I've never rebalanced - Can I do ok without it?

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sheople2
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I've never rebalanced - Can I do ok without it?

Post by sheople2 » Sun Feb 04, 2018 10:17 pm

I have a rebalancing question. Is it OK that I’ve never rebalanced? Can I do well without doing so? If I don’t understand something and find it extremely confusing and stressful, I generally choose not to do it. I just keep track of my year-to-date returns every year. I just hold.

Yesterday I was rereading this from Jack Bogle:

“Jack Bogle: I am in a small minority on the idea of rebalancing. I don't think you need to do it. The data bear me out, because the higher-yielding asset is going to be stocks over the long term. That's the way the capital markets work. Not in every 10-year period, or even for that matter every 25-year period. But the higher-returning asset you're getting rid of to go into a lower-returning asset, so it dampens your returns, and the differences turn out to be, if you look at 25-year periods, very, very small. And sometimes rebalancing improves your returns. Sometimes it makes them worse.

There is a comfort level for an investor, and a feeling of he's kind of protected, as much as you can be protected in these volatile days. So it's a behavioral problem. Anybody that feels they should rebalance, I think they should rebalance. I wouldn't tell them not to. But I'd say, do it in a little more sensible way than it's done. I wouldn't have some formula: oh my God, I've gone from 60% to 61%. I better get back to 60%. On a given day, that may happen in these markets. So it should be some range. Say you want to stay close to 65%. If you get below 60%, you can rebalance. If you get above 70%, you rebalance. And you try and not do it not with any great frequency.

So if you do it, set really wide bands …
Bogle: Wide bands. That's actually a decently wide band. And you can set it a little wider or a little narrower. But right down to the decimal point is just foolish, it's over-managing.”

_________________

Also, doesn't my portfolio automatically rebalance itself ? For instance, my allocation was 50/50 until the end of 2017 where it became 60/40 - and then went up further throughout January - until today where my allocation is now back down to lower than 60/40.

For those that reply, please keep answers simple. Thanks.

MotoTrojan
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Re: I've never rebalanced - Can I do ok without it?

Post by MotoTrojan » Sun Feb 04, 2018 10:28 pm

sheople2 wrote:
Sun Feb 04, 2018 10:17 pm
I have a rebalancing question. Is it OK that I’ve never rebalanced? Can I do well without doing so? If I don’t understand something and find it extremely confusing and stressful, I generally choose not to do it. I just keep track of my year-to-date returns every year. I just hold.

Yesterday I was rereading this from Jack Bogle:

“Jack Bogle: I am in a small minority on the idea of rebalancing. I don't think you need to do it. The data bear me out, because the higher-yielding asset is going to be stocks over the long term. That's the way the capital markets work. Not in every 10-year period, or even for that matter every 25-year period. But the higher-returning asset you're getting rid of to go into a lower-returning asset, so it dampens your returns, and the differences turn out to be, if you look at 25-year periods, very, very small. And sometimes rebalancing improves your returns. Sometimes it makes them worse.

There is a comfort level for an investor, and a feeling of he's kind of protected, as much as you can be protected in these volatile days. So it's a behavioral problem. Anybody that feels they should rebalance, I think they should rebalance. I wouldn't tell them not to. But I'd say, do it in a little more sensible way than it's done. I wouldn't have some formula: oh my God, I've gone from 60% to 61%. I better get back to 60%. On a given day, that may happen in these markets. So it should be some range. Say you want to stay close to 65%. If you get below 60%, you can rebalance. If you get above 70%, you rebalance. And you try and not do it not with any great frequency.

So if you do it, set really wide bands …
Bogle: Wide bands. That's actually a decently wide band. And you can set it a little wider or a little narrower. But right down to the decimal point is just foolish, it's over-managing.”

_________________

Also, doesn't my portfolio automatically rebalance itself ? For instance, my allocation was 50/50 until the end of 2017 where it became 60/40 - and then went up further throughout January - until today where my allocation is now back down to lower than 60/40.

For those that reply, please keep answers simple. Thanks.
Depends on your portfolio make-up and needs, and whether you are still contributing which can allow you to maintain balance via contributions; dividends can also be used to maintain balance.

If you invested at 60/40 a few decades ago, you'd end up with a much higher equity allocation over time. Not sure how you consider that "automatic". I agree that reasonable sized bands (5-10%) are all that is necessary.

