Best Re-balancing technique . . .

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MikeT
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Best Re-balancing technique . . .

Post by MikeT » Sat Dec 08, 2018 10:53 am

Best technique to rebalance this?

Image

Is it best to FIRST rebalance each of the USA funds with other USA funds, international with other international funds, and THEN between USA & International? (Since some are ETF's, that might get messy).

When I compare goal USA dollars to actual USA dollars, USA is in excess by 2.5% and International is under by 3.6%.

Thanks for your thoughts on how to make this rebalancing process less tedious.

Since I spent so much effort on developing this Paul Merriman style portfolio, please don't just say ditch it and go 3-fund :-)

-Mike
Last edited by MikeT on Sat Dec 08, 2018 2:01 pm, edited 1 time in total.

Flyer24
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Re: Best Re-balancing technique . . .

Post by Flyer24 » Sat Dec 08, 2018 11:09 am

Ok. I will say it. You have way too many funds. Ha.

You don’t really need to rebalance until you are more than 5% out of the band.

Grogs
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Re: Best Re-balancing technique . . .

Post by Grogs » Sat Dec 08, 2018 11:12 am

A few questions:

Are these in tax-advantaged accounts, or taxable where there is a cost of trading?

How big is your balance relative to contributions? I would probably start by moving 100% of contributions to bonds (if I'm understanding correctly), but I don't know how much that will move the needle.

Flyer24
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Re: Best Re-balancing technique . . .

Post by Flyer24 » Sat Dec 08, 2018 11:15 am

It is so much easier doing total market funds...just saying.

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HomerJ
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Re: Best Re-balancing technique . . .

Post by HomerJ » Sat Dec 08, 2018 11:18 am

Easiest way is to change your contributions. No taxable event that way.

If your goal is 60/20/20 stocks/international stocks/bonds, and you find yourself at 54/19/25, then you just change your new money going in to be 90/10 stocks/international stocks.

Second easiest way to just move stuff around in your tax-deferred space.

I have stocks, international stocks, and bond funds all in my Vanguard IRA and 401k. My taxable account is almost 100% Total Stock Market Index... I just leave that one alone, and do all my rebalancing inside my IRA and 401k.

I agree with others that you have too many funds. And rebalancing doesn't really need to be done until you are 5% or so out of balance.

I haven't rebalanced at all during these last few months, because my AA hasn't changed enough to even bother yet.
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whodidntante
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Re: Best Re-balancing technique . . .

Post by whodidntante » Sat Dec 08, 2018 11:21 am

I look at my entire portfolio as one big bag and use tools like portfoliovisualizer, personal capital, and full view to understand my asset allocation and factor loading. Then I implement my desired portfolio as tax efficiently as possible. Tax efficiency is also a consideration when rebalancing.

If it's a taxable account, I tax loss harvest, and use the proceeds to rebalance and continue to rebalance from cash flow until things get in band again. I won't realize a capital gain to rebalance. I don't care about the order.
In tax advantaged accounts, just put the orders in. Order does not matter.

It's not obvious to me that you need to rebalance.

MotoTrojan
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Re: Best Re-balancing technique . . .

Post by MotoTrojan » Sat Dec 08, 2018 12:44 pm

Entirely too complicated of a portfolio. It is very simple to setup excel to tell you how many shares of each holding to have to maintain balance, thus making rebalancing simple (one transaction per holding, unlike what I think you’re proposing). If you can’t manage that then simplify.

livesoft
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Re: Best Re-balancing technique . . .

Post by livesoft » Sat Dec 08, 2018 12:49 pm

If you have to use a spreadsheet with a Merriman portfolio, then you have got something wrong. A Merriman portfolio should be pretty simple to deal with.

I showed in this thread how I can do things without a spreadsheet:
viewtopic.php?t=150267

BTW, this month your portfolio is going to give you at least 0.5% of its value in dividends. Take them in cash and put the money where it is needed. That is, the US fund dividends are probably going to be used to buy shares of the international funds.

And what's your benchmark? How is the performance of your portfolio versus the benchmark you have for it?
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MikeT
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Re: Best Re-balancing technique . . .

Post by MikeT » Sat Dec 08, 2018 2:09 pm

Is the 5% thing between USA vs. International Vs. Bonds?

e.g. if USA large cap vs. USA small gets out of whack, are you meant to rebalance those FIRST, and then look at USA vs International vs. Bonds?

Thx
Mike

PS: most of this retirement (only taxable is in international)

livesoft
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Re: Best Re-balancing technique . . .

Post by livesoft » Sat Dec 08, 2018 2:13 pm

MikeT wrote:
Sat Dec 08, 2018 2:09 pm
Is the 5% thing between USA vs. International Vs. Bonds?
The 5% thing is anything you want it to be. That's the deal with rebalancing: Most of it just doesn't matter at all.
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retiredjg
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Re: Best Re-balancing technique . . .

