it differently. If the money had been in stocks, it would have been out of the market during the transfer and missed a bit of a run-up. Since the money was in bonds, it did not miss a bit of a run-up. Seems to me it worked out fine.
But if one believes the stock market will grow over time, which is why we invest to begin with, then should I be taking an approach that may leave me missing stock rallies?
I don't think you are missing the stock rallies. You have stocks. They just are not in your 401k. As long as you are staying somewhere near your target, you have the amount of stocks you want. If your stock percentage is dropping too low, just adjust it. But that seems unlikely during a rising market.
Right, when I rolled the money over to my Roth, my AA was around 79/21, which is slightly on the lower side of my target AA but still well within my +-5 bands. From this perspective, it worked out fine. Had I been investing this after tax money into my 401k in stocks and bonds at 80/20, my AA would have likely gone to a few pts above 80/20. So both approaches fit within my target AA.

I suppose another way to simplify this question is, am I better off investing regularly into bonds and then 2-3 times per year doing lump exchanges of those accumulated bonds to stocks to rebalance, or should I instead be regularly buying stocks/bonds at 80/20 throughout the year. I could do this by continuing to invest in bonds in my 401k but regularly exchange bonds to stocks in my Roth IRA.

Ultimately, which approach will be most advantageous depends on market performance. I recognized that. You can't predict it.

It just irks me that I essentially bought up bonds for 5 months and then converted them all to stocks at a relatively higher price. For example, in the two weeks from when I placed the in-service withdrawal till the money got rolled over to my Roth -- this always takes some time -- Total Intl Stock increased by 5%.

Iced Tea

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by retiredjg » Thu May 30, 2013 2:19 pm

That makes the question a little clearer. I don't think there is an answer. Or maybe I just don't know it. But you could make an exchange from bonds to stocks in the Roth IRA before you make the transition from after-tax-401k to Roth IRA. Would that make it seem any different to you?

Or you could be making smaller transitions from bonds to stocks each month (or every 2 weeks) - this would be essentially the same as buying stocks once a month (or every 2 weeks) in your 401k. Would that seem different? Would you feel better about that?

I really think this is a mental thing, not a real thing. If you are staying within your band, it's all the same, isn't it? Sometimes you'll buy stocks at higher prices than they would have been before. Sometimes at lower prices than they would have been before.

In a rising market, if you want to avoid paying a lot of tax on earnings, that's how it will work out unless you are constantly making adjustments in the IRA. Or you could forget about the amount of earnings that will be taxed and just buy both stocks and bonds all along. It's a trade off - which choice do you feel better with?

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by icedtea » Thu May 30, 2013 3:52 pm

retiredjg wrote:That makes the question a little clearer. I don't think there is an answer. Or maybe I just don't know it. But you could make an exchange from bonds to stocks in the Roth IRA before you make the transition from after-tax-401k to Roth IRA. Would that make it seem any different to you?

Or you could be making smaller transitions from bonds to stocks each month (or every 2 weeks) - this would be essentially the same as buying stocks once a month (or every 2 weeks) in your 401k. Would that seem different? Would you feel better about that?

I really think this is a mental thing, not a real thing. If you are staying within your band, it's all the same, isn't it? Sometimes you'll buy stocks at higher prices than they would have been before. Sometimes at lower prices than they would have been before.

In a rising market, if you want to avoid paying a lot of tax on earnings, that's how it will work out unless you are constantly making adjustments in the IRA. Or you could forget about the amount of earnings that will be taxed and just buy both stocks and bonds all along. It's a trade off - which choice do you feel better with?
I think moving ahead I'll keep investing in bonds only in my 401k but each month I'll exchange bonds for stocks in my Roth. I know it could go either way in the end at any given time, but I'd probably feel better about it. It will require a little more work on my part.

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by retiredjg » Thu May 30, 2013 4:59 pm

That should work. Good luck!

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by icedtea » Fri May 31, 2013 1:51 pm

retiredjg wrote:That should work. Good luck!
Thanks. Actually, I'm at 82/18 so I guess I'll let things roll for now and hold off on moving bonds to stocks in my Roth 'till I get closer to 80/20. That could be a while.

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Re: Moving AA from 80/20 to 85/15 (new title)

Post by retiredjg » Fri May 31, 2013 6:25 pm

icedtea wrote:Thanks. Actually, I'm at 82/18 so I guess I'll let things roll for now and hold off on moving bonds to stocks in my Roth 'till I get closer to 80/20. That could be a while.
I wondered about that too. With the market rising, buying only bonds (or mostly bonds) might just work out fine.

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