Ron Scott
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Re: I've never rebalanced - Can I do ok without it?

Post by Ron Scott » Sun Feb 04, 2018 10:45 pm

Holding is fine if that is really what you're doing. If you find yourself in retirement and determine that you may NEED to withdraw from equities for living expenses during the coming decade or so, i.e., NOT HOLD, then selling some equities to rebalance might make sense. If you're not in a position where you'd be forced to sell in a downturn then don't worry about it and just HOLD.

My goal is not to rebalance and I retired in 2017.

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Re: I've never rebalanced - Can I do ok without it?

Post by KlangFool » Sun Feb 04, 2018 10:46 pm

OP,

Invest in a fund of funds like Vanguard Lifestrategy Fund or Target Retirement Fund, it will rebalance every day for you.

KlangFool

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Re: I've never rebalanced - Can I do ok without it?

Post by Lafder » Sun Feb 04, 2018 11:09 pm

There was some story quoted on here that the best performing accounts at ? Fidelity, were those that had not been touched because the owner had passed away or forgotten about it. That says something about messing with accounts...............but adjusting your holdings is a bit different than "just" rebalancing.
lafder

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FrugalInvestor
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Re: I've never rebalanced - Can I do ok without it?

Post by FrugalInvestor » Sun Feb 04, 2018 11:13 pm

Yes, over the long run you'll very likely do better without it IF you can keep your emotions in check.
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

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Watty
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Re: I've never rebalanced - Can I do ok without it?

Post by Watty » Sun Feb 04, 2018 11:38 pm

There is no reason not to at least partially rebalance. You can set the dividends and capital gains distributions to not be automatically reinvested then you can put them in whatever asset class is under weighted.

Likewise if you are still adding money to the account, or spending some of it, then you can use that to bring the asset allocation closer to your target asset allocation by selling or buying whichever fund is too low or high.
sheople2 wrote:
Sun Feb 04, 2018 10:17 pm
Can I do well without doing so? If I don’t understand something and find it extremely confusing and stressful, I generally choose not to do it. I just keep track of my year-to-date returns every year. I just hold.
One option would be to use something like a target date retirement fund or a Lifestrategy fund that will automatically rebalance for you.

https://investor.vanguard.com/mutual-fu ... estrategy/#/

https://investor.vanguard.com/mutual-fu ... etirement/#/

These would work best in retirement accounts where tax efficiency is not an issue but even in a taxable account they might be better than just neglecting your account asset allocation for years at a time.

You could also hire Vanguard to manage it for your for 0.3% a year.

https://investor.vanguard.com/financial ... ial-advice

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joe8d
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Re: I've never rebalanced - Can I do ok without it?

Post by joe8d » Sun Feb 04, 2018 11:42 pm

Never rebalanced. Done very well without it.
All the Best, | Joe

Gnirk
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Re: I've never rebalanced - Can I do ok without it?

Post by Gnirk » Sun Feb 04, 2018 11:54 pm

Not planning to rebalance, (over 90% of my portfolio is in taxable) but then I didn't have a high percentage to equities to begin with.

daveydoo
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Re: I've never rebalanced - Can I do ok without it?

Post by daveydoo » Mon Feb 05, 2018 2:23 am

sheople2 wrote:
Sun Feb 04, 2018 10:17 pm
...Is it OK that I’ve never rebalanced? Can I do well without doing so? If I don’t understand something and find it extremely confusing and stressful, I generally choose not to do it. I just keep track of my year-to-date returns every year. I just hold...
This is like changing your oil :D

I was you and ended up > 92% equity, to my surprise. (I don't know your age, but this was not appropriate for mine, or for my circumstances.) I would think that after many decades of never re-balancing, that you would become increasingly equity-heavy. That's fine if you're rich -- less fine if you're not and need to retire. I suspect some of the "you'll be fine" responses are from folks who have been serious about their finances for only the last decade or less. "I've never worn a seatbelt or gotten a flu shot!" You can do just fine until you don't.

The reason you see it recommended so consistently (apart from this thread) is that it's beneficial. It's stressful making those first few moves -- especially if it's like 10% or more of your net worth. My hands shook a little the first time. :D Now I don't really care -- it's just doing the right thing. I tell my spouse what I'm about to do (mostly for due diligence) and she could not care less. I don't expect to make money doing it; I expect a little more downside protection. Be aware of the tax implications before making any big move.

