Allocating new contributions/rebalancing across accounts (need help from people mathematically smarter than me! :)

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CrazyCatLady
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Allocating new contributions/rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by CrazyCatLady » Sat Apr 13, 2019 2:00 pm

I added a taxable account this year and some of my allocations are getting skewed as a result. I am trying to figure out the best way to rebalance and then set my allocations going forward. It's a little complicated (to me at least) so please bear with me.

My desired allocations are 41% US, 24% International, 28% Bonds, 6% Small Cap, 1% Cash (investment cash, does not include emergency fund or sinking funds). Each year I will reduce both US and International by 0.5% and increase Bonds or cash by 1%. My Backdoor Roth IRA and $10k iBonds are already funded for 2019.

My current allocations are 44.4% US, 23.6% International, 24.4% Bonds, 6.4% Small Cap, 1.3% Cash.

My monthly additions are allocated as follows: 401(k) goes 47% VTSAX, 29% VTBLX, 17% VTMGT and 7% VSGAX. 100% of my taxable contributions go to IXUS (with any fractional amounts going to VMMXX). My goal is to eventually have all of my international in taxable (IXUS) and no international (VTMGT) in my 401(k).

That brings me to my rebalance. I think the part I am hung up on is international since I want to increase IXUS and gradually decrease VTMGT until all international is in my taxable. However, since my monthly taxable addition is larger than my monthly 401(k) addition, it is confusing me.

The only thing I could think of was to rebalance my 401(k) as follows (numbers are approximate. I basically took $30k from VTMGT and reallocated it to Total US and Total Bond).

I would be overallocated in Total US and underallocated in Bonds and International at the time of rebalance, but with the larger contributions to international and bonds and the lower contributions to US for the rest of the year, by 12/31 I should hit my desired allocations. I'm not sure how I would set up my contributions after that though to stay in balance. I thought about adding VTSAX to taxable, but that would affect how quickly I can get all international into taxable.

Any thoughts on the best way to rebalance/allocate contributions would be greatly appreciated! I know it can't possibly be as complicated as I am making it. Thanks! :sharebeer
Last edited by CrazyCatLady on Sun Apr 14, 2019 12:35 pm, edited 2 times in total.

livesoft
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Re: Rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by livesoft » Sat Apr 13, 2019 2:23 pm

Don't use math at all. Simply guess and make trial-and-error guesses. This other thread is all about guessing:
viewtopic.php?t=150267
No spreadsheet(s) needed either.

After reading that thread, please tell me what you think. Thanks!
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pdavi21
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Re: Rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by pdavi21 » Sat Apr 13, 2019 2:58 pm

This is going to potentially ruin everything, but I suggest adding VWO (emerging) in taxable. It is a very tax efficient fund currently (not sure if it beats IXUS or not for you).

Add VWO such that it reaches 0.22 / (1-0.22) of your value of Developed and keep IXUS.

For example, if you have 200k in Developed and 20k in IXUS, you should have 200k x 0.22 / (1-0.22) = 56.4k VWO.

A portfolio of 200k Developed plus 56.4k VWO plus 20k IXUS is quite similar to a portfolio of 276.4k IXUS.

After reaching balance, when you continue adding, for every $(1-0.22) of Developed you add, add $0.22 of VWO.

Here is a quick list of factors to multiply your holdings in Developed to get how much VWO you need based on the Emerging market percentage in Total World.

22%: VWO = 0.282 x Developed (Current)
20%: 0.25 x Developed
25%: 0.333 x Developed
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

Topic Author
CrazyCatLady
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Re: Rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by CrazyCatLady » Sat Apr 13, 2019 3:55 pm

livesoft wrote:
Sat Apr 13, 2019 2:23 pm
Don't use math at all. Simply guess and make trial-and-error guesses. This other thread is all about guessing:
viewtopic.php?t=150267
No spreadsheet(s) needed either.