Post by retiredjg » Sat Dec 08, 2018 2:26 pm

MikeT wrote:
Sat Dec 08, 2018 10:53 am
Best technique to rebalance this?

Image

Is it best to FIRST rebalance each of the USA funds with other USA funds, international with other international funds, and THEN between USA & International? (Since some are ETF's, that might get messy).

When I compare goal USA dollars to actual USA dollars, USA is in excess by 2.5% and International is under by 3.6%.

Thanks for your thoughts on how to make this rebalancing process less tedious.

Since I spent so much effort on developing this Paul Merriman style portfolio, please don't just say ditch it and go 3-fund :-)

-Mike
It is not possible to tell you how to rebalance because we don't know which funds are in the same account. It would be non-sensical to tell you to sell X and buy Y when X is in a 401k and Y is in an IRA. It can't be done.

To rebalance in general, do not approach it as you mentioned. It will not work.

First see if your stock to bond ratio is off by enough to fix it. For many people this is plus or minus 5 percentage points. If it is, fix it by selling one and buying the other inside one of your tax-deferred accounts if possible.

When that is fixed, see how much of your stock allocation falls into international. If your target is 40% of stocks in international and you have 35% instead, it probably doesn't matter much but you could do a little adjustment there if you wanted. Again, sell the one you have too much of and buy the one you have too little of in a tax-deferred or Roth account.

As for the smaller divisions....large cap vs mid vs small....It isn't going to matter much. If you see it is out of whack just change your contributions and let it fix itself. Or if they are in the same account, sell one and buy the other as long as that account is not your taxable account.

I think Merriman is OK in theory and a royal pain to implement because the funds you want are usually not available in the accounts which should be getting the most money. I'm not going to say to ditch it. You are already figuring it out yourself what a pain it is. I seriously doubt it is worth the work and you could probably accomplish the same thing just by doing a simple add on tilt.

retiredjg
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Re: Best Re-balancing technique . . .

Post by retiredjg » Sat Dec 08, 2018 2:33 pm

PS. If you want to show your portfolio broken down by account, it might be easier to help out. You can see how to do that in the link at the bottom of this message.

MikeT
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Re: Best Re-balancing technique . . .

Post by MikeT » Sat Dec 08, 2018 2:42 pm

Thanks @retiredjg, I was looking for the general approach, not specifically which funds. First looking stocks:bonds makes sense.

And yes, it is a pain.

I just started a new job 9 months ago so I have all my new contributions going into a target date fund so I'm not really using new contributions as a means to rebalance..

Outafter20
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Re: Best Re-balancing technique . . .

Post by Outafter20 » Sat Dec 08, 2018 3:02 pm

I "balance" biweekly with new contributions to keep my asset allocation at a firm 70/30 (no international).

I "rebalance" anytime my asset allocation bands dip 5%.

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Earl Lemongrab
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Re: Best Re-balancing technique . . .

Post by Earl Lemongrab » Sat Dec 08, 2018 3:06 pm

With my portfolio, I wouldn't be doing any rebalance. I use the 5/25 rule as promoted by Larry Swedroe. Use the deltas to direct where new money goes.

For what it's worth, I use a spreadsheet for my slice-and-dice. Why wouldn't you? Keeps track of the deltas in each category and gives the bottom line. Especially useful when you have a number of accounts due to beneficial transfer bonuses.
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dratkinson
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Re: Best Re-balancing technique . . .

Post by dratkinson » Sat Dec 08, 2018 4:39 pm

It's easiest to rebalance by sending new money to the ONE asset most under its desired allocation.
--If the one asset is in an employer's retirement plan, then you will need to talk to HR.
--If the one asset is in an IRA, then you buy it... if you are allowed the contribution.
--If the one asset is in a taxable account, then it's easy to tweak AA with monthly new money.

If you need to rebalance MULTIPLE assets across MULTIPLE accounts, then the difficulty level increases.

If you need to make frequent HR changes, then this will become a PITA for both you and HR.

If you must sell/buy to rebalance, then the difficulty level increases.

If you need to sell in taxable, (1) recognizing CGs is not recommended, and (2) TLHing is non-trivial to do right. (Disclosure. I'm in the middle of a 4-month TLHing round trip: last rebalance, TLH to, TLH back, resume rebalancing.)



Just for simplicity, I would not want any investments that required frequent HR changes.
--In an employer's retirement plan, I'd really hope for the simplicity of a good all-in-one fund.
--Failing that, then I'd hope for one or two broad market index funds that received a constant allocation.
--Then I'd tweak my target AA by new contributions to: (1) my IRA, and (2) taxable.

A complex investing strategy that required constant HR involvement would be a non-starter. (I hate it when I make a mistake, and I care more about doing it right than HR. Can search forum for members complaining about HR doing something wrong... at the end of the year... with no chance to correct. Bottom line: The less HR involvement the better.)



Disclosure. In my index investing beginning, before I found this forum, I had a few problems that the forum offered suggestions to solve. The results were good.

