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Advice for Changing Strategic Asset Allocation

Posted: Thu Mar 14, 2019 2:53 pm
by DisallowedWord
Salutations Bogleheads!

This site and these forums have been the best source of collected knowledge on personal investing I've seen! Thanks to everyone who's participated with sharing advice and their own experiences. It's been very valuable to read as a new investor to get a better understanding.

However, one thing I haven't been able to find much information about is the best way to change a strategic asset allocation (or what considerations should be made if the "best way" depends on one's personal situation like most topics). The Rebalancing page on the Bogleheads wiki was very informative regarding different strategies for rebalancing a portfolio but seemed focused on maintaining an existing strategic asset allocation rather than changing to a new one.

Although I don't want to re-start the debate on how much exposure to International Stocks is optimal (and if that's 0%), my personal objective with changing my strategic asset allocation is two-fold:
  • Move all my international stocks out of tax-advantaged accounts to taxable accounts in order to take advantage of the Foreign Tax Credit (as per the very well written and well illustrated Tax Efficient Fund Placement Bogelheads wiki page)
  • Reduce the overall exposure to International Stocks in my portfolio in favor of US Stocks
Since I only started investing recently this will be the first time I've made a strategic asset allocation change and I don't want to pay more taxes/lose more money than necessary. The Dollar Cost Averaging Bogleheads wiki page recommends doing a lump sum transaction when switching to a more conservative portfolio, would the same principles apply when changing an allocation between asset classes like International Stocks to US Stocks? Are there other factors I should be taking into consideration?

Thanks in advance for any advice!

Re: Advice for Changing Strategic Asset Allocation

Posted: Thu Mar 14, 2019 3:23 pm
by bloom2708
Welcome.

Seems you have 2 considerations:

1. What are the gains (long/short term) on what you are selling in taxable?
2. What is your new mix of stocks (US to International) and bonds?

General idea:

401k/403b/457/Thrift Savings: All your bonds, balance in stock index funds (based on options and expense ratios)
Traditional IRAs (if any) - Bonds if they don't fit above, balance in stock index funds
Roth IRAs - Stock index funds, Total US and/or Total International and/or tilts (Emerging markets, Small cap value)
Taxable - Total US and Total International (maybe for you, more of taxable is International if all your international is here)

If there are not big gains (tax might be owed), then I would just make the moves. No tax consequences in places other than taxable. Frequent trading might apply elsewhere.

I continue to think 20% is a good floor for International. Even if you don't "feel" it will beat US. Things change. Have enough to stay in the game.

Re: Advice for Changing Strategic Asset Allocation

Posted: Thu Mar 14, 2019 3:27 pm
by KingRiggs
I'm doing this a bit with baby steps. New purchases in taxable account are VXUS. Then I sell my international fund in my 401K and buy either my bond or stock fund, depending on current balances to maintain desired allocation. It'll take a while and I may never get there completely, but it beats selling a bunch of shares in taxable and triggering LTCG.

Re: Advice for Changing Strategic Asset Allocation

Posted: Thu Mar 14, 2019 7:04 pm
by ExitStageLeft
Welcome to the forum!

Some advice I've seen in various threads is to implement a strategic asset change very deliberately, to ensure you are making the change because it is appropriate to your circumstances and not due to current market conditions. One specific suggestion is to update the IPS to reflect your new allocation but not act on it for six months.

Re: Advice for Changing Strategic Asset Allocation

Posted: Fri Mar 15, 2019 1:55 pm
by DisallowedWord
Thanks for the polite reception and the responses so far!
bloom2708 wrote:
Thu Mar 14, 2019 3:23 pm
1. What are the gains (long/short term) on what you are selling in taxable?
2. What is your new mix of stocks (US to International) and bonds?

If there are not big gains (tax might be owed), then I would just make the moves. No tax consequences in places other than taxable. Frequent trading might apply elsewhere.
Really appreciate the advice! Since there are no tax consequences for changing the Asset Allocation for tax-advantaged accounts, I'll proceed with changing those. However, like you mentioned for the taxable account I'll calculate the taxes on any gains first before changing from my existing asset allocation.
KingRiggs wrote:
Thu Mar 14, 2019 3:27 pm
I'm doing this a bit with baby steps. New purchases in taxable account are VXUS. Then I sell my international fund in my 401K and buy either my bond or stock fund, depending on current balances to maintain desired allocation. It'll take a while and I may never get there completely, but it beats selling a bunch of shares in taxable and triggering LTCG.
Glad to hear I'm not the only one doing something like this! When changing asset allocations it seemed like the major options to me were either doing it all at once or incrementally over a period of time. Based on what you're saying it seems like since doing it over a period of time may avoid triggering long term capital gains that's probably the way to go, unless the benefits of changing the asset allocation outweigh the benefits of avoiding taxes (which seems unlikely).
ExitStageLeft wrote:
Thu Mar 14, 2019 7:04 pm
Some advice I've seen in various threads is to implement a strategic asset change very deliberately, to ensure you are making the change because it is appropriate to your circumstances and not due to current market conditions. One specific suggestion is to update the IPS to reflect your new allocation but not act on it for six months.
Thank you for saying this because I had to look up IPS to find Investment Policy Statement. This seems like a very good idea to help with self-discipline, like keeping a budget. I'll have to put one together.

In regards to making sure changing asset allocation is appropriate to my circumstances: it's my understanding the most common or perhaps most important change is factoring in one's age to determine a stocks/bonds balance that's suitable, and updating that appropriately while growing older and reaching retirement. However, since this isn't a change between stocks and bonds but rather two investments that have a similar level of risk, I'm not certain of all the considerations to take into account.

Does anyone have any suggestions for what factors to consider when changing asset allocation between investments with similar level of risk, but different kinds of risk? (Thanks to Vanguard for having an well-written in plain language assessment of the different risks for each fund in their "Plain talk about risk" section!)