how are you rebalancing your 401K?

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brokenrudder
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how are you rebalancing your 401K?

Post by brokenrudder »

Are you re-allocating % from your paycheck deduction differently and restoring the assest allocation over a period of several paychecks - or - rebalancing by selling/buying ?

Just curious - it would seem that (assuming no fees on rebalancing) that either way would be OK but wondering what people think?
Grt2bOutdoors
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Post by Grt2bOutdoors »

Both - changing percentage allocations and if we have a severe market movement that leads my allocations to become severely out of sync - will then re-balance selling some investments and adding to others.
livesoft
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Post by livesoft »

My paycheck goes into a bond fund. I am practically always underweight in bonds. The contribution from a paycheck is a very low percentage of total portfolio, so on its own it will not affect asset allocation one iota.

Then on any really bad days in the stock market I look to see if I should exchange from bonds to equities. I really don't have to look any other times.
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YDNAL
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Re: how are you rebalancing your 401K?

Post by YDNAL »

brokenrudder wrote:Are you re-allocating % from your paycheck deduction differently and restoring the assest allocation over a period of several paychecks - or - rebalancing by selling/buying ?

Just curious - it would seem that (assuming no fees on rebalancing) that either way would be OK but wondering what people think?
It depends on the size of the portfolio vs. size of paycheck. If the paycheck is small in relation to the portfolio, and markets move significantly, one should rebalance by selling/buying stuff that's up/down, respectively.

Otherwise, rebalance mostly with new contributions.
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brokenrudder
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Post by brokenrudder »

thanks.
paulsiu
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Post by paulsiu »

It's a 401K, you can rebalance it without tax consequence. Just do a simple rule of rebalancing if it's 10% out of whack or every couple of years.

Paul
golfallday
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Post by golfallday »

Automatically every December: 65% VIIIX; 35% VBTIX.
Wagnerjb
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Re: how are you rebalancing your 401K?

Post by Wagnerjb »

brokenrudder wrote:Are you re-allocating % from your paycheck deduction differently and restoring the assest allocation over a period of several paychecks - or - rebalancing by selling/buying ?

Just curious - it would seem that (assuming no fees on rebalancing) that either way would be OK but wondering what people think?
Early in my career I used to rebalance by shifting the allocation of my twice-monthly contributions. That worked fine when my portfolio was smaller, and the monthly contributions were significant in comparison to the total portfolio.

However, once my portfolio grew to a larger balance changing the monthly contributions didn't make much of a dent in my AA, so I went to buying/selling periodically as necessary.

Best wishes.
Andy
Cruncher
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Post by Cruncher »

Both as well.

I use the 5%/25% rebalance bands Swedroe talks about (as an example). I've been using them for about a year now (still a young Boglehead pup), but have not had to rebalance using them (I don't even get close).

Primarily because:

I "rebalance" twice per month as I contribute to my 401k. Essentially, I compare my asset allocation targets from my portfolio's actual percentages. Then I direct new money into the laggards of the bunch before new money posts.

I don't want to get bogged down in details, but my only challenge with this method is when I have to direct money to an asset class I do not have in my 401k per se (I only contribute to my 401k nowadays; I have a few Vanguard IRAs as well, a mix of traditional & Roths for me and my better half). In these situations, I just shift money in my Van accounts to initially force an asset class (I can buy in my 401k) to a laggard. Then I direct money into said class in my 401k (hope that made sense).

If you are interested: The asset classes I don't have "direct" access to in my 401k are some of the "Value" plays. What I foresee happening in my Vanguard accounts are them more or less shifting to accounts full of "Value" indexes (namely: VO, VBR, VTRIX). I understand these value companies are already in the index (just following Bernstein's observations).

That being said 1) this tends to take a little bit of time / thought process , & more importantly 2) there are easier ways. :-)

I'm still in the "learn as much as you can mode," not sure if this mode ever ends, but I currently enjoy it. If (rather when) in the future I loose interest, I'll shift to a 3 or 4 fund portfolio and let it rebalance annually. Heck, this is in my will!

I love Vanguard!

Good luck,
Cruncher

PS I strive to invest in passive indexes at rock bottom costs/fees. I don't pay any transactions fees (funds or ETFs) and am very aware of the costs of trading ETFs (Ferri, et al). All transactions are in tax sheltered accounts (no tax consequences). I don't try to time the market. Bear markets are blue light sales. I stay the course, though I'm considering shifting my domestic equities more towards international (the printing machine, I mean Fed ... ah nevermind :-( )
Easy Rhino
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Post by Easy Rhino »

My 401k happens to have decent fund choices for all my major desires asset categories (largecap, smallcap, intl, and bonds), so my contributions are set according to my "target" allocation.

Then I just rebalance when necessary. I use balancing bands.

I'm beginning to reach the stage where contributions aren't too significant compared to what I've got in there, so for transactional simplicity each month I may want to consider doing something like making my contributions just bonds.
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og15F1
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Post by og15F1 »

If we're talking about re-balancing only within a 401k (or Roth IRA / non-taxable accounts for the sake of discussion) I don't fully understand why people re-balance by redirecting new contributions unless there are some fees to avoid.

