Your experiences (obstacles?) rebalancing your Vanguard IRA?

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beardsworth
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Your experiences (obstacles?) rebalancing your Vanguard IRA?

Post by beardsworth » Fri Jun 15, 2007 4:45 pm

I have lurked at this forum and the original Morningstar forum for years--and found much helpful information and many helpful people at both--but this is my first actual post.

My wife and I have had taxable accounts with Vanguard several times, but have never had Vanguard IRAs. I recently called Vanguard customer service--twice--to ask procedural questions about rebalancing an IRA portolio--and am confused by the apparently contradictory information received.

Here was the example I gave on each call: Limit the discussion of Vanguard's policy on rebalancing within to IRA situations, in which no current "taxable event" is created by purchases, sales, exchanges. Also, leave Vanguard's "frequent trading" restrictions out of the picture, i.e., assume that I am rebalancing in a way that would not run afoul of them. Suppose that I want four funds in my IRA (the exact number doesn't matter), and suppose (for the sake of simplicity) that I want an equal allocation to each of the four funds. Over the course of time, some funds will inevitably outperform others, and I will want to rebalance to my desired allocations. Finally, suppose that I want to accomplish periodic rebalancing by transfers from overperforming funds to underperforming funds, i.e., by exchange, in order to "sell high and buy low," and NOT simply by contributing "new" IRA money to the underperforming fund(s). . . . I asked Vanguard's phone reps: Since we've never had Vanguard IRAs before, exactly how does Vanguard accomplish such periodic rebalancing?

The first phone rep said it wasn't possible to rebalance among funds by percentages, even within an IRA. He said it would be necessary for us to specify a particular dollar amount to be liquidated, or a specific number of shares to be liquidated, from the overperforming fund(s), and then to specify how many dollars or shares we wanted to direct to each underperforming fund. I observed that this seemed cumbersome. I also observed that, since Vanguard--like every other fund company known to me--has online portfolio tools and printed literature which encourage asset allocation by percentages, it seemed bizarre that Vanguard could not also do rebalancing by percentages.

Doubting the answer I got on my first call, I tried again some days later and presented the same hypothetical situation. This Vanguard phone rep said, "Sure, you can rebalance by percentages. We do it all the time." But he then added that "it will never be quite exact, because you'll be requesting it today, but the exchange will happen on tomorrow's business, so the price per share of each fund will have changed slightly--but it should be very close to your percentages."

Both customer service reps agreed that Vanguard presently has no option to request automatic rebalancing (annually, semiannually, whatever) of an IRA without a specific case-by-case request from the shareholder. I wrote to Vanguard CEO Brennan and urged the adoption of such an automatic rebalancing option, as it would eliminate an enormous number of shareholder phone calls, would meet the shareholder's desire to maintain desired allocations, and would also meet Vanguard's desire to encourage buy-and-hold investing (since automatic rebalancing on prescheduled dates is the very opposite of market timing and frequent trading). I got a noncommital thank-you-for-writing reply from a member of Brennan's staff.

My wife and I already have IRAs with another company which allows rebalancing by percentages, exchanges up to three times a month (far more frequent than any rebalancing we'd ever consider), without frequent trading rules, and with the option for the shareholder to establish annual automatic rebalancing on his/her birthday. This seems very convenient compared to Vanguard's procedures. Yet Vanguard has several funds which are of serious interest to us--IF the mechanics of maintaining our desired asset allocation can be accomplished at Vanguard without a lot of hassles.

The question (at last): What has been your experience rebalancing your Vanguard IRA? In practice, how DOES this work (or not work)?

Thanks in advance to all who reply.

Marc

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Post by White Coat Investor » Fri Jun 15, 2007 6:15 pm

Ummm, I calculate what dollar amount the percentage I want will equal, then calculate it based on today's value, and then it is a little off tomorrow when it happens. But since even my perfectionist self can handle that, and since there is no such thing as a perfect asset allocation, I think you expect a bit much.

Of course, if Vanguard did offer "automatic rebalancing" I would have to consider taking them up on it.
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Post by livesoft » Fri Jun 15, 2007 6:22 pm

First, studies show that rebalancing is not important :D
Second, studies show that too much rebalancing is detrimental.
Third, when doing an exchange, the Vanguard web site has an option menu with these options shares, dollar, percentage, all.
So your wish is granted.

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beardsworth
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Post by beardsworth » Fri Jun 15, 2007 6:26 pm

What a friendly first reply to a first-ever post. I hope it isn't an omen of things to come.

