Do you change your AA in discrete chunks or gradually?

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frugalecon
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Do you change your AA in discrete chunks or gradually?

Post by frugalecon » Tue Jun 05, 2018 2:33 pm

I was doing some "maintenance" on the portfolio over the weekend, and I noted that our AA had drifted from my default 80-20 up to 83-17. Looking at that, and reflecting on the experience of almost 10 years ago, and the fact that I am 7 - 9 years from retirement, I decided to drop down to 75-25. I felt very comfortable with that change after I made it, but I am now thinking it makes sense just to decide where I want to be at retirement and then target getting there gradually over the remaining time. (Maybe I will decide that 75-25 is optimal, though I could imagine 70-30 might help me to sleep at night even better.) I am wondering how people approach this, in a lumpy or gradual fashion, and why.

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FIREchief
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Re: Do you change your AA in discrete chunks or gradually?

Post by FIREchief » Tue Jun 05, 2018 2:40 pm

Back when rebalancing was part of my modus operandi, I never made a rebalancing move (or any other change to allocations) that exceeded one percent of the total portfolio value in a given month. That was either conservative, smart or a security blanket.
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Re: Do you change your AA in discrete chunks or gradually?

Post by bloom2708 » Tue Jun 05, 2018 2:55 pm

Every scenario is different. How much of your retirement is covered by pensions/social security?

Some might say 75/25 is still on the riskier side of things 7 or so years out from retirement. Others might stay at 80/20 all through retirement if all their spending is covered.

You won't know how you feel until the next big decline. The last one is always pretty easy to look back on.
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schwank
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Re: Do you change your AA in discrete chunks or gradually?

Post by schwank » Tue Jun 05, 2018 3:05 pm

If I was going to do it by selling shares, I'd just do it all at once to minimize the hassle and any applicable transaction costs.

However I don't rebalance that way, I do it by changing the allocation of new inbound money. Just overweight the new funds to tilt your overall allocation back to the desired level, then resume the target allocation for new funds.

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Re: Do you change your AA in discrete chunks or gradually?

Post by RickBoglehead » Tue Jun 05, 2018 3:07 pm

You also need to look at what comprises your allocation. For example, if your bond holdings are 25% of your assets, but it's enough money to live on for ten years, that's a totally different perspective than if your bond holdings are only enough money for 2 years.

My targeted ratio at close to 60 is 65/35. Right now I have 68% stock, 25% bonds, and 7% cash and CDs (1 yr, 18 month, 2 year). My bond and cash/CD balance is adequate for 7+ years of living after retirement in 3 years, and then SS kicks in for both of us at 70. So I plan a slow decrease over the years to 60/40 by retirement and then 50/50 by 70.

I've tried to just allocate new money to bonds/cds, but the equity side increases too much to just do that.
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Re: Do you change your AA in discrete chunks or gradually?

Post by dcabler » Tue Jun 05, 2018 3:25 pm

In my deferred accounts are all of my bond funds, but also with some stock funds. And in my taxable accounts, it's all stocks. I make deposits every month, so I can only increase stock % by doing that. To increase the bond %, I'll sell some stock funds in my deferred accounts to get there. I'm at 50/50 but my total portfolio has about 60% in deferred accounts and 40% in taxable. So far, with 60% in my deferred accounts, that's been enough buffer that I've never had to sell stock funds in my taxable accounts. Hope to keep this up until it's time to start withdrawing from the accounts.

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Re: Do you change your AA in discrete chunks or gradually?

Post by livesoft » Tue Jun 05, 2018 3:27 pm

I was lumpy, but I don't think it really matters.
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annielouise
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Re: Do you change your AA in discrete chunks or gradually?

Post by annielouise » Tue Jun 05, 2018 3:28 pm

My allocation is set to change 1-2% per year to reach my desired allocation at retirement. Some people prefer to make a larger change (5% or so) less frequently.

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Re: Do you change your AA in discrete chunks or gradually?

Post by balbrec2 » Tue Jun 05, 2018 3:48 pm

Going more conservative is easier than going more aggressive.
Get where you can sleep at night and be done with it. Bonds and stocks are both
rather richly priced right now so timing your move isn't really an issue right now.

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Re: Do you change your AA in discrete chunks or gradually?

Post by BogleMelon » Tue Jun 05, 2018 3:57 pm

My targeted AA is according to my $$ balance not years or age. I rebalance with new money anyways.
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Re: Do you change your AA in discrete chunks or gradually?

Post by grabiner » Tue Jun 05, 2018 11:14 pm

I have made both types of changes, but my general principle is that planned changes should be made slowly, while unplanned changes should be made when necessary.

For example, when I bought a home in 2013, this changed my risk tolerance, as I now had much higher living expenses for 15 years (while paying off the mortgage), and much lower expenses after that. Therefore, I changed my asset allocation at the same time. I went from 90% stock to 100% net stock, counting the mortgage as a negative bond; this actually led to a decrease in my stock allocation.

However, as retirement approaches, I have a plan to decrease my net stock allocation by 2% per year. I rebalance every January, so I get back to my desired allocation.

One other situation in which I have made sudden changes is the addition of new options; however, these changes have all been within stock, rather than increasing my stock allocation. For example, I did not have a target allocation to small-cap international stock when Vanguard's international funds were all large-cap. But when Vanguard took over International Explorer, I now had a low-cost way to get international small-cap, and added this to my target allocation as a new asset class.
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Re: Do you change your AA in discrete chunks or gradually?