After reading that thread, please tell me what you think. Thanks!
That is pretty interesting, and man you put in a lot of work. I kind of like the idea of looking at the underlying holdings to see percentages of ownership (ie I suspect I hold more small cap than I fully appreciate because of holding Total US). I kind of took a short cut and based my allocations on types of funds rather than actual holdings (i.e. I decided I wanted to hold 24% international funds, 41% total US Funds, 6% small cap funds, without considering what the breakdown was within each fund) and that may need to be tweaked. I will have to spend some time and play with PW. :)

Unfortunately, unless I am missing something (quite possible) I don't think it clarifies my confusion on how to allocate holdings and new contributions between accounts because of how small my Roth IRA is and also the disparity in the amount I contribute to my 401(k) versus taxable each month.

The only small cap index fund my 401(k) offers is small cap growth (vsgax), so if I want to tilt small cap (which I do), I have to use that. However, I'd prefer small cap value or at least blend, which is why I added VIOV in my Roth IRA. That way I have my own custom small cap blend :). I was going to add IJS or SLYV to taxable to get more of a value blend, but it wasn't tax efficient so I lowered my desired allocation to small cap and increased my desired allocation to international. At this point my Roth IRA isn't large enough to hold all my small cap (and truthfully, I don't want to burn all my Roth space on small cap anyway since it could just as easily lose money as make it).

International is my other problem child. The only international index in my 401(k) is VTMGT. The problem is it only holds developed markets and I want emerging as well. I thought about adding emerging markets (I think it's called VEU) in my Roth IRA, but again my Roth IRA is too small and the ER was a killer. Also, I think a fund of just EM may be too volatile for my peace of mind (I don't think EM losses are as noticeable in a total international fund). Plus I like having international in my taxable to get the tax credit, and IXUS was pretty tax efficient for me based on Tricertop's spreadsheet.

Having said all that, since January 54% of my monthly contributions have gone to IXUS, so if I don't do something soon, I am going to have way too much in international funds (far in excess of the 24% international funds I want). Right now I am on track to have to rebalance every 3-4 months, and is rather not do that. Does that make sense?

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CrazyCatLady
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Re: Rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by CrazyCatLady » Sat Apr 13, 2019 4:07 pm

pdavi21 wrote:
Sat Apr 13, 2019 2:58 pm
This is going to potentially ruin everything, but I suggest adding VWO (emerging) in taxable. It is a very tax efficient fund currently (not sure if it beats IXUS or not for you).

Add VWO such that it reaches 0.22 / (1-0.22) of your value of Developed and keep IXUS.

For example, if you have 200k in Developed and 20k in IXUS, you should have 200k x 0.22 / (1-0.22) = 56.4k VWO.

A portfolio of 200k Developed plus 56.4k VWO plus 20k IXUS is quite similar to a portfolio of 276.4k IXUS.

After reaching balance, when you continue adding, for every $(1-0.22) of Developed you add, add $0.22 of VWO.

Here is a quick list of factors to multiply your holdings in Developed to get how much VWO you need based on the Emerging market percentage in Total World.

22%: VWO = 0.282 x Developed (Current)
20%: 0.25 x Developed
25%: 0.333 x Developed
Hmmmmm, that is interesting. Before I settled on IXUS I looked at adding EM to my Roth IRA, but I didn't have enough room and didn't want to burn my Roth space on EM because I thought it would be too volatile. I never thought about adding it to taxable. I'll have to check it's efficiency in Tricertop's spreadsheet.

How volatile is VWO? I'm good about not freaking out when my 401(k) goes down, but taxable is more "real money" to me, so I'm not sure how I'd react to large losses there (though I guess I could just TLH if that happens...).

I guess after a year or so when I hit my desired percentage of VWO I could start buying VTSAX in taxable to free up 401(k) space for more bonds.

Thanks for the suggestion!

pdavi21
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Re: Rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by pdavi21 » Sat Apr 13, 2019 7:08 pm

CrazyCatLady wrote:
Sat Apr 13, 2019 4:07 pm
pdavi21 wrote:
Sat Apr 13, 2019 2:58 pm
This is going to potentially ruin everything, but I suggest adding VWO (emerging) in taxable. It is a very tax efficient fund currently (not sure if it beats IXUS or not for you).

Add VWO such that it reaches 0.22 / (1-0.22) of your value of Developed and keep IXUS.

For example, if you have 200k in Developed and 20k in IXUS, you should have 200k x 0.22 / (1-0.22) = 56.4k VWO.

A portfolio of 200k Developed plus 56.4k VWO plus 20k IXUS is quite similar to a portfolio of 276.4k IXUS.