Agree with others who've recommended target retirement-date funds. As you develop a more complex estate, however, they can be limiting -- you might want the income-generating piece to be in tax-deferred but you can only move them together. For example, we have a lot of VG Balanced Index because we started buying many years ago. Now I want to split up the equity and bond pieces but I don't want to take the capital gains hit.
"I mean, it's one banana, Michael...what could it cost? Ten dollars?"

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Noobvestor
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Re: I've never rebalanced - Can I do ok without it?

Post by Noobvestor » Mon Feb 05, 2018 2:37 am

Gnirk wrote:
Sun Feb 04, 2018 11:54 pm
Not planning to rebalance, (over 90% of my portfolio is in taxable) but then I didn't have a high percentage to equities to begin with.
I'm mostly taxable too, so I rebalance a bit in tax-advantaged, but also use dividends - it's worked out well so far.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: I've never rebalanced - Can I do ok without it?

Post by Dandy » Mon Feb 05, 2018 7:12 am

The assumption is that you want to keep roughly the same percentage allocation to equities and fixed income including any sub allocations to each. Since, over time, equities outperform fixed income by a wide margin if you don't rebalance or adjust your contributions/withdrawals, your equity allocation will increase and so will your risk. If you want a rising equity allocation that is fine.

If not you must find some way of keeping the equity allocation near your target. That can be by reducing or eliminating contributions to equities and instead making them to fixed income products, withdrawing equities instead of fixed income, or selling some equities and buying fixed income with the proceeds.

I think the main goal should be keeping your risk, which is mostly due to your equity allocation, near your goal. I wouldn't be overly focused on sub allocations e.g. how much international equities you have vs US equities. I also don't think people need to make panic moves if their allocation is a bit higher or lower than goal especially if they have to incur taxes to make it happen. But, you usually don't want a target of say 50% equities to get to 60 or 40% unless your actual need for risk or tolerance for risk has fundamentally changed.

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Watty
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Re: I've never rebalanced - Can I do ok without it?

Post by Watty » Mon Feb 05, 2018 7:32 am

daveydoo wrote:
Mon Feb 05, 2018 2:23 am
"I've never worn a seatbelt or gotten a flu shot!" You can do just fine until you don't.
That is a great analogy. :beer

The stock market is still near an all time high, bonds have been through a decades long bull market, and inflation and interest rates are as low as they have been in a generation or two. A lot of people have already forgotten about the crash in 2008 and it has been a long time since there has been a normal bear market.

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AtlasShrugged?
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Re: I've never rebalanced - Can I do ok without it?

Post by AtlasShrugged? » Mon Feb 05, 2018 7:37 am

Also, doesn't my portfolio automatically rebalance itself ? For instance, my allocation was 50/50 until the end of 2017 where it became 60/40 - and then went up further throughout January - until today where my allocation is now back down to lower than 60/40.
Sheople2....The short answer is that I don't think you need to do much of anything. You appear to hover between 50/50 (very conservative) and 60/40 (conservative).

If you want much more specific, tailored advice - post the details of your holdings. And whether you are accumulating or retired. Makes a difference.

FWIW - The worst enemy of your portfolio stares back at you every morning in the mirror. Remember that.
“If you don't know, the thing to do is not to get scared, but to learn.”

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Re: I've never rebalanced - Can I do ok without it?

Post by saltycaper » Mon Feb 05, 2018 8:06 am

sheople2 wrote:
Sun Feb 04, 2018 10:17 pm
I have a rebalancing question. Is it OK that I’ve never rebalanced? Can I do well without doing so? If I don’t understand something and find it extremely confusing and stressful, I generally choose not to do it.
Maybe you're confused because you're reading Bogle, who makes no sense in passages you quote. Presumably you selected an asset allocation for one or more reasons. If those reasons still hold, you should rebalance to get back to the asset allocation you originally selected as often as you think is practical. If those reasons no longer hold, you should select a new asset allocation and maintain it as closely as is practical. It's that simple. :happy If you don't do either of those things, you are saying that you don't care what your asset allocation is. Only you can decide if that makes sense to you.

Regarding Bogle's comments on which rebalancing decisions have produced higher returns in the past, that's irrelevant. If you want higher expected returns, you could simply maintain an asset allocation that includes more stocks.
Quod vitae sectabor iter?

sheople2
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Re: I've never rebalanced - Can I do ok without it?

