Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional shares?

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LetsQuitTheGrind
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Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional shares?

Post by LetsQuitTheGrind » Wed Jul 06, 2016 7:16 pm

I'm having a slice-n-dice problem: I make 2x monthly contributions to my 401K and my ETF share prices aren't making it easy to hit my target allocations. I can't buy fractional shares. I want to buy the exact same percentage of my target asset classes every week but this isn't possible. Those that do chose to slice-n-dice, what is your method to approximate your target allocation?

About me and my portfolio philosophy
-I am 37 and have 25% in Intermediate-Term Bonds which for simplicity I've excluded from this post.
-My 401K at Schwab is awesome and I have access to pretty much everything.
-I'm looking to follow the Merriman Ultimate Buy and Hold Portfolio Allocation at Schwab.
-I'm looking to rebalance either annually (as recommended by Merriman) or opportunistically (20% bands).
-I realize that some crave simplicity but, but I am willing to work a little harder to eek out another 1%.

The Usual Slice 'n Dice Issues
-10 FUNDS for equities alone?!?!? Complicated! I was looking into the Trev H 4 fund portfolio but didn't find a good example using Schwab ETFs.
-I don't quite contribute enough with each contribution to purchase all of my ETFs, let alone the appropriate percentages.
-My 2x monthly contribution is ~$387.50. Buying 1 of each ETF would be $440.63, and that doesn't even touch the 25% I'm putting into bonds.
-I could just buy the loser asset classes to constantly rebalance (what I've done in the past) but Merriman believes this costs you returns in excess of 1%.

Other Issues More Unique to Me
1) I receive an annual ~$5,000 profit sharing deposit into my 401K account in March or April.
2) I plan to fund the remaining balance of my $18,000 contribution limit ($11,400) in December when I get my bonus.
3) Because of 1 and 2 above, I may opt to rebalance annually when I deposit one of these two lump sum payments.
4) I really love the idea of 20% bands though.

I'm obviously not going to be able to buy all of the ETFs at their target allocation percentage every deposit. What is your method for coming as close to your allocation % purchase targets as possible when share prices vary so much?

Equity Allocation - Merriman Ultimate Buy and Hold (75% of portfolio- 25% in bonds not shown)

Code: Select all

Symbol	Alloc%  Target	Price	Price/Target
SCHX		10%	$38.75 	 49.66 	 0.78 
SCHV		10%	 38.75 	 44.58 	 0.87 
SCHA		10%	 38.75 	 53.75 	 0.72 
SLYV		10%	 38.75 	 99.63 	 0.39 
SCHH		10%	 38.75 	 43.71 	 0.89 
SCHF		10%	 38.75 	 26.52 	 1.46 
DWX	 	10%	 38.75 	 34.42 	 1.13 
SCHC		20%	 77.50 	 28.33 	 2.74 
SCHE		05%	 19.38 	 20.92 	 0.93 
EWX	 	05%	 19.38 	 39.12 	 0.50 
----------------------------------------------
Total 	100%	$387.50 	$440.63 	
Annual Contributions

Code: Select all

					                     2x Monthly	Annual
2x Monthly 401K Witholdings:			 $275.00 	$6,600.00 
2x Monthly 401K Company Matching:		112.50 	 2,700.00 
----------------------------------------------------------------
2x Monthly 401K Total Deposit:		  $387.50 	$9,300.00 
				
March 401K Company Profit Sharing:               $5,000.00 
December 401K Bonus Deposit		                11,400.00 
----------------------------------------------------------------
Annual 401K Contributions				 			 $25,700.00 

If you weren't going to "buy up the losers", how would you maintain contributions according to your asset class target percentages in the real world?

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David Jay
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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by David Jay » Wed Jul 06, 2016 9:01 pm

1. You don't need 10 equity funds. Even the coffeehouse portfolio (where I started) has only 6 equity funds and I have simplified that over time by using Total Stock instead of two individual funds. Any holding that is less than 10% of your total portfolio is basically "window dressing" - that is - it looks good but it doesn't move the portfolio return.

2. At your age, the most important thing is You CONTRIBUTION, not allocation. Don't sweat the details, purchase shares in one asset class each pay period. Over the course of 10 months you will have a roughly equal contribution in each fund.
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livesoft
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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by livesoft » Wed Jul 06, 2016 9:43 pm

I have a 401(k) that only holds ETF shares. I have a slice-and-dice portfolio. My method: I simply do not worry about it. Since I don't pay commissions if I have a little cash leftover I will buy a single share of something if I can to reduce the cash even smaller. I usually don't even care what that oddball share is, but there are plenty of ETF shares around the $35 level and less, so my cash [pile --admin LadyGeek] is usually less than $35.