For the record, I'm not seeking "perfection." But I've had multiple Vanguard phone reps giving me multiple answers, and I'd just like to know--from those more experienced with Vanguard than myself--if (in the real world) it's possible to rebalance a Vanguard IRA once every year or so, without resorting to a calculator.

Marc

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Post by groovy9 » Fri Jun 15, 2007 6:27 pm

It took you more time to write this post than it would to do the math for the next two or three rebalances. The "rebalance by percentages" feature you mention could only work, if it existed, within a single account. Unless only one of you intends to ever have an IRA, it's a moot point.

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Post by oneleaf » Fri Jun 15, 2007 6:29 pm

I just figure out what I need to sell and what I need to buy, and then perform the exchange using "dollar" amounts. Isn't that all there is to it?

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Post by livesoft » Fri Jun 15, 2007 7:03 pm

MarcMyWord wrote:What a friendly first reply to a first-ever post. I hope it isn't an omen of things to come.

For the record, I'm not seeking "perfection." But I've had multiple Vanguard phone reps giving me multiple answers, and I'd just like to know--from those more experienced with Vanguard than myself--if (in the real world) it's possible to rebalance a Vanguard IRA once every year or so, without resorting to a calculator.

Marc
I see now how one could get multiple answers. The percentage option used with an exchange takes a percentage of the fund you are exchanging out of. It does not look at your entire portfolio to calculate the percentage.

Thus if your VTSMX is 52% of your total portfolio and you wanted to reduce it to 50%, then you could not use "exchange 2% of it", but would have to figure out to sell 4% of it.

So one rep understood what you wanted and the other did not.

For myself, I do not like simple automatic rebalancing, so your request is completely foreign to me. Also, I have other accounts that have to be considered in my grand scheme of things, so I would not use the feature you desire even if it was available.

Here is something to read about rebalancing. Maybe after reading it, you will not want to rebalance so often or so easily?

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Post by groovy9 » Fri Jun 15, 2007 7:13 pm

oneleaf wrote:I just figure out what I need to sell and what I need to buy, and then perform the exchange using "dollar" amounts. Isn't that all there is to it?
That's it. It may be more complicated across multiple accounts, such that you can't achieve exactly your goal with just a few transfers. That's why this feature would be so difficult to implement and, I'm sure, why it hasn't been offered already.

Speaking as a computer programmer, it's not as simple as a lay person might think. For many (most?) situations, it would be somewhere between difficult and impossible to do automagically.

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Post by oneleaf » Fri Jun 15, 2007 7:17 pm

MarcMyWord wrote: For the record, I'm not seeking "perfection." But I've had multiple Vanguard phone reps giving me multiple answers, and I'd just like to know--from those more experienced with Vanguard than myself--if (in the real world) it's possible to rebalance a Vanguard IRA once every year or so, without resorting to a calculator.
I think the customer service rep misunderstood you.
The only way you can do it without resorting to a calculator is if you can do it in your head. I recommend using an Excel spreadsheet. I imagine most people on this board have an Excel spreadsheet with their portfolio information in it.

groovy9 wrote: That's it. It may be more complicated across multiple accounts, such that you can't achieve exactly your goal with just a few transfers. That's why this feature would be so difficult to implement and, I'm sure, why it hasn't been offered already.
Yep, and if they did offer it, I doubt I would use it, since I still prefer to do things manually (that way, I only have myself to blame if things go wrong!).

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Rebalancing between IRA's

Post by krmann » Fri Jun 15, 2007 8:02 pm

I have found this a very easy process with Vanguard. I determine what percentage I want to move, determine the dollar amount, and then decide what particular account(s) the funds should be exchanged to. Once I do that, it takes a matter of minutes to complete the transaction(s) online at the Vanguard site.

Kate

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Post by TedSwippet » Fri Jun 15, 2007 8:29 pm

Vanguard do indeed seem to offer this, but only for 401(k) accounts. I found "automated rebalancing" tools in my Vanguard 401(k), and used it once for convenience; it worked just fine. The programming challenges, then, of rebalancing within a single account aren't insurmountable, it seems.

But yes, it's also easy to do manually. And the one-push solution neglects everything outside the 401(k), making it a little inflexible. I suspect it's mainly aimed at folk who have only 401(k)s, and would otherwise be intimidated by the thought of rebalancing in any guise.

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rebalancing "may not help" and "may hurt"

Post by roymeo » Fri Jun 15, 2007 9:00 pm

Boy, I'm really in trouble.

I'm a real person who's INVESTING money now.

And in doing so, I'm adding money to the places that fall behind in my asset allocation.