Post by sheople2 » Mon Feb 05, 2018 9:49 pm

When I first posted about 10 years ago, I gave my specs. Maybe now is a good time for a portfolio check-up in relation to this rebalancing question. How am I doing? (Isn’t there a rule if you double your money every 7 yrs you’re doing ok?). Let me know if you need addt’l info.

Amount age 40: $117K
Amount now, age 50: $356K
Income: $18,500 SSDI
Taxes: none

Vang Health Care fund: $5,674.
Vang Int’l Value fund: $8,561.
Vang Total Stock Market Index fund: $21,318.
ROTH IRA - Vang Total Stock Market Index fund: $97,148.

AAPL (Apple Stock): $68,386.

Ally Bank:
5-yr CD: $23,238. (2.05%)
12 mo CD: $70,000. (2%)
24 mo CD: $32,483. (1.55%)
Savings Acct: $24,813. (1.35%)

Checking: $4,765.

I don’t own property and live with family.
No expected inheritance, but hard to say for sure. If any, small.
What am I leaving out?...
Last edited by sheople2 on Wed Feb 07, 2018 10:27 pm, edited 1 time in total.

A-Commoner
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Re: I've never rebalanced - Can I do ok without it?

Post by A-Commoner » Mon Feb 05, 2018 11:17 pm

I’m in the camp of not rebalancing. Not rebalancing puts a floor on losses. If you have a 60:40 stock-bond portfolio, and stocks dropped to zero and you never rebalanced by selling bonds to buy stocks, you actually get to preserve your bonds. Your maximum loss is 60% of your original portfolio. If you kept rebalancing, your maximum loss could be 100% if stocks never recovered and you run out of bonds to sell.

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Re: I've never rebalanced - Can I do ok without it?

Post by daveydoo » Mon Feb 05, 2018 11:21 pm

sheople2 wrote:
Mon Feb 05, 2018 9:49 pm

I don’t own property and live with family.
No expected inheritance, but hard to say for sure. If any, small.
What am I leaving out?...
You're half cash -- it doesn't really matter what you do. You must have rebalanced, whether you know it or not. You don't say what your asset allocation was back then but if you were half cash then (like now), I doubt your cash returned 7% annually (i.e., doubled). And you're overweight in one lucky winner (AAPL). Be sure to do that for the next ten years -- that worked out well.

I have a Ford Pinto. It has never blown up. Therefore it is a safe car. What am I leaving out...? :D

Seriously, good job. But it doesn't really impact the rebalancing question at hand.
"I mean, it's one banana, Michael...what could it cost? Ten dollars?"

Dillinger
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Re: I've never rebalanced - Can I do ok without it?

Post by Dillinger » Tue Feb 06, 2018 1:14 am

sheople2 wrote:
Sun Feb 04, 2018 10:17 pm
Also, doesn't my portfolio automatically rebalance itself ? For instance, my allocation was 50/50 until the end of 2017 where it became 60/40 - and then went up further throughout January - until today where my allocation is now back down to lower than 60/40.
It depends upon whether or not you are invested in an asset allocation fund.

dbr
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Re: I've never rebalanced - Can I do ok without it?

Post by dbr » Tue Feb 06, 2018 10:21 am

This whole issue is not about rebalancing as a good in itself. The answer to the question can I do ok without it is that as long as your asset allocation is acceptable for your purposes, yes, you can ignore reblancing. When or if your asset allocation is somehow not suitable for you, then you should do something about it. Mr. Bogle would certainly not disagree with that.

sheople2
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Re: I've never rebalanced - Can I do ok without it?

Post by sheople2 » Tue Feb 06, 2018 11:59 pm

daveydoo wrote:
Mon Feb 05, 2018 11:21 pm

And you're overweight in one lucky winner (AAPL). Be sure to do that for the next ten years -- that worked out well.
I can usually detect tone but I can't in this sentence. It's meant to be sarcastic - yes? Please advise. Just trying to learn.

P.S. ( I realize I'm overweighted in Apple, but I can't make myself sell any now. There you have it. Years ago I took a 9K gain and that was it. Did that count as rebalancing for that year? ;) I'd rather think about rebalancing tires at this point - and I hate thinking about car maintenance.

sheople2
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Re: I've never rebalanced - Can I do ok without it?

