Rebalancing thru contributions?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
guppyguy
Posts: 4
Joined: Tue Jan 30, 2018 4:24 pm

Rebalancing thru contributions?

Post by guppyguy » Tue Feb 13, 2018 3:59 pm

I've got 600K in a 401K and 21 years to retire. I use a 90/10 split in two index funds and contribute roughly $5K per month.

Is it better to in the long run (or does it matter at all):
A) When I make a contribution buy equal dollar amounts in both index funds then rebalance once per year.

OR

B) When I make a contribution, purchase more of whichever fund is below its allocation to bring it up, then with any contribution remaining for the month purchase both funds equally. Rebalance once per year only if necessary.


I realize at some point option B would not be feasible given either size of the portfolio or market volatility.

Dottie57
Posts: 3959
Joined: Thu May 19, 2016 5:43 pm

Re: Rebalancing thru contributions?

Post by Dottie57 » Tue Feb 13, 2018 4:01 pm

guppyguy wrote:
Tue Feb 13, 2018 3:59 pm
I've got 600K in a 401K and 21 years to retire. I use a 90/10 split in two index funds and contribute roughly $5K per month.

Is it better to in the long run (or does it matter at all):
A) When I make a contribution buy equal dollar amounts in both index funds then rebalance once per year.

OR

B) When I make a contribution, purchase more of whichever fund is below its allocation to bring it up, then with any contribution remaining for the month purchase both funds equally. Rebalance once per year only if necessary.


I realize at some point option B would not be feasible given either size of the portfolio or market volatility.
I've done B. I look about 2 times a year to decide if I need to change amounts.

rkhusky
Posts: 5263
Joined: Thu Aug 18, 2011 8:09 pm

Re: Rebalancing thru contributions?

Post by rkhusky » Tue Feb 13, 2018 4:11 pm

There is no evidence that any particular rebalancing scheme will be better than another in terms of future returns. Therefore, choose one that you feel comfortable with and that fits your lifestyle.

mega317
Posts: 2477
Joined: Tue Apr 19, 2016 10:55 am

Re: Rebalancing thru contributions?

Post by mega317 » Wed Feb 14, 2018 7:44 am

I do A. The investments are automated, I have better things to do than change my elections all the time, like post here at 4am.

When I am contributing period lumps to taxable I will, if it's a large amount, do B. But these days I am never buying even 1% of the portfolio at a time.

User avatar
Tamarind
Posts: 1118
Joined: Mon Nov 02, 2015 2:38 pm

Re: Rebalancing thru contributions?

Post by Tamarind » Wed Feb 14, 2018 7:52 am

If your split is 90/10 in two funds, why would you buy them in equal dollar amounts (ie 50/50)?

How about for less hassle

C) Automate purchase at a 90/10 ratio. Check annually to see if you need to rebalance.

Most 401k tools will let you set an automated contribution by percentage rather than dollar.

User avatar
telemark
Posts: 2285
Joined: Sat Aug 11, 2012 6:35 am

Re: Rebalancing thru contributions?

Post by telemark » Wed Feb 14, 2018 7:53 am

A) is basically a bet on momentum whie B) is a bet on mean reversion. Which one produces better results depends on how the market is behaving at the moment. Personally I prefer B) but only because it scratches my itch to tinker. A) is more of a hands off approach.

User avatar
Toons
Posts: 12873
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Rebalancing thru contributions?

Post by Toons » Wed Feb 14, 2018 8:03 am

I would go with Option A.








:idea:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

BuckyBadger
Posts: 819
Joined: Tue Nov 01, 2011 11:28 am

Re: Rebalancing thru contributions?

Post by BuckyBadger » Wed Feb 14, 2018 8:05 am

I did B for quite a while. My interface made redirecting contributions crazy easy, and my balance was low enough that I could actually make a difference with contributions.

Not so much now. Everything goes in at a certain ratio and I rebalance when necessary.

guppyguy
Posts: 4
Joined: Tue Jan 30, 2018 4:24 pm

Re: Rebalancing thru contributions?

Post by guppyguy » Wed Feb 14, 2018 5:02 pm

Tamarind wrote:
Wed Feb 14, 2018 7:52 am
If your split is 90/10 in two funds, why would you buy them in equal dollar amounts (ie 50/50)?

How about for less hassle

C) Automate purchase at a 90/10 ratio. Check annually to see if you need to rebalance.

Most 401k tools will let you set an automated contribution by percentage rather than dollar.
Your correct, I didn't mean equal absolute dollar amounts, only relative to the desired AA (90/10) in this case.

guppyguy
Posts: 4
Joined: Tue Jan 30, 2018 4:24 pm

Re: Rebalancing thru contributions?

Post by guppyguy » Wed Feb 14, 2018 5:04 pm

BuckyBadger wrote:
Wed Feb 14, 2018 8:05 am
I did B for quite a while. My interface made redirecting contributions crazy easy, and my balance was low enough that I could actually make a difference with contributions.

Not so much now. Everything goes in at a certain ratio and I rebalance when necessary.
I think I'm going to go with B for now. My 401K contribution amount depending upon my fluctuating income, so I have to place a manual trade with Schwab anyway.

User avatar
AtlasShrugged?
Posts: 564
Joined: Wed Jul 15, 2015 6:08 pm

Re: Rebalancing thru contributions?

Post by AtlasShrugged? » Wed Feb 14, 2018 6:12 pm

B) When I make a contribution, purchase more of whichever fund is below its allocation to bring it up, then with any contribution remaining for the month purchase both funds equally. Rebalance once per year only if necessary.
I do a variant of B. I direct contributions to bring my portfolio into my desired allocation.
“If you don't know, the thing to do is not to get scared, but to learn.”

Dominic
Posts: 203
Joined: Sat Jul 02, 2016 11:36 am

Re: Rebalancing thru contributions?

Post by Dominic » Wed Feb 14, 2018 6:21 pm

If you have taxable, B should be more tax-efficient, since you're not selling shares to rebalance.

indexonlyplease
Posts: 1155
Joined: Thu Apr 30, 2015 12:30 pm
Location: Pembroke Pines, FL

Re: Rebalancing thru contributions?

Post by indexonlyplease » Wed Feb 14, 2018 6:21 pm

I have been rebalancing once a yr in January. Seems to work and is easy. Don't have to worry all year about where the money goes bi weekly.

Post Reply