And if rebalancing doesn't really help, and maybe can hurt, I'm doing myself no good with every paycheck and deposit.

And if rebalancing doesn't really help, I have to start questioning whether asset allocation matters. Cause if it rebalancing (IE: returning to a particular asset allocation) doesn't help, then one begins to think that asset allocation itself can't really matter.

And if asset allocation doesn't really matter, then Taylor is a big fat liar in almost every post. (hee hee, you know I'm not saying that for real.)

roymeo
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Post by kcyahoo » Fri Jun 15, 2007 9:47 pm

This has been discussed many times. Do a search. You will find downloadable Excel rebalancing files. I made my own. You plug your actual balances into Excel, actual % column calculates automatically (with simple formulas). You list the target percentages next and calculate new target amounts with a column of the amounts to add or subtract. You use those amounts to enter the transactions. I do this 2 - 4 times a year. It's very easy.
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Post by White Coat Investor » Fri Jun 15, 2007 10:18 pm

MarcMyWord wrote:What a friendly first reply to a first-ever post. I hope it isn't an omen of things to come.

Marc
Sorry, sometimes my sarcasm gets the best of me. Welcome to the forum!
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Post by gkaplan » Fri Jun 15, 2007 10:31 pm

I agree. This is not rocket science. I constructed an Excel spreadsheet that, among other purposes, shows me what needs to be rebalanced at the equity/fixed income level, what needs to be rebalanced at the sub-asset class level and what needs to be rebalanced at the fund level. If I can do it, anyone can.
Gordon

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Post by WiseNLucky » Sat Jun 16, 2007 9:52 am

EmergDoc wrote:
MarcMyWord wrote:What a friendly first reply to a first-ever post. I hope it isn't an omen of things to come.

Marc
Sorry, sometimes my sarcasm gets the best of me. Welcome to the forum!
I could tell from ED's post that he wasn't sending the negative vibe you were receiving. His sarcastic humor reminds me of mine. :)

I also know exactly what he meant about his "perfectionist self" because I suffer from the same malady. I have assets in my 401(k), wife's retirement investment plan, both of our Roths, both of our standard IRAs and taxable investments. I have to use an Excel spreadsheet once a year to figure out where our investments are in relation to our planned percentages and then calculate the dollars I need to move within each fund (within each account) to get things to even out. All movements take place in tax advantaged accounts.

It bothers me a bit and I have to laugh it off that the very day of my rebalancing my percentages are off a little because you can only buy and sell using today's prices but can only do the calculations using yesterday's prices.

The pains of being a perfectionist (I actually refer to myself as "slightly obsessive compulsive") :D

Welcome to the forum. You have lots of good information here and good experience that Vanguard customer service isn't always up to par. But their costs and fund choices make me a Vanguard Diehard despite the lack of knowledge base in the customer service group. I wish you well on the board and with your investing future.
WiseNLucky

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WizeNLucky

Post by kcyahoo » Sat Jun 16, 2007 4:38 pm

WiseNLucky, I know exactly what you mean when your AA isn't EXACTLY at your target after you rebalance. Punta Gorda
Retired @ 57, now 75 | was 50/45/5, then 42/54/04, now 35/60/5 | KC

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Post by tetractys » Sat Jun 16, 2007 6:24 pm

A friend of mine told me about "push button" rebalancing at Schwab. He just fills in the percents of his asset allocations, then pushes a button, and a meter shows his portfolio rebalancing. From the sound of it, I gathered he was using the tool just about every time he visited his account online (like a toy or something!), so I did my best to explain modern rebalancing theory, periodicity, avoiding tax events, the 25/5 rule, and etc. I believe he actually listened to me and the outcome was very positive!

Anyway, rebalancing is serious business, and not a game! After all its the investors returns that are at stake. I think Vanguard's tools work very well as they are, with their various checks and balances; and that a push button type approach, while convenient in some cases, would actually be a detriment when misused by unknowing investors.

Tet

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Post by alec » Sat Jun 16, 2007 8:54 pm

Screw the spreadsheet, I just use Bob Beeman's Portfolio Rebalance Calculator.

- Alec

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Post by WiseNLucky » Sun Jun 17, 2007 7:22 am

alec wrote:Screw the spreadsheet, I just use Bob Beeman's Portfolio Rebalance Calculator.

- Alec
Sure looks like a spreadsheet to me! Someone else just did the work for you setting it up.

Mine is different because it has color coding for tax-advantaged accounts so I can see the amounts I have available to rebalance from (I have so far been able to rebalance my entire portfolio without ever involving a taxable account).
WiseNLucky

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