But some of the wise forum advice proved to be not exactly right for ME, and it required a fewer years for me to understand what I needed to change. I'm happy with my changes.

Time line. I indexed on my own ~3 years before receiving the forum's advice. I indexed for an additional ~5 years after receiving the forum's advice and before making my final tweaks. So ~8 years total.

My investments are now my own and new money easily keeps them in balance. I also SWAN (sleep well at night).



Bottom line. If your rebalancing is a pain, it takes a lot of time, and you need the help of a team, then your investments are not correct for YOU.

It's time for you to give up your Merriman investing style. Make your changes as tax-efficiently as possible.

I'm guessing you've at the ~3-year point in following the Merriman style of investing. :)

After you convert to the 3-fund style, you may need to tweak your investments again in ~5 years. :-)
Last edited by dratkinson on Sat Dec 08, 2018 5:19 pm, edited 2 times in total.
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MotoTrojan
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Re: Best Re-balancing technique . . .

Post by MotoTrojan » Sat Dec 08, 2018 4:49 pm

MikeT wrote:
Sat Dec 08, 2018 2:09 pm
Is the 5% thing between USA vs. International Vs. Bonds?

e.g. if USA large cap vs. USA small gets out of whack, are you meant to rebalance those FIRST, and then look at USA vs International vs. Bonds?

Thx
Mike

PS: most of this retirement (only taxable is in international)
You have $XYZ dollars and setup your allocation to have each asset be a percentage of that full dollar amount. I’m very confused by how you’re looking at it. You rebalance it all, the only thing each is compared to is the total dollar amount and the percentage you are allocating to.

I strongly suggest you move your tax-advantaged accounts to a self-balancing fund.

BogleMelon
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Re: Best Re-balancing technique . . .

Post by BogleMelon » Sat Dec 08, 2018 5:26 pm

MikeT wrote:
Sat Dec 08, 2018 10:53 am


Is it best to FIRST rebalance each of the USA funds with other USA funds, international with other international funds, and THEN between USA & International? (Since some are ETF's, that might get messy).
No, just rebalance each fund according to its target percentage independently. It is the same thing at the end, so why would you do 2-steps if 1 step would get you the same results?
MikeT wrote:
Sat Dec 08, 2018 10:53 am
Since I spent so much effort on developing this Paul Merriman style portfolio, please don't just say ditch it and go 3-fund :-)

-Mike
I hear you, it is fun to make investments a bit challenging and complicated, however I learned that the more it is complicated, the less money I will make, so honestly, ditch it and go 3-fund :D
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grabiner
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Re: Best Re-balancing technique . . .

Post by grabiner » Sun Dec 09, 2018 11:16 am

I use a spreadsheet like yours. When I rebalance, I compare the actual amount to the target amount. I plan in two steps:

Big picture: US/foreign/bonds. This is the most important part of my asset allocation. I want my total bond allocation to come out right, as that determines the risk level of my portfolio. Therefore, I will plan to change allocations to get these totals. My employer plan holds all three of these asset classes, so I can always make this adjustment without a tax cost.

Smaller picture: subclasses such as small-cap value or large-cap emerging markets. These will be adjusted, but only if I can make the adjustment in the account which holds the funds, and (if in the taxable account) without a tax cost. Since I have capital gains on my entire holding in Emerging Markets Index, I won't sell any of that to rebalance unless I get way over the target; I will adjust other international holdings instead to get the right international total. However, if I am overweighted in emerging markets, the dividend I receive from Emerging Markets Index will not be reinvested into that fund; it will be reinvested in something else.

Execution: Within each account, make the necessary transactions, selling overweighted funds to buy underweighted funds. If my employer plan has $10K too much in US stock, $7K too little in foreign stock, and $3K too little in bonds, then I sell $7K in US stock to buy foreign stock, and $3K in US stock to buy bonds. I can make similar transactions within my Roth IRA (and, in theory, in my HSA, but my HSA is so small that it is all in a single fund).

This only takes a few minutes to work out with the spreadsheet. I do it every January, because January is the time I have the most flexibility with my portfolio, with new money to add to my IRA.
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MikeT
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Re: Best Re-balancing technique . . .

Post by MikeT » Sun Dec 09, 2018 12:13 pm

Thanks everyone!

@grabiner , your routine sounds closest to mine.

-Mike

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ruralavalon
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Re: Best Re-balancing technique . . .

Post by ruralavalon » Sun Dec 09, 2018 12:33 pm

That portfolio is too complex, but you don't want advice on that.

1) Rebalance the stock/bond allocation if needed.

2) Rebalance the domestic/international stock allocation if needed.

3) Rebalance the sub-classes of stocks if needed.

Rebalance by exchanging between funds inside a tax-advantaged account. (I make it a point to have to have a core bond, core domestic stock and core international stock fund inside a large tax-advantaged account, to make rebalancing easy.)

Avoid exchanging between funds in a taxable account.
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