I see you have the complicated Merriman portfolio when a simplified version will do. Check out the Trev H thread on simplifying the Merriman portfolio without simplifying peformance: viewtopic.php?t=38374

Also give up on buyng the same percentage every two weeks. Instead buy the lowest performers or the most interesting or whatever you need to make the numbers look pretty. For instance, if I have 98 shares of something, you know I am going to buy 2 shares to get to 100 shares because that looks nicer.
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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by grabiner » Wed Jul 06, 2016 9:57 pm

There is no point in keeping things too precise. If your target allocation to a fund is 20% of your portfolio, and you get to exactly 20% today, it could be 19.8% tomorrow, and 19% by the next payday. You can then fix it next time, putting your new contribution into whatever is underweighted.
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telemark
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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by telemark » Wed Jul 06, 2016 10:52 pm

I avoid the problem by using mutual funds.

LetsQuitTheGrind
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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by LetsQuitTheGrind » Thu Jul 07, 2016 1:13 am

David Jay wrote:At your age, the most important thing is You CONTRIBUTION, not allocation. Don't sweat the details, purchase shares in one asset class each pay period. Over the course of 10 months you will have a roughly equal contribution in each fund.
Thank you for responding. This is an option that I'm considering, even if I keep the 10 asset classes.

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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by LetsQuitTheGrind » Thu Jul 07, 2016 1:19 am

livesoft wrote:Check out the Trev H thread on simplifying the Merriman portfolio without simplifying peformance: viewtopic.php?t=38374
Thank you for responding. I've yet to find a Trev H Schwab ETF simplified portfolio. Does anyone know of one?
Also give up on buyng the same percentage every two weeks. Instead buy the lowest performers or the most interesting or whatever you need to make the numbers look pretty.
I was previously buying low performers (aka constantly rebalancing via contributions) but feel as Merriman does that this lowers returns (though decreases risk, but I can't touch this stuff for 23 years minimum). That's why I was contemplating an alternative.

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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by LetsQuitTheGrind » Thu Jul 07, 2016 1:29 am

grabiner wrote:There is no point in keeping things too precise. If your target allocation to a fund is 20% of your portfolio, and you get to exactly 20% today, it could be 19.8% tomorrow, and 19% by the next payday. You can then fix it next time, putting your new contribution into whatever is underweighted.
Thank you for responding. This is a valid point, but I want to emphasize that a key part of this strategy eeking out extra returns comes through not constantly rebalancing underweighted asset classes, though at the expense of some volatility/risk. Merriman goes against conventional Boglehead wisdom here: he advocates on his podcast that a young person never rebalance, and that an older or more risk averse person rebalance only once annually.

I enjoy solving problems, so the complexity isn't the issue to me. This type of portfolio keeps me busy enough to not to something stupid like attempting to time markets or constantly shifting my allocation of equities/bonds. I'm just looking for an optimal solution.

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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by LetsQuitTheGrind » Thu Jul 07, 2016 1:32 am

telemark wrote:I avoid the problem by using mutual funds.
This would be awesome but I'm at Schwab where low ER ETF's are king.

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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by livesoft » Thu Jul 07, 2016 6:26 am

LetsQuitTheGrind wrote:
livesoft wrote:Check out the Trev H thread on simplifying the Merriman portfolio without simplifying peformance: viewtopic.php?t=38374
Thank you for responding. I've yet to find a Trev H Schwab ETF simplified portfolio. Does anyone know of one?
Why don't you propose a Schwab ETF simplified portfolio with reasons why you picked those investments? You did write that you enjoy solving problems. Enjoy!
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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by LibertyLover » Thu Jul 07, 2016 6:39 am

LetsQuitTheGrind wrote: -I could just buy the loser asset classes to constantly rebalance (what I've done in the past) but Merriman believes this costs you returns in excess of 1%.
Is there a link to an explanation of this? I'm not following the reasoning on why it would lower returns.

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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by czeckers » Thu Jul 07, 2016 7:07 am

LibertyLover wrote:
LetsQuitTheGrind wrote: -I could just buy the loser asset classes to constantly rebalance (what I've done in the past) but Merriman believes this costs you returns in excess of 1%.
Is there a link to an explanation of this? I'm not following the reasoning on why it would lower returns.

Good question.
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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by Lafder » Thu Jul 07, 2016 9:06 am

A key piece is tolerance for being off from your target :)

Are you having the contributions go to money market then you can manually order the purchases in whole shares from there, leaving some dollars and cents behind if needed ?

I agree with the comment re mutual funds. They are much easier to buy and sell in fractions. Plus you can put orders in at any time of day. But as you said, you may enjoy complexity much more than I do, so go for it if you like ETFs :)

FYI Vanguard Admiral share mutual funds have the same expenses as their ETFs so no cost saving with ETFs there, I have been told.