Post by Sandtrap » Tue Jun 05, 2018 11:42 pm

Through a combination of market changes and addition of new substantial funds, my allocation has drifted from 30/70 to 40/50/10 (equities, fixed,cash) over a period of time. I'm comfortable with it for now but might adjust it progressively each year or so. I realize it doesn't need to be exact to work well.
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frugalecon
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Re: Do you change your AA in discrete chunks or gradually?

Post by frugalecon » Wed Jun 06, 2018 4:36 am

bloom2708 wrote:
Tue Jun 05, 2018 2:55 pm
Every scenario is different. How much of your retirement is covered by pensions/social security?

You won't know how you feel until the next big decline. The last one is always pretty easy to look back on.
We will have pensions, so I am ok taking more risk than someone might otherwise want to take at this stage, relatively close to retirement.

In 2008/2009, I concluded from my churning guts that 90-10 was a bit too risky, so I targeted 80-20. But you are right that pre-decline introspection only gets you so far, so it is hard to be certain that any particular allocation is better than another. As Sandtrap observed, though, it only has to be close enough

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beyou
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Re: Do you change your AA in discrete chunks or gradually?

Post by beyou » Wed Jun 06, 2018 4:56 am

As another above, lumpy and smooth, both.

I am always in rebalancing mode, 100% of the time.
New cash goes where needed.
Dividends reinvested in tax def, where needed.
Dividends in taxable swept to mmkt fund for eventual investing where needed.
Large market moves would cause me to make a one time lumpy move, but this is rare if you are always gradually moving towards the target ( and depending on AA, more in stocks, then more likely you would need lumpy one time changes).

Overall AA is set to make annual 1% change, reducing equities to a long term retirement target.

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Mursili
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Re: Do you change your AA in discrete chunks or gradually?

Post by Mursili » Sat Jun 09, 2018 1:32 pm

schwank wrote:
Tue Jun 05, 2018 3:05 pm
However I don't rebalance that way, I do it by changing the allocation of new inbound money. Just overweight the new funds to tilt your overall allocation back to the desired level, then resume the target allocation for new funds.
I used to do that, but as I get nearer retirement, the size of the accounts makes re-balancing this way take forever. I would never reach my desired allocation before my next re-balancing period.

I just do it in the lumpy way since I find that I have too little time to devote to this and need to get it done all at once or it will languish.
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Re: Do you change your AA in discrete chunks or gradually?

Post by togb » Sat Jun 09, 2018 1:57 pm

I recently made a rather significant rebalance from 99/1 to about 80/20. I did this by selling some stocks, and putting the proceeds (basis and gains) into the bond sector. Some stock positions were closed out entirely, others were simply reduced, after I'd evaluated each position. I'm aiming for about 75/25, as well as reducing the sheer number of investments by replacing some higher cost funds/EFTs with more bogglehead-ish choices. So as I sell off a position, I just put the proceeds where I want it. Similarly, new contributions are being placed where needed.

When I'm retired, I'll look to use my withdrawals to rebalance when possible. It probably won't totally take care of it, but it will keep things in check a bit.

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Re: Do you change your AA in discrete chunks or gradually?

Post by MathWizard » Sun Jun 10, 2018 12:11 am

Discrete chunks.
I prefer not to tinker so much.

The fee smoother AA changes that I've made, I've changed the AA of new money to slowly bring the overall AA back to where I want it, but that usually takes longer than I want to wait.

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Re: Do you change your AA in discrete chunks or gradually?

Post by magneto » Sun Jun 10, 2018 10:21 am

Poster in a much older thread, suggested moving 10% of deviation from target per month.

Three potential advantages seem to be :-
+ Investor psychological balance
+ Momentum harvesting
+ Investment System stability

Purists might object target never reached.
But markets have a habit of coming to meet the investor.

Target might be a Glide Path?
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Re: Do you change your AA in discrete chunks or gradually?

Post by The Wizard » Sun Jun 10, 2018 10:44 am

FIREchief wrote:
Tue Jun 05, 2018 2:40 pm
Back when rebalancing was part of my modus operandi, I never made a rebalancing move (or any other change to allocations) that exceeded one percent of the total portfolio value in a given month. That was either conservative, smart or a security blanket.
This was exactly what I did, 1% moves.
I found that it made rebalancing more frequent and less of a conceptual thing.

Five years into retirement now, I'm letting my AA drift upward from original 50/50 to more like 60% stocks.
But I've still rebalanced a bit between domestic and international stock funds...
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Re: Do you change your AA in discrete chunks or gradually?

Post by scrabbler1 » Sun Jun 10, 2018 10:51 am

I suppose my answer to the OP's title question is "both." When my AA (rollover IRA only) moves out of my acceptable range, I make gradual moves in discrete amounts, usually $10k. As I age, I have been gradually been moving my AA from stocks to bonds, to the point where I am now basically playing with the house's money in the stock fund.

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Re: Do you change your AA in discrete chunks or gradually?

Post by The Wizard » Sun Jun 10, 2018 10:54 am

scrabbler1 wrote:
Sun Jun 10, 2018 10:51 am
...to the point where I am now basically playing with the house's money in the stock fund.
The house's money, eh?
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