Post by sheople2 » Wed Feb 07, 2018 12:15 am

FrugalInvestor wrote:
Sun Feb 04, 2018 11:13 pm
Yes, over the long run you'll very likely do better without it IF you can keep your emotions in check.
Yes, I can keep emotions in check. I worry. but I don't sell. I hold. This is a discipline I had to learn. Is there any article out there that supports what you say about doing better financially without it? I believe you - but I ask because everything I've read always seems to tout the importance of rebalancing and I assume it was because they thought it would bring one a better lifetime return.

sheople2
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Re: I've never rebalanced - Can I do ok without it?

Post by sheople2 » Wed Feb 07, 2018 12:28 am

daveydoo wrote:
Mon Feb 05, 2018 11:21 pm

You're half cash --
Arent't I half bonds? CDs are considered bonds I thought. ...Or is that only true if the CD returns are more decent - like 4% and up?
Answers simple / concise. I'm not trying to send us off topic.

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Re: I've never rebalanced - Can I do ok without it?

Post by daveydoo » Wed Feb 07, 2018 1:44 am

sheople2 wrote:
Wed Feb 07, 2018 12:28 am
daveydoo wrote:
Mon Feb 05, 2018 11:21 pm

You're half cash --
Arent't I half bonds? CDs are considered bonds I thought. ...Or is that only true if the CD returns are more decent - like 4% and up?
Answers simple / concise. I'm not trying to send us off topic.
Maybe there's a real answer but it's cash to me. You're not really vulnerable if interest rates rise -- except in terms of opportunity cost. And the penalties for early termination/withdrawal have been quite low now that yields are historically low. You have 50% no-volatility ballast in your portfolio. Whether that is CD, or ultra-short-term bonds, or money market fund, or savings account, the difference is pretty small, imo.

About AAPL, I only meant that it's like 5% of your portfolio and has been a winner (maybe it started out as 5% of your portfolio -- I don't know). And maybe there was an element of sarcasm there... :wink:

As others have pointed out, if you're willing to accept a range of asset allocations, then I suppose you never need to re-balance. Then you're not really asking if it matters whether you re-balance; you're asking whether it matters that you don't care what your asset allocation is. Not sure that's helpful since there's no one best allocation -- it's a function of time horizon, risk tolerance, availability of a safety net, personality, family harmony, etc., etc. If you (and spouse) would be happy at 90:10 or at 50:50, then you're almost always fine. Most people don't think that way. If you go to the used car lot thinking "I don't care what I come home with or how fun or reliable it is!", then you're pretty unlikely to think you've made a foolish choice no matter what you end up with.
"I mean, it's one banana, Michael...what could it cost? Ten dollars?"

Olemiss540
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Re: I've never rebalanced - Can I do ok without it?

Post by Olemiss540 » Wed Feb 07, 2018 7:42 am

Are your expenses covered by your income?

If so, than I see no issue with your portfolio. No need to think too deep about it as it seems you would MUCH prefer to leave it alone. If you don't need the portfolio income for living expenses than it matters little what your asset allocation is and that you overweight a single stock so heavily (AAPL).
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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AtlasShrugged?
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Re: I've never rebalanced - Can I do ok without it?

Post by AtlasShrugged? » Wed Feb 07, 2018 7:45 am

Sheople2.....First, you have done well in ten years. So give yourself a pat on the back, ok? Nice job, more than doubling your holdings in a decade.

One, you collect SSDI. So my question is, do you suffer from a chronic health condition that is disabling?
Two, can you give us a rough idea of monthly expenses. Your income appears to be 18,500/12 = 1,542 monthly.
Three, and this might be tough to confront. Do you believe you will need institutionalized care at some point?

Can you provide ticker symbols of all of your holdings? Example...Is Vang Total stock = VTSAX? We really need to know tickers, and whether you have index funds or not. The Roth IRA is what, meaning what holdings? I am also trying to figure out what is in taxable accounts, versus what is in tax advantaged accounts.

You have a LOT of cash instruments. Personally, if your expenses are 18,500 annually, I would not hold more than 55K in cash instruments, which would be roughly 3 years of expenses in cash. But without knowing the medical situation, that could change. My initial thoughts.

One, leave AAPL alone for the time being. If that is set to dividend reinvestment, fine.
Two, please read the thread, 'Three Fund Portfolio'. To me, this is made for you. Very simple.
Three, update your holdings to include ticker symbols, and indicate if it is a taxable account, or tax advantaged account (Roth IRA, 401K).