I like whole numbers for mutual fund purchases even though any dollar amount can be bought. So when making a new solo401k purchase, I look at our overall AA and make the purchase accordingly, approximately. If on track I contribute at approximately our AA grossly rounded to 500$ increments. If our AA is off I put all of the contribution in the lowest asset. My husband's 401k contributions are set at our goal AA since it is close. If the market shifts a lot I can change the contribution allocation. But it can take a few pay cycles to kick in.

It is enough choices for me between 3 funds. I can only imagine with 10 :shock:

Keeping contributions exactly on your AA may not be as crucial as it seems since you are doing periodic rebalancing back to your AA anyway.

With ETFs, if there are dividends are they unable to reinvest since it would only be a partial share amount?

lafder

livesoft
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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by livesoft » Thu Jul 07, 2016 11:55 am

Lafder wrote:I agree with the comment re mutual funds. They are much easier to buy and sell in fractions. Plus you can put orders in at any time of day. But as you said, you may enjoy complexity much more than I do, so go for it if you like ETFs :)
And the cool thing is that Schwab has some decent no-load low-expense-ratio passively-managed index funds. One could use those mutual funds and ETFs.
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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by Aptenodytes » Thu Jul 07, 2016 12:51 pm

LetsQuitTheGrind wrote:
livesoft wrote:Also give up on buyng the same percentage every two weeks. Instead buy the lowest performers or the most interesting or whatever you need to make the numbers look pretty.
I was previously buying low performers (aka constantly rebalancing via contributions) but feel as Merriman does that this lowers returns (though decreases risk, but I can't touch this stuff for 23 years minimum). That's why I was contemplating an alternative.
You aren't paying attention to Livesoft's recommendation. He didn't say to buy the lowest performer, he said buy any combination that works. If you want to apply momentum thinking to your new-contribution puzzle, then tilt the new contributions to the high performers. The point is not to worry about the lumpiness of your new contributions because it simply does not matter. At the extreme, let's say you are worried that ANY approach might create undesired risk, then all you have to do is alternate between opposite approaches so that they cancel each other out.

Does Merriman really say that targeting new contributions on the low-performing assets can lower returns 1%? That seems to lack credibility to me except in the special case of very low portfolio values (where the 1% isn't worth worrying about). I can see making a case that constant rebalancing could lower returns 1% compared to hefty bands, but that's a different question.

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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by LetsQuitTheGrind » Thu Jul 07, 2016 5:02 pm

Aptenodytes wrote: You aren't paying attention to Livesoft's recommendation. He didn't say to buy the lowest performer, he said buy any combination that works.
I understand, and as to "any combination that works", I'm looking for a combination that I can implement programatically so that I don't have to think about it. I'm looking for something mechanical--that I could automate if I feel like it. I've currently automated my "buying the losers approach" (paste balances into excel, excel tells me what to buy). I'm looking to automate the "buy the ETFs at the target percentages but I have insufficient contributions to hit the percentages so I need to buy more of this ETF next pay period" approach.
Does Merriman really say that targeting new contributions on the low-performing assets can lower returns 1%? That seems to lack credibility to me except in the special case of very low portfolio values (where the 1% isn't worth worrying about). I can see making a case that constant rebalancing could lower returns 1% compared to hefty bands, but that's a different question.
No, and that was my fault for misspeaking. He says monthly rebalancing could lower returns more than 1% vs. annual rebalancing, and advises a young person to possibly never rebalance (equities, at least). Everyone should rebalance the ratio of equities to bonds. I believe I was thinking of monthly rebalancing when I mentioned buying up losers, but my intuition is that buying up losers twice per month will yield results more similar to monthly rebalancing than to rebalancing annually or never rebalancing. He also does speak out against buying up losers on his podcast and explicitly states to keep buying at your target asset class percentages.

In his own words, click here for the article.
Merriman (via Marketwatch) wrote: First, all investors should continue to rebalance between stocks and bonds. This is a legitimate tactic for controlling risk.

Second, young investors probably will do better over the long haul if they don’t rebalance among equity asset classes. Remember the $6.6 million (no rebalancing) versus $4.2 million (annual rebalancing) over the past 50 calendar years.

Third, older investors, certainly including retirees, should be more conservative and not let any single asset class get too far away from its target percentage. For these investors, rebalancing is probably a good idea. It doesn’t have to happen every year, but it should happen at least every four or five years.

