I've recently moved my portfolio over to vanguard, sold the high expense ratio mutual funds I was in, and replaced them with a two fund VTI/VXUS portfolio at an allocation of 60/40.
My question, how often should I balance a portfolio like this? And how would I go about doing that? I wonder if it's as simple as setting up a cross multiplication ratio, finding the percentage of each fund, and then buying more of the fund that's lower than the target 60/40 allocation. Does that make sense or is it gibberish? I'd really appreciate some clarification on this topic.
Your infant boglehead.
There are various simple methods:
— rebalance back to 60/40 when your funds shift out of “bands” of +/- 5% of what you want (so if your 60/40 skews to 55/45 or 65/35)
— rebalance once a year, or once every 6 months, or ...
The main point of the document linked above is that different practices don’t produce wildly different results, so just pick a reasonable method and stick with it!
If you are doing this in a taxable account, I’d recommend choosing a less frequent rebalancing scenario (or reasonable band size), just because you will perhaps be generating taxable events when you rebalance if you sell one type of fund to buy the other. If on the other hand you rebalance simply by making new contributions preferentially to the fund that is beneath its allocation, this won’t be a concern.
If the first, try rebalancing say once a year because rebalancing will bring taxes (after all, when you sell with a profit, you need to pay taxes on that profit).
If the latter, no real issues rebalancing as much as you want. There's no "set rebalancing". Some do it once a quarter. Some once a year. Some once half a year. Some do once every two weeks. Some do when portfolio off by 3%. Some do when portfolio off by 5%. etc.
The idea is to stick with a plan. Ideally, you want to re-balance when your portfolio drifts too much from your set allocation but it can get annoying to manage (hence why lots of people here just do once every year -say on your birthday-).
2. And yes. Cross multiplication. Yap.
Fund A is $50. Fund B is $50.
To get 60/40, sell $10 from Fund B and put $10 to Fund A. Done.
If that's too much work for you, you can also always opt to just purchase VT (Vanguard World Market) which is currently about 56% US, 44% International (though unlike a set 60/40, this will change by market cap of the world).
Or you can open an automatic re-balancing brokerage like M1Finance and just make it auto re-balance every few months or every time your portfolio drifts by a set percentage.
But yes, it's just simple (total worth) * 0.60 and (total worth) * 0.40
I didn't consider the tax event implications, so I appreciate you bringing that to my attention. Considering that, I'm going to try to go with the approach of buying more shares of the stock that's below its target allocation, up until I reach the desired 60/40 allocation.
I like the suggestion of making a plan and sticking with it, that seems a common trend on the forum. I think I'll pass on doing it on my birthday however :p
Usually, if you set some plus/minus brackets -- e.g. allocation of 60/40 and rebalance when that varies by 5 points (e.g. equities exceed 65%) then you will likely not have to rebalance often. Also, when your portfolio signals it is time to rebalance it isn't a fire alarm it is time to take some action -- could be an exchange or a change to your contributions or withdrawals etc. The risk difference between an equity allocation of 60 vs 66% isn't usually a major change in risk - you just usually want to be aware of the rising (or declining) risk and adjust it.
Rebalancing between stocks and bonds is much more important.
Also, you should consider all your investments as one large portfolio. Do you have IRA and/or 401k accounts?
The best way to handle rebalancing in a taxable account is to make sure all the funds/ETFs are NOT set to automatically reinvest anything. Set all distributions to be funneled into the settlement account. At that point you can purchase whichever fund/ETF is below its AA without triggering any taxes. The two ETFs you've chosen pay dividends once a quarter.ArboristInTraining wrote:I didn't consider the tax event implications, so I appreciate you bringing that to my attention. Considering that, I'm going to try to go with the approach of buying more shares of the stock that's below its target allocation, up until I reach the desired 60/40 allocation.