is this a good time to increase bonds and switch from target retirment funds

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bogleboyz
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is this a good time to increase bonds and switch from target retirment funds

Post by bogleboyz » Sun Jun 26, 2016 1:24 pm

I have my work 401 K and 457 with fidelity.
currently my accounts are invested in the Fidelity freedom fund 2045 (target retirement fund) expense ratio 0.64.

I will be changing it to low cost index funds offered in the 401 and 457. I will also be increasing the bond allocation in my account. Currently the fidelity freedom 2045 fund is 94.5% stocks and only 5.4% bonds. I plan on increasing the bond allocation to 20% with 80% stocks
I have already figured out which funds to use. These decisions were made prior to BREXIT

My question is, is this a good time to make that change? with the recent drop after BREXIT and possibly further drop, should i wait to make this change?
I know i shouldnt be timing the market but dont want to make this major change at the wrong time.
it seems like i will be buying more bonds at a higher price (after recent increase in bond prices) and selling stocks low. isnt this opposite of what we generally want to do?

any advice will be appreciated
thanks

jpelder
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Re: is this a good time to increase bonds and switch from target retirment funds

Post by jpelder » Sun Jun 26, 2016 1:34 pm

Perhaps start directing new contributions to the new allocation, then set up an automatic transfer to get you from your current allocation into the new one by, say, a year from now? That should smooth things out a bit, and avoid this (hopefully) short-term blip

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TomatoTomahto
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Re: is this a good time to increase bonds and switch from target retirment funds

Post by TomatoTomahto » Sun Jun 26, 2016 1:42 pm

I rebalance, or change AA, only with new money. Since you're accumulating, you can also.

livesoft
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Re: is this a good time to increase bonds and switch from target retirment funds

Post by livesoft » Sun Jun 26, 2016 1:46 pm

bogleboyz wrote:it seems like i will be buying more bonds at a higher price (after recent increase in bond prices) and selling stocks low. isnt this opposite of what we generally want to do?

Yes, this is the opposite of what I would do.

What kind of percentage changes are you talking about? Going from 5% bonds to 20% bonds is not that big a deal, so going only part-way to 10% or 12% bonds would be OK.

So going to index funds is not the issue. You are asking about go to index funds with a 95:05 ratio or an 80:20 ratio or perhaps in-between. Since you were living with 95:05 for awhile, I see no reason to hurry into 80:20.
Last edited by livesoft on Sun Jun 26, 2016 2:19 pm, edited 2 times in total.
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ruralavalon
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Re: is this a good time to increase bonds and switch from target retirment funds

Post by ruralavalon » Sun Jun 26, 2016 1:53 pm

I often say that questions with the word "time" in them are usually the wrong question.

The switch you mention should make your portfolio less volatile, and give you much a lower expense ratio. Your intended changes seem reasonable to me. The Brexit vote doen't change the desirability of those goals.

You made your decision before the recent Brexit panic and independent of it. So it not a question of time.

I suggest just going ahead and make the switch now. I see no reason to stretch it out. Why delay achieving the lower expense and reduced risk?
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jjface
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Re: is this a good time to increase bonds and switch from target retirment funds

Post by jjface » Sun Jun 26, 2016 2:08 pm

If you were wanting to reduce volatility before then doing it sooner rather than later is probably wise. There is still a chance the effects of Brexit will continue and getting to your new bond allocation now will dampen any further drops a little more. Plus get you out of a riskier actively managed fund.

Lafder
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Re: is this a good time to increase bonds and switch from target retirment funds

Post by Lafder » Sun Jun 26, 2016 4:00 pm

Since your plan is to increase to 20% bonds, you could set your ongoing contributions to all bonds in the fund you are going to use for your 3 fund portfolio.

I know it is market timing......but then at some point in the future you can move your Target date fund into the 3 new sub funds.

This way you are not selling current stocks low, and you are increasing your bond allocation starting immediately.

Of course it also means you are not buying stocks on sale. But it is also possible the "market" will more than make up the loss from Friday tomorrow and it will be back to just another market day. Of course the news will try to make a story out of whatever happens with the markets this week.

lafder

bogleboyz
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Re: is this a good time to increase bonds and switch from target retirment funds

Post by bogleboyz » Sun Jun 26, 2016 5:23 pm

TomatoTomahto wrote:I rebalance, or change AA, only with new money. Since you're accumulating, you can also.


i have already contributed the maximum for this year to both 401 and 457 so i cant direct new contributions until start of next year

bogleboyz
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Re: is this a good time to increase bonds and switch from target retirment funds

Post by bogleboyz » Sun Jun 26, 2016 5:26 pm

Lafder wrote:Since your plan is to increase to 20% bonds, you could set your ongoing contributions to all bonds in the fund you are going to use for your 3 fund portfolio.

I know it is market timing......but then at some point in the future you can move your Target date fund into the 3 new sub funds.

This way you are not selling current stocks low, and you are increasing your bond allocation starting immediately.

