Rebalancing within US total stock/international total stock

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silvervknight
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Rebalancing within US total stock/international total stock

Post by silvervknight » Thu Jul 05, 2018 11:23 pm

Regarding my wife and my 401ks, we started our investment goal at 60/30/10 US total stock index fund/International Total stock index /total bond index (VITPX/VWILX/VBPMX) about 2 years ago at the age of 30.
We're looking at another 30+ years of investing window.
We're maxing out our 401k every year. The funds are all in Vanguard admiral shares with exceptionally low ER

As of today, the allocation is more like 77/18/3/2 US total stock/international total stock index/total bond index/cash.
*Cash allocation because I once "rebalanced" by selling stock but putting the money in money market instead of total bond index due to rising interest rate environment. Am I market timing? Considering all that I've read, it just doesn't make sense to park money in bond knowing that rising interest has an inverse relationship with bond fund. We're even thinking if we should just go with all stocks (75/25 US/international) given we are not planning on touching our 401k until retirement age (60+)

As I'm reading about rebalancing: Vanguard's white paper: Best practices for
portfolio rebalancing https://www.vanguard.com/pdf/icrpr.pdf, Kites, Paul Merrimen, and other voices, it seems like the argument for and against rebalancing center around risk management more than chasing returns.

With that said, my questions are:

1. Given the current rising interest environment, I don't see any logical sense to throw money into my total bond index (VBMPX). My 401k doesn't have any specific short term/intermediate term bond funds. I almost want to go with total US/international stock split for the next few years. I've only started this investing journey for 2 years. Am I being short sighted?

2. What should I think about if I'm only rebalancing within tax deferred accounts (401ks) only since I don't have to worry about creating a taxable event?

3. What should I consider when deciding between selling US total stock fund to buy international total stock fund versus changing my allocation to invest new money into international fund to move closer to my planned allocation?

Thank you!

bloom2708
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Re: Rebalancing within US total stock/international total stock

Post by bloom2708 » Fri Jul 06, 2018 10:54 am

1. New money put into Total US Bond has a lower NAV and pays a higher rate of interest compared to your previously own shares.

For long term buy and hold investing, you will come out fine (after a period of time) with the higher interest being paid. If you want to use the money market for now, that is about 1.7% to 1.9% where Total US Bond is paying out 3%. With the risk of further NAV shrinking with interest rate increases (maybe).

2. Re-balancing with in 401k is completely fine. As long as you don't hit "frequent trading" in 401k, then that is a good place to move around.

3. If you want 30% international, then 1 (or 2) times per year (birthday?). Re-align the mix of US to International.
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vineviz
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Re: Rebalancing within US total stock/international total stock

Post by vineviz » Fri Jul 06, 2018 11:40 am

silvervknight wrote:
Thu Jul 05, 2018 11:23 pm
1. Given the current rising interest environment, I don't see any logical sense to throw money into my total bond index (VBMPX). My 401k doesn't have any specific short term/intermediate term bond funds. I almost want to go with total US/international stock split for the next few years. I've only started this investing journey for 2 years. Am I being short sighted?
Probably. The sooner you let go of making investment decisions specifically because of "the current environment" the happier (and wealthier) you'll be.

A 100% stock portfolio is an entirely reasonable allocation for someone who is 30ish and has a moderate to high tolerance for volatility. Your investment horizon is probably 50 years or so (life expectancy minus current age), and any bond fund you DO hold should have duration of between 75% and 90% of your investment horizon IMHO. That means long-term bonds for someone your age. Rising rates are great for you, because if rates rise then bond prices will fall (all else equal) and you get to buy your bonds at cheaper prices.

Honestly, the financially optimal bond allocation for someone your age is 0% to 20%. If there is any chance that watching your stock funds drop by 30% to 50% in a single year will scare you into changing your allocation, then put something in bonds now. Otherwise, I'd say you're fine with just stocks.
silvervknight wrote:
Thu Jul 05, 2018 11:23 pm
3. What should I consider when deciding between selling US total stock fund to buy international total stock fund versus changing my allocation to invest new money into international fund to move closer to my planned allocation?
The smart move is to choose the allocation you are comfortable with in the long-run and (absent tax considerations) move to it as soon as you make your choice.

One member of this forum has a mandated six month "cooling off period" between DECIDING to change their allocation and actually IMPLEMENTING that change. That seems like a reasonable rule to me if it helps you avoid waffling back-and-forth or chasing the latest whim. Otherwise, pick your long-run allocation and set it up ASAP.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Jordan4FI
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Re: Rebalancing within US total stock/international total stock

Post by Jordan4FI » Fri Jul 06, 2018 11:52 am

Do not sell to balance, just stop adding to the over funded funds and lay heavy on the under funded funds. I would keep bonds if you can handle any tax events.

I see it as buying shares and shares in our eyes always go up in time.. Bonds and Balanced Funds are good but all depending on your tax situation. I use Balanced Fund (Target Dates) at the moment in Taxable and Roth IRA.. And will very very likely stay in Balanced Funds my whole life. But I also live abroad and earn income abroad and pay no tax on income below 108K and no tax on investments below the Standard Deduction.

Jordan4FI
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Re: Rebalancing within US total stock/international total stock

Post by Jordan4FI » Fri Jul 06, 2018 11:57 am

I would also start to become more conservative as years pass.. at 30- 60/30/10 at 40- 55/25/20 at 50-40/20/40...ect

lukestuckenhymer
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Re: Rebalancing within US total stock/international total stock

Post by lukestuckenhymer » Fri Jul 06, 2018 12:02 pm

Refusing to put new money into the bond fund and thinking you will get a higher return in a MM is probably short-sighted. Total Bond Index may be negative over the last year, but forecasting this continuing into the near future is not a good bet. Keep in mind that the yields are going up on both the bond fund and the MM. I'd safely bet that you'll end up with more YOY with the bond fund.

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Hyperborea
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Re: Rebalancing within US total stock/international total stock

Post by Hyperborea » Fri Jul 06, 2018 12:34 pm

My plan for rebalancing during my accumulation time was to never sell in taxable accounts. I only rebalanced by selling inside the tax deferred accounts and using new contributions. Depending on the size of tax deferred to taxable that may mean that you don't fully rebalance one year. That's fine just keep contributing new money to the underweight segment and you will get to balance.

A 100% equity allocation is fine but it does require one to be able to hold that allocation when the inevitable downturn happens. That means having a reasonable emergency fund. What's reasonable will depend on a lot of personal factors - job safety, working spouse, career safety (broader industry rather than specific job), ongoing costs, etc.

After that it's psychological. Can you do it? Not everybody can and they keep bonds to "allow them to sleep at night". Me, I sleep like a rock and my wife claims that my deep sleep is my super power. I kept at pretty much 100% equity in a roughly world equity weight portfolio since the early 90's.

If you can't keep the 100% allocation through a downturn and will sell off at the bottom then you should realize that in advance and hold the allocation that you can keep during a downturn. If you sell at the bottom with your 100% allocation you will be worse off than if you had kept to a 90/10, 80/20 or whatever.
It’s hard to win an argument with a smart person, it's damn near impossible to win an argument with a stupid person. - Bill Murray

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