How do you allocate your contributions?

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vicp88
Posts: 22
Joined: Sat Mar 11, 2017 1:29 pm

How do you allocate your contributions?

Post by vicp88 »

Let's assume that you've decided on an asset allocation of 70% stocks and 30% bonds, and plan on making monthly contributions of $1,000 ($700 into stock fund and $300 into bond fund), and rebalance once a year. Now let's say that a few months in you have a strong performance with your stock fund, making your asset allocation more heavily weighted toward stocks, would you adjust your monthly contributions to try and maintain your asset allocation, or would you continue to contribute $700 in stocks and $300 in bonds then simply take care of the issue during your yearly rebalancing?

I'm sure different scenarios would favor one approach over the other, but I am wondering if historically speaking one approach is better than the other.
bloom2708
Posts: 8360
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: How do you allocate your contributions?

Post by bloom2708 »

When your account balances are relatively low, a new purchase might be able to "right" your asset allocation differences.

As your portfolio grows a new purchase (in taxable) will move toward your desired asset allocation, but likely won't fix it.

So my philosophy is to buy toward. If you are dead on the day you invest, then split 70/30. If stocks are high, do a quick calculation and figure out if all $1,000 goes to bonds or if something less than $1,000 will get your AA back in line.

I don't alter my pre-tax 401k percentages frequently. Taxable purchases toward my overall desired allocation.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
CppCoder
Posts: 920
Joined: Sat Jan 23, 2016 9:16 pm

Re: How do you allocate your contributions?

Post by CppCoder »

bloom2708 wrote: If you are dead on the day you invest, then split 70/30.
If I'm dead on the day I invest, then I won't do anything, but my wife has instructions for what to do with the life insurance :twisted:. Sorry, I couldn't resist.

To answer the OP's question, it's different for everyone. Every two weeks, I contribute in my taxable account to the fund that is furthest away from its target. The problem is that I only keep a domestic and foreign equity fund in taxable. My 401k has bonds and equity options, but monthly, I send the whole contribution to bonds. I have a REIT fund in one of my IRAs, but it only gets funded once a year. Surprisingly, I've been able to stay reasonably close to my targets using this strategy with a once a year rebalance. In the event that one asset is much hotter than the rest, I maintain immediate rebalancing bands that would trigger me to rebalance before my annual rebalance event. I've not hit an immediate rebalancing band in the two years for which I've been implementing this strategy.
rkhusky
Posts: 10909
Joined: Thu Aug 18, 2011 8:09 pm

Re: How do you allocate your contributions?

Post by rkhusky »

For IRA contributions I put it towards the fund that is low. For 401K contributions, which are payroll deductions, I handle disparities via rebalancing, since it is too much of a pain to change the allocation.
PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: How do you allocate your contributions?

Post by PFInterest »

i manually buy each much in the dollar amount needed to keep the AA steady. aka "re-balance" with new money.
NiceUnparticularMan
Posts: 1740
Joined: Sat Mar 11, 2017 7:51 am

Re: How do you allocate your contributions?

Post by NiceUnparticularMan »

IRA or other lump sum investments are usually part of my annual general rebalancing process. If there is a big lump sum at another time (a rare event), I might initiate an additional general rebalancing.

For paycheck contributions to 401Ks, I don't worry about it until the next overall rebalancing. I like to think of it as my version of a "momentum" play (the truth is it would be too much of a hassle to bother).
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telemark
Posts: 2797
Joined: Sat Aug 11, 2012 6:35 am

Re: How do you allocate your contributions?

Post by telemark »

Yet another approach is to put all the new money into the asset class that is farthest over its target, rebalancing only when a band is exceeded. This is a more extreme version of the momentum strategy mentioned above, and I don't know if anyone actually does it. Whatever you do, there are two things to remember:
  • No matter which approach you take, the effect is likely to be small, near the level of noise.
  • No approach is always best. There will be a sequence of market moves that can cause it to do
    worse than one of the others.
Personally, I like to rebalance with new money, on the theory that buying low (for whatever low means today) is a good thing. But if I buy bonds because stocks went up, and then stocks go up some more, I would have more money if I'd put some of that money into stocks and then rebalanced.
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