Of course it also means you are not buying stocks on sale. But it is also possible the "market" will more than make up the loss from Friday tomorrow and it will be back to just another market day. Of course the news will try to make a story out of whatever happens with the markets this week.

lafder



I have already contributed the maximum for this year to 401 and 457. For new contributions i will have to wait till next year

bogleboyz
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Re: is this a good time to increase bonds and switch from target retirment funds

Post by bogleboyz » Sun Jun 26, 2016 5:47 pm

livesoft wrote:
bogleboyz wrote:it seems like i will be buying more bonds at a higher price (after recent increase in bond prices) and selling stocks low. isnt this opposite of what we generally want to do?

Yes, this is the opposite of what I would do.

What kind of percentage changes are you talking about? Going from 5% bonds to 20% bonds is not that big a deal, so going only part-way to 10% or 12% bonds would be OK.

So going to index funds is not the issue. You are asking about go to index funds with a 95:05 ratio or an 80:20 ratio or perhaps in-between. Since you were living with 95:05 for awhile, I see no reason to hurry into 80:20.



so would you suggest changing the target retirement fund to index funds maybe 90% stocks and 10% bonds now and then increasing the bonds to 20% over a period of time?
I would imagine going from the target retirement fund to index funds would not be an issue as i will be selling low in the target retirement fund and buying low in the new index fund.
i wont be able to direct new contributions until start of 2017 as i have already maximized contributions for 2016 for both 401 and 457

livesoft
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Re: is this a good time to increase bonds and switch from target retirment funds

Post by livesoft » Sun Jun 26, 2016 5:50 pm

bogleboyz wrote:so would you suggest changing the target retirement fund to index funds maybe 90% stocks and 10% bonds now and then increasing the bonds to 20% over a period of time?

I think it is something to consider. I like increasing risk when equities drop quickly, but I don't know what you like.
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bogleboyz
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Re: is this a good time to increase bonds and switch from target retirment funds

Post by bogleboyz » Sun Jun 26, 2016 5:57 pm

ruralavalon wrote:I often say that questions with the word "time" in them are usually the wrong question.

The switch you mention should make your portfolio less volatile, and give you much a lower expense ratio. Your intended changes seem reasonable to me. The Brexit vote doen't change the desirability of those goals.

You made your decision before the recent Brexit panic and independent of it. So it not a question of time.

I suggest just going ahead and make the switch now. I see no reason to stretch it out. Why delay achieving the lower expense and reduced risk?



other option would be to change from the target retirement fund to the index funds with lower expense ratio now and starting with asset allocation of may be 90/10 at the start and then increase it to 80/20 over a period of time. I will be able to achieve the lower expense ratio now and decrease the effect of selling low and buying high .
do you think that is a reasonable option?

Lobster
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Re: is this a good time to increase bonds and switch from target retirment funds

Post by Lobster » Sun Jun 26, 2016 6:54 pm

Get out of the expensive funds because you are suffering from the tyranny of compounding costs. But first, regarding your AA, I would take the time to do research until you can settle on an AA that you will feel comfortable sticking with through thick and thin.

My recommended reading list:
Bogleheads Guide to Investing
Bogle's Little Book of Common Sense Investing
William Bernsteins' The Investor's Manifesto
Rick Ferri's All About Asset Allocation

Personally I think it was worthwhile to read the other books before the asset allocation book because it gave me some grounding in the boglehead philosophy.
Submit to the relentless rules of humble arithmetic and avoid the tyranny of compounding costs.

Lafder
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Re: is this a good time to increase bonds and switch from target retirment funds

Post by Lafder » Sun Jun 26, 2016 7:35 pm

Do you by chance have spare post tax cash to invest in tax advantaged bonds or pay down a mortgage?

Those both seem to head towards your goal to me.

But if you are sure you want to switch to a 3 fund instead of target date, any time is fine. You can also change by 5% now, and an extra 5% every month to spread it out, or just go for it.

lafder

TropikThunder
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Re: is this a good time to increase bonds and switch from target retirment funds

Post by TropikThunder » Sun Jun 26, 2016 7:40 pm

livesoft wrote:So going to index funds is not the issue. You are asking about go to index funds with a 95:05 ratio or an 80:20 ratio or perhaps in-between. Since you were living with 95:05 for awhile, I see no reason to hurry into 80:20.


^This. Most BH's will say each investor should only accept what risk they are comfortable with, and I am by no means telling you what to do. But your original choice of the 2045 target date suggests you have well over 20 years to go before retirement, and most (not all) advisors would say 80/20 is too conservative at that age (evidenced by the fact that every target date fund out that far is 90% equity or more). I don't think I'm alone in seeing all the reactive sell-off and shaking my head at how short-sighted the sellers are, but I'm sure it's a different calculus for someone <5 years from retirement.

bogleboyz wrote:other option would be to change from the target retirement fund to the index funds with lower expense ratio now and starting with asset allocation of may be 90/10 at the start and then increase it to 80/20 over a period of time. I will be able to achieve the lower expense ratio now and decrease the effect of selling low and buying high .
do you think that is a reasonable option?


This would be the better option in my opinion. It would achieve the goal of lowering cost now while not mimicking a panic sell-off. Yes, you planned to shift your AA in the direction of bonds before the drop, and selling now would not be a panic move on your part. But I think it would be a mistake to ignore what just happened, and what may continue in the upcoming week, no one knows one way or the other. The S&P 500 lost 3.6% on Friday. It's not out of the realm of possibility that it's back to where it started by next Friday. If it were me, I would wait a week or two before changing my AA that much.

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