You're doing Ok, so don't get discouraged or intimidated. Investing is not all that hard, it is just math. The hard part is controlling your emotions.
“If you don't know, the thing to do is not to get scared, but to learn.”

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Re: I've never rebalanced - Can I do ok without it?

Post by aristotelian » Wed Feb 07, 2018 8:17 am

JCE66 wrote:
Wed Feb 07, 2018 7:45 am

One, leave AAPL alone for the time being. If that is set to dividend reinvestment, fine.
Why? He is paying zero tax right now. I don't know the full details of how SSDI is taxed, but he could be realizing gains for 0% while diversifying his portfolio.

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AtlasShrugged?
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Re: I've never rebalanced - Can I do ok without it?

Post by AtlasShrugged? » Wed Feb 07, 2018 8:22 am

aristotelian....Without a fuller picture, can you give an informed recommendation? I think not. Hence, do nothing for the time being.
“If you don't know, the thing to do is not to get scared, but to learn.”

sheople2
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Re: I've never rebalanced - Can I do ok without it?

Post by sheople2 » Wed Feb 07, 2018 10:49 pm

Yes, my SSDI covers my expenses and in the past few years I’ve had about $8K left over which I usually tend to put into CD/cash side. If my living situation changes in the coming years, it’s hard for me to predict what the expenses will be at that time.

I may need to purchase a car to replace my old car this year. I wish I didn't have to. This is a need, not a want - just to be clear.

Did I triple my holdings in the last decade? What’s the basic math equation? I should be on the Bogleheads board for eight-year olds.

Here are the names of the funds:
Vanguard Health Care Fund
Vanguard International Value Fund
Vanguard Total Stock Market Index Fund
ROTH - Vanguard Total Stock Market Index Fund

The dividends in my AAPL are sent to me quarterly and I shove them in cash. The dividends in my Vanguard mutual funds are auto-reinvested. The interest in any CDs gets rolled over.

I have no idea if I will end up in long term care facility or not - and I believe no more so than anyone else - at least at this point. (I never completed my previous thread regarding whether or not I should get long term care insurance. I haven’t had time or energy to check on eligibility or quotes yet.. As most have said including a few agents, I probably don’t qualify and I can’t afford it anyway. That's for another time.)

I’ll need more time to digest all of the comments so far. If anyone needs more info or has more comments, that’s fine with me. I greatly appreciate the help and encouragement.

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AtlasShrugged?
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Re: I've never rebalanced - Can I do ok without it?

Post by AtlasShrugged? » Wed Feb 14, 2018 5:57 am

Sheople2....Adding up your responses, and your PMs.

You have roughly 10.5K in annual expense, and you can save 8K annually. Your SSDI covers all expenses.
You live with family.

ROTH: I think this is fine, I am assuming the ticker is VTSAX.
AAPL: Up to you, but I would set this to dividend reinvestment. It will grow over time.

I strongly urge you to think about a three-fund portfolio for your taxable account (Total US stock, Total US Bond, Total International). The other alternative is to dump all of your taxable funds into a Vanguard Lifestrategy fund. You need to be careful not to trigger a taxable event when you do this. Either will be a lower cost in terms of expense ratio. A Vanguard or professional advisor can help you with this.

You indicated you needed a car. You have sufficient funds to buy one. Do not buy new. Buy a used car, roughly two years old, low mileage. Personally, I am partial to Toyota. Friends like Honda. Either is fine. For 12K-15K, you can get a pretty decent used car.

If your expenses are 10K annually, I would not keep more than 30K (three years expenses) in cash instruments. I am pretty sure that Vanguard can help you set up a three year CD ladder, and maintain it. As for your savings/checking account, it 'feels like' 5K-10K is more than enough.

You're doing fine. Good luck with this. And don't get too worked up about rebalancing, or investing. The emotional aspect of investing is the hardest part to control.
“If you don't know, the thing to do is not to get scared, but to learn.”

vested1
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Re: I've never rebalanced - Can I do ok without it?

Post by vested1 » Wed Feb 14, 2018 8:35 am

I look at it a little differently than the respondents so far in this thread. My rebalancing bands are 5%, so if I drift a fraction of 1% over that mark I start to pay closer attention. Rebalancing the outperforming portion of the portfolio back to my original AA always results in selling high and buying low, and I can't see how that would ever change. Since in my case, the rebalancing is done within a tax deferred IRA it has no immediate tax or LT capital gain consequences. Once I add a taxable portion to the portfolio at RMD's, it will be comprised entirely of equity, so rebalancing will take that into account for the overall portfolio.