After reaching balance, when you continue adding, for every $(1-0.22) of Developed you add, add $0.22 of VWO.

Here is a quick list of factors to multiply your holdings in Developed to get how much VWO you need based on the Emerging market percentage in Total World.

22%: VWO = 0.282 x Developed (Current)
20%: 0.25 x Developed
25%: 0.333 x Developed
Hmmmmm, that is interesting. Before I settled on IXUS I looked at adding EM to my Roth IRA, but I didn't have enough room and didn't want to burn my Roth space on EM because I thought it would be too volatile. I never thought about adding it to taxable. I'll have to check it's efficiency in Tricertop's spreadsheet.

How volatile is VWO? I'm good about not freaking out when my 401(k) goes down, but taxable is more "real money" to me, so I'm not sure how I'd react to large losses there (though I guess I could just TLH if that happens...).

I guess after a year or so when I hit my desired percentage of VWO I could start buying VTSAX in taxable to free up 401(k) space for more bonds.

Thanks for the suggestion!
VWO is very volatile and probably less tax efficient than IXUS. IXUS is the best overall INTL fund for tax efficiency. Triceratop may not have a worksheet for 2018, but the numbers are out, so they can be updated.

Only knock in IXUS I can think of is that it has a slightly higher ER than a mix of VEA and VWO, and I've heard that they only return 75% of securities lending revenue to the shareholder (although it may have more securities lending revenue in the first place).
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

nolesrule
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Re: Allocating new contributions/rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by nolesrule » Sat Apr 13, 2019 7:45 pm

Just rebalance once a year or use tolerance bands so something doesn't get too out of kilter.

Also, if you estimate how much you think you'll contribute to each account throughout the year, you just set your contribution allocations to each account based on how much of each will go into the account during the year. If you're a bit off, so what? It's not the end of the world.

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CrazyCatLady
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Re: Allocating new contributions/rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by CrazyCatLady » Sun Apr 14, 2019 10:03 am

nolesrule wrote:
Sat Apr 13, 2019 7:45 pm
Just rebalance once a year or use tolerance bands so something doesn't get too out of kilter.

Also, if you estimate how much you think you'll contribute to each account throughout the year, you just set your contribution allocations to each account based on how much of each will go into the account during the year. If you're a bit off, so what? It's not the end of the world.
Tolerance bands - that's when you rebalance when an allocation is more than 5% from your desired allocation? That's kind of what I've been doing (but at 3% instead of 5%). Maybe I just need to let it go longer before I rebalance.

It sounds like there really isn't an easier way than what I've been doing. Sounds like I just need to guesstimate what I think my contributions should be and then plan on rebalancing twice per year on average.

Thanks for your response! :)

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Re: Allocating new contributions/rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by grabiner » Sun Apr 14, 2019 10:47 am

I keep track of my overall asset allocation in a spreadsheet.

When I have new money to add to my taxable account, I added it to whatever asset class is most underweighted, among those I am willing to hold in my taxable account. For example, last week, I was underweighted in international small-cap, so I bought some VSS (Vanguard FTSE All-World Ex-US Small-Cap). I don't invest enough to make it worth splitting a single investment across multiple asset classes, as my new taxable investments are usually less than 1% of my total portfolio.

Similarly, dividends go to the money-market fund, instead of being reinvested, so that I can direct money where it is needed. The money VSS purchase included the March dividends from my other taxable holdings, in addition to salary I hadn't spent.

I rebalance within my tax-deferred account when possible. My Investment Policy Statement says that I will only sell for a capital gain to rebalance if I am outside the tolerance bands and do not expect that normal inflows will fix the problem. This has never happened to me in 22 years of taxable investing, although it came close in 2007; one more year of an emerging markets boom would have forced me to sell some Emerging Markets Index to reduce the specific risk. (Instead, the market crashed, and I was able to get rid of the overweight by selling Emerging Markets Index for a capital loss and buying into other funds.)
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CrazyCatLady
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Re: Allocating new contributions/rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by CrazyCatLady » Sun Apr 14, 2019 12:41 pm

Thanks everyone, I appreciate the help! Once I projected out contributions for the rest of the year as Nolesrules suggested, I realized if I changed my 401(k) allocations to be about 2/3