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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by livesoft » Thu Jul 07, 2016 5:13 pm

LetsQuitTheGrind wrote:..., and as to "any combination that works", I'm looking for a combination that I can implement programatically so that I don't have to think about it. I'm looking for something mechanical--that I could automate if I feel like it.
Something like that could still be implemented programmatically. Just use a random number generator to select from several implementations or combos and away you go. It might turn out better than the proverbial WSJ dart-throwing monkey and would be more fun.
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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by LetsQuitTheGrind » Thu Jul 07, 2016 6:19 pm

Lafder wrote:A key piece is tolerance for being off from your target :)
According to Merriman the key is to get them in at a target and then let them driiiiiiiiiiiifttttttt!
Are you having the contributions go to money market then you can manually order the purchases in whole shares from there, leaving some dollars and cents behind if needed ?
Yes, this is how my Schwab 401K works. Never knew how good I had it until I read the horror stories here.
Keeping contributions exactly on your AA may not be as crucial as it seems since you are doing periodic rebalancing back to your AA anyway.
With ETFs, if there are dividends are they unable to reinvest since it would only be a partial share amount?
lafder
True to your first point, and as to your second, you are able to reinvest ETF dividends--anything left over will go to the sweep account (money market).

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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by grap0013 » Thu Jul 07, 2016 10:33 pm

What are your 401K standard account options?

Your problem is an easy fix. Simply buy a target retirement fund or a cheap index mutual fund exclusively throughout the entire year. Once per year do a dump and disseminate the money from the feeder fund to the aforementioned ETFs. Gradually the 25K or whatever amount sitting at year's end in the target retirement fund is completely dwarfed by the ETF total dollar amount. You have an "aha" moment when you realize it felt a little silly previously worrying about exact percentages and wishing you could buy fractional shares. Trust me on this one.
There are no guarantees, only probabilities.

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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by LetsQuitTheGrind » Mon Jul 11, 2016 10:19 am

My options are that I can buy any fund, stock, bond, or ETF that are offered for trade at Schwab. Practically this means buying schwab commission-free ETFs because $8.95 per transaction for non-free ETFs on a $400 contribution are a non-starter. I like your idea as it's practical. However, the more I think about it, when not worrying about re-balancing one needs to just monitor how much money has been distributed to each target asset class, which I can do automatically by downloading my transactions--same process that I was doing before when I was buying up losers, only instead of looking at the current portfolio percentages, I'd be looking at the historical portfolio purchases.

Same process: download CSV, paste transactions, and it tells me which underpurchased ETFs to buy this week.

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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by avalpert » Mon Jul 11, 2016 10:27 am

LetsQuitTheGrind wrote: However, the more I think about it, when not worrying about re-balancing one needs to just monitor how much money has been distributed to each target asset class,
Why do you have to monitor that - to what end? Why would it possibly matter how much was distributed if it doesn't matter how much is in each asset class today (why should new money be looked at differently than old money)?

There are any number of ways to ask it but it all gets to the same point - false precision and anchoring bias seem to be the outcome of your approach.

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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by grap0013 » Tue Jul 12, 2016 9:09 am

LetsQuitTheGrind wrote:My options are that I can buy any fund, stock, bond, or ETF that are offered for trade at Schwab. Practically this means buying schwab commission-free ETFs because $8.95 per transaction for non-free ETFs on a $400 contribution are a non-starter. I like your idea as it's practical. However, the more I think about it, when not worrying about re-balancing one needs to just monitor how much money has been distributed to each target asset class, which I can do automatically by downloading my transactions--same process that I was doing before when I was buying up losers, only instead of looking at the current portfolio percentages, I'd be looking at the historical portfolio purchases.

Same process: download CSV, paste transactions, and it tells me which underpurchased ETFs to buy this week.
The dollar amounts you are concerned about are so small that you are talking about a few dollars and cents here. If you enjoy doing this that is fine, but do not fool yourself that you are practically making a differences to your returns.
There are no guarantees, only probabilities.

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Re: Slice-n-Dice 401K Contributions: What's you method for hitting asset class allocation % targets w/out fractional sha

Post by LetsQuitTheGrind » Fri Jul 15, 2016 1:37 am

I'm more looking for a way to make sure I spend the same money one each asset class (ETF, in this case). You're right, I don't need extreme precision, but I do think that this is something that is easy to automate.

Here are a few options from this thread:
Option 1) Buy one asset class each contribution, maybe top off at the end of the year. I might recommend this to friends that want a simple approach.
Option 2) Buy an ETF (TSM, etc) with each contribution and sell at the end of the year, then buy all asset classes with the proceeds. Love the idea but if I believe I can get another 1% from following the merriman strategy, I don't wanna lose that 1% every year for the latest year.
Option 3) Buy up the losers--no fun, plus it's likely -EV (negative expected value) vs pursuing a no rebalancing strategy.

What I'm doing for fun is Option 4)

Auto import the balances and transactions from Schwab into Excel or Google Sheets, then have the spreadsheet auto prioritize the purchases based on need. Instead of purchasing losers (based on current balance), it looks to see how much of each asset class (ETF) has been purchased previously and then prioritizes based on most under purchased to least. I realize that this is way too complicated for some, but I want an approach that removes any emotion and makes this mechanical.

I'll probably write a bot to do this for me down the road.

I appreciate everyone's time responding here.

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