Will my gain suffer because I shift more money into a less risky investment? Maybe, but selling high and buying low is the standard most often cited. The rub is knowing when the "high" and "low" occur. Rebalancing back to the desired AA eliminates the guesswork and virtually guarantees I will be following the standard.

I decided on an AA for a reason, and have developed a plan of slowly rising equity allocation at certain ages, the next of which I haven't yet reached, so for now, my AA remains at 60/40 in retirement. That I happened to surpass my bands in mid-January and rebalanced saved me some of the paper losses I would have experienced had I ignored the drift to a higher equity allocation. The difference in equity allocation was a 6% downward shift at rebalancing. Equity indexes I owned dropped around 7% while the bond indexes dropped around 2% in the latest correction. Sticking to the plan worked.

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Re: I've never rebalanced - Can I do ok without it?

Post by jjface » Wed Feb 14, 2018 9:57 am

I like rebalancing. It keeps risk in check. You pick an asset allocation to match your risk tolerance. If you are okay letting stocks drift from 50 to 60% then you either were too low to begin with or are not thinking enough about what you would feel if stocks started to plummet. What happens if stocks reach 70:30 are you okay with that? If stocks crash are you going to be okay watching larger decreases in your portfolio and leaving it alone? Would seeing an extra $40k disappear from your balance make you queezy? If not then why are you at 60:40 now and not 70:30?

Cds are fine instead of bonds. You want some kind of fixed income not necessarily bonds.

At the end of the day you have your expenses covered by your income so are in a good position. Rebalancing may not be a big deal in the whole scheme of things but I would think more about what level of risk you want to take and try to stick more closely to it. 5% drifts are okay. Maybe even 10%. 10+% not really in my opinion but I'm not you.

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Taco Knight
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Re: I've never rebalanced - Can I do ok without it?

Post by Taco Knight » Wed Feb 14, 2018 10:52 am

I don't manually rebalance. Ever.

I split my contributions, both direct through IRA and indirect through DCPs, into equity funds, target-date funds, and bond/stable income funds.

The equities usually go up, and I buy more of them each year. The TD funds rebalance on their own (meaning, I don't do it), and the bonds do their thing. I don't take into account where they are when I contribute again, and I'm sure my actual AA does not mirror my contribution AA, but I am happy with my risk tolerance and performance, and without thinking about it, my portfolio becomes more and more conservative with the automatic balancing I don't have to lift a finger for.

sheople2
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Re: I've never rebalanced - Can I do ok without it?

Post by sheople2 » Wed Feb 14, 2018 10:53 pm

JCE66 wrote:
Wed Feb 14, 2018 5:57 am
Sheople2....Adding up your responses, and your PMs.

You have roughly 10.5K in annual expense, and you can save 8K annually. Your SSDI covers all expenses.
You live with family.

ROTH: I think this is fine, I am assuming the ticker is VTSAX.
AAPL: Up to you, but I would set this to dividend reinvestment. It will grow over time.

I strongly urge you to think about a three-fund portfolio for your taxable account (Total US stock, Total US Bond, Total International). The other alternative is to dump all of your taxable funds into a Vanguard Lifestrategy fund. You need to be careful not to trigger a taxable event when you do this. Either will be a lower cost in terms of expense ratio. A Vanguard or professional advisor can help you with this.

You indicated you needed a car. You have sufficient funds to buy one. Do not buy new. Buy a used car, roughly two years old, low mileage. Personally, I am partial to Toyota. Friends like Honda. Either is fine. For 12K-15K, you can get a pretty decent used car.

If your expenses are 10K annually, I would not keep more than 30K (three years expenses) in cash instruments. I am pretty sure that Vanguard can help you set up a three year CD ladder, and maintain it. As for your savings/checking account, it 'feels like' 5K-10K is more than enough.

You're doing fine. Good luck with this. And don't get too worked up about rebalancing, or investing. The emotional aspect of investing is the hardest part to control.
Hi JC, a few more questions then I'll cut you guys loose;

1) What's your objection to my index fund? It covers a wide scope. It's the Vanguard Total Stock Market Index Fund. I know Bogleheads like fewer funds, but I don't have a lot of funds. (Sidebar, I don't like Target funds because I don't like bond funds. I would buy individual bonds but they require a pro to pick them out. Too complicated and expensive for me.)

