Appropriate rate of AA adjustment

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bacon4retirement
Posts: 8
Joined: Sun Apr 19, 2020 9:59 pm

Appropriate rate of AA adjustment

Post by bacon4retirement » Thu May 21, 2020 9:02 pm

How large of shift in AA is appropriate to do within a single year? I picked some mutual funds straight out of college, and had not adjusted much in the intervening 15 years. Thanks to spare time at home due to Covid-19, I finally have had time to learn more about investing and AA. My spouse and I currently have an AA of 91/9 and given our age and risk profile an AA of about 80/20 seems more reasonable. Even though we have a very high savings rate, it would take more than 2 years of investing exclusively in bonds and international stocks to move from our current AA to our desired AA. Such a large change in investment strategies seems antithetical to a slow, steady, buy and hold strategy. Perhaps it would be better to aim for shifting our AA by 2% per year? I want to keep buying at least some US stocks in case this turns out to be bottom of the market.

Emergency funds: six months

Debt: None

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, 0% State

State of Residence: Washington

Age: me 38, spouse 31

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 35% of stocks

Current Asset allocation: 91% stocks / 9% bonds
Current International allocation: 20% of stocks

Portfolio size: low seven-figures

Current retirement assets
Our portfolio is split across several accounts that use retirement trusts rather than tickers. For simplicity, I summarized it in terms of equivalent basic fund tickers.

Taxable
1% savings/MM accounts
5% CDs
18% Vanguard Total Stock Market Index (VTSAX)
21% Vanguard Total International Stock Index (VTIAX)

401k/Roth/HSA
3% Schwab U.S. Aggregate Bond Index Fund (SCHK)
52% Vanguard Total Stock Market Index (VTSAX)

Pension
Defined benefits plan providing approximately $3000/month at retirement

New annual Contributions
$57,000 her 401k with employer match and mega-backdoor
$19,500 his 457 deferred comp
$6,000 his backdoor IRA/Roth IRA
$6,000 her backdoor IRA/Roth IRA
$7,000 HSA
$65,000 to taxable brokerage

Kookaburra
Posts: 93
Joined: Thu Apr 02, 2020 11:14 pm

Re: Appropriate rate of AA adjustment

Post by Kookaburra » Fri May 22, 2020 12:34 am

There is no “single year limit.” The right amount is whatever it takes to get to your AA. If you’ve determined it’s 80/20, do it all at once. You may fall prey to market timing and behavioral mistakes otherwise. Ask me how I know.

absolute zero
Posts: 246
Joined: Thu Dec 29, 2016 4:59 pm

Re: Appropriate rate of AA adjustment

Post by absolute zero » Fri May 22, 2020 12:47 am

I’d probably shift to 85/15. Let it ride for a few weeks to confirm my sentiment. Then finish it off and move the rest of the way to 80/20.

If you prefer, can also just switch to 80/20 immediately. As long as you are confident that 80/20 is more appropriate for the level of risk/return you desire, I don’t see any problem with an immediate 10% change.

michoco911
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Joined: Sun Jul 14, 2019 4:13 am

Re: Appropriate rate of AA adjustment

Post by michoco911 » Fri May 22, 2020 6:55 am

I think you should have done it before, but now that you have reached this stage, if 80/20 is what you see suitable for you, then do it as one shot.
30% VWRD 30% VUSD 40% AGGG until further notice

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midareff
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Location: Biscayne Bay, South Florida

Re: Appropriate rate of AA adjustment

Post by midareff » Fri May 22, 2020 7:01 am

Seeing as you have had the allocation for a considerable time period keep one eye on tax consequences..... if it matters little to not at all get it done with.... it the tax bite is a concern moderate to fit your needs.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Appropriate rate of AA adjustment

Post by retiredjg » Fri May 22, 2020 7:07 am

When you realize you are at the wrong allocation, it should be changed immediately. If you simply must spread it out, do half today and half next week.

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vineviz
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Re: Appropriate rate of AA adjustment

Post by vineviz » Fri May 22, 2020 8:53 am

bacon4retirement wrote:
Thu May 21, 2020 9:02 pm
Such a large change in investment strategies seems antithetical to a slow, steady, buy and hold strategy. Perhaps it would be better to aim for shifting our AA by 2% per year?
The difference between 90/10 and 80/20 is not going to be statistically significant. It's a trivial shift, and not one you're like to notice in the performance of your portfolio.

That said, I generally object to sudden changes in asset allocation on purely behavioral grounds (i.e. a desire to make a sudden shift is, in itself, more often than not a dangerous impulse).

Why not just invest new contributions at a 50/50 stock/bond allocation until your allocation is down to your target? This would strike a balance in terms of regret management: you won't be able to regret a sudden move that was sub-optimal and also won't end up regret doing nothing at all.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

retired@50
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Location: Living in the U.S.A.

Re: Appropriate rate of AA adjustment

Post by retired@50 » Fri May 22, 2020 8:58 am

vineviz wrote:
Fri May 22, 2020 8:53 am
Why not just invest new contributions at a 50/50 stock/bond allocation until your allocation is down to your target? This would strike a balance in terms of regret management: you won't be able to regret a sudden move that was sub-optimal and also won't end up regret doing nothing at all.
+1
I think slow, even sloth like, movements are appropriate for people in your position. You're still a ways from retirement. In my experience one hasty move can bring on another.

Regards,
This is one person's opinion. Nothing more.

retiredjg
Posts: 40409
Joined: Thu Jan 10, 2008 12:56 pm

Re: Appropriate rate of AA adjustment

Post by retiredjg » Fri May 22, 2020 11:22 am

I don't see this as a behavioral shift. I see it as "ignored my portfolio for 15 years and have now decided I need something different from what I have".

Agree that purely behavioral changes are unwise. Nothing in the original post shouts that out to me.

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