Maybe we can assume for the sake of discussion that these buying/selling fees in the tax sheltered accounts are negligible EG commission free ETF trades at VG.

If so, I understand that when you redirect new contributions towards the asset class(es) that are underweight then you are "buying low". What I don't see is the benefit of doing that versus selling the overweight asset classes to buy the underweight classes - selling high AND buying low at the same time. It seems by redirecting contributions, although you're buying low, you may still be leaving money on the table at the time the overweight classes go down.

If my assumption about fees is incorrect and you incur some significant penalty for buying/selling within the tax sheltered account then I understand why one would want to minimize that.

----------------------------------------------------------------------------------

That said, I'm selling asset classes that deviate too much from their target % and buying the underweight classes.
lambdapro
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Post by lambdapro »

I will be doing an initial balance in late April. My problem is that I will be buying five Vanguard funds in my self directed brokerage account tied to my 401K. There is a $30 transaction fee for each of these Vanguard funds. The point is then that while the $150 per year is not too bad for the six figures of the account, I cannot then dollar cost average twice a month into these accounts. So, I have three of the five funds covered with sort of similar funds in my 401K. I then have a fourth covered in my Roth. What I will do is then bias my balance on the fifth fund to make it approximately six months on contributions "heavy" in the initial balance.
David
medicevans
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Post by medicevans »

og15F1 wrote:
If so, I understand that when you redirect new contributions towards the asset class(es) that are underweight then you are "buying low". What I don't see is the benefit of doing that versus selling the overweight asset classes to buy the underweight classes - selling high AND buying low at the same time. It seems by redirecting contributions, although you're buying low, you may still be leaving money on the table at the time the overweight classes go down.
Is this the correct way to look at rebalancing? I may have to think about it for a bit. Can someone clarify for me?
Cruncher
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Post by Cruncher »

For me, directing new money into my laggards allows me to not have to rebalance via hitting rebalance bands (at least at my current portfolio levels).

This works for me now, though I do envision this technique shifting to something less intensive in the future.
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Raging Mage
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Post by Raging Mage »

medicevans wrote:
og15F1 wrote:
If so, I understand that when you redirect new contributions towards the asset class(es) that are underweight then you are "buying low". What I don't see is the benefit of doing that versus selling the overweight asset classes to buy the underweight classes - selling high AND buying low at the same time. It seems by redirecting contributions, although you're buying low, you may still be leaving money on the table at the time the overweight classes go down.
Is this the correct way to look at rebalancing? I may have to think about it for a bit. Can someone clarify for me?
Redirecting contributions should work well if you're young and you have a very small portfolio, since your AA can easily be readjusted through buying at that stage. This is how I manage my IRA--actually, since I have an Excel sheet set up to help me decide "which ETF to buy next" based on values, shares, and my biweekly contributions, I'm in effect continually rebalancing to the target AA. But for an older investor with a large portfolio, where market movements matter more than for young investors, what Og mentioned might indeed be an issue.
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touchdowntodd
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Post by touchdowntodd »

GRT2BOUTDOORS wrote:Both - changing percentage allocations and if we have a severe market movement that leads my allocations to become severely out of sync - will then re-balance selling some investments and adding to others.

x2
tryin to do this right... thanks guys
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og15F1
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Post by og15F1 »

Raging Mage wrote: Redirecting contributions should work well if you're young and you have a very small portfolio, since your AA can easily be readjusted through buying at that stage.
I would agree but it seems like there are two options for re-balancing that are a trade-off between relative ease and profit-taking.

Rebalancing by redirecting contributions is easy because you don't really need to do the math required to sell and buy across what may be multiple accounts. Maybe multiple accounts is the problem - I can envision the situation where a person cannot sell an asset class that has grown overweight in one account to buy an underweight asset class in another.

Rebalancing by selling high and buying low requires you to use math but I think, if you aren't limited by accounts or fees or something, that you're getting more financial benefit by selling high and buying low. This isn't really my great idea but from the Bogleheads Guide to Investing:
Rebalancing forces us to sell high and buy low. We're selling the outperforming asset class or segment and buying the underperforming asset class or segment. That's exactly what smart investors want to do.

Chapter 17, Page 200, 2007 edition
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Raging Mage
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Post by Raging Mage »

og15F1 wrote:Rebalancing by selling high and buying low requires you to use math but I think, if you aren't limited by accounts or fees or something, that you're getting more financial benefit by selling high and buying low. This isn't really my great idea but from the Bogleheads Guide to Investing:
Rebalancing forces us to sell high and buy low. We're selling the outperforming asset class or segment and buying the underperforming asset class or segment. That's exactly what smart investors want to do.

Chapter 17, Page 200, 2007 edition
I'm actually going through that book now. It's not likely I'll use every piece of advice there, but it's a great resource regardless.

For the most part, I agree with your post. There's no question that selling is a necessary part of rebalancing, and even new investors need to "graduate" to that strategy in very short order. I'd go so far as to say that the "buy to rebalance" approach will start hurting a young investor making regular weekly/monthly 401(k)/IRA contributions once his portfolio is large enough that he can't "fix" his AA with a single regular deposit. At least, that's when I plan to switch over, anyway.
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