2) Since I already have too much in Apple, why would you say to reinvest the Apple dividends in this case? I thought it smart to pile it on the cash side.

3) I already essentially have a CD ladder. Why would I need Vanguard to set one up for me? I'm not comfortable with the idea of "brokered CDs" yet, so I'm keeping the "regular" CDs with Ally.

4) Re; car. Need AWD so it's Subaru once again. I had amazing luck in the past with old used Subarus. Up to now, I had only spent an average of $100 a month on repairs which is supposed to be excellent. However, current Sub is a money-pit nightmare which has cost me $7K just over the past two years with many other needed expensive repairs which I don't want to make. ...Not buying any more 5-10 year old cars. In my area no individuals part with their newer Subarus. Given this and the fact that this is a time-sensitive issue means that I'm actually considering going to a car dealer (YIKES) for a bottom-of-the-line new car or one or two-year-old if they have them. The new one would be $18.5K. From what I've been tracking, they price all their cars $4-5.5K over what they're worth. If they are willing to negotiate who knows. I'm really not sure I care at this point. What do you think?

5) The amount I can put into savings may decrease a lot soon, if the legislation for the healthcare subsidy I have gets taken away. Have to wait and see.

6) Thanks for the encouragement. It is invaluable.

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nisiprius
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Re: I've never rebalanced - Can I do ok without it?

Post by nisiprius » Thu Feb 15, 2018 8:46 am

Unless they're investing in a full-bore multi-asset slice-and-dice factorized portfolio of highly volatile holdings, I don't think anyone needs to rebalance very often. Once every three, four, five years simply conduct the same exercise you conducted at the beginning: look at your pie chart, see what your percentage of stocks is, and compare it to what you think it should be based on your risk tolerance, and adjust it if it is too far out of whack with your target.

How far is too far? Well, Vanguard offers four LifeStrategy funds with 80/20, 60/40, 40/60, 20/80 and obviously thinks that those four allocations are close enough for anything. That means that it's OK to be within ±10% on the stock allocation. So I'd suggest that there's no obvious reason to do anything if your portfolio has a stock allocation that's with ±10% of your desired target.

Vanguard has a chart in a part of a paper on--never mind--but it is purporting to show why rebalancing is advisable and what would have happened if you didn't:

Source
Image

This chart is convincing evidence that, yes, stock allocation really will drift up over time if you don't rebalance. In this case, 60% stocks drifted up to about 85%, and someone who thought 60% stocks was right for them would probably not think 85% was right.

But look how long it took! It took 55 years to get that far out of whack!

To my eyeball, rebalancing once every ten years would have been good enough to keep things under control.

In that same paper, which is making a case for rebalancing, Vanguard says in so many words that "the goal of a rebalancing strategy is to minimize risk, rather than maximize return" (and reading carefully, they do not really mean minimizing risk, they just mean avoiding the increasing risk that comes if you never rebalance). Furthermore, while they try to make some kind of genned-up case for it improving returns, involving a selected time period and other things, the size of the benefit they claim to have found is 0.35%.

The ideas that rebalancing can magically manufacture extra return out of pure volatility, and that it is an infallible formula that works because it automatically buys low and sells high--well, I'm convinced these are nonsense.
Last edited by nisiprius on Thu Feb 15, 2018 8:50 am, edited 2 times in total.
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AtlasShrugged?
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Re: I've never rebalanced - Can I do ok without it?

Post by AtlasShrugged? » Thu Feb 15, 2018 8:50 am

Hi Sheople2...Answers below.
1) What's your objection to my index fund? It covers a wide scope. It's the Vanguard Total Stock Market Index Fund. I know Bogleheads like fewer funds, but I don't have a lot of funds. (Sidebar, I don't like Target funds because I don't like bond funds. I would buy individual bonds but they require a pro to pick them out. Too complicated and expensive for me.)
Answer: None. It sounds like you have VTSAX.
2) Since I already have too much in Apple, why would you say to reinvest the Apple dividends in this case? I thought it smart to pile it on the cash side.
Answer: Up to you, but you already have enough cash. I prefer growing the investment over time. Just a personal preference.

You'll be fine. You've done a good job just to get to where you are now. Keep things simple, and don't let your emotions get the better of you. Good Luck!
“If you don't know, the thing to do is not to get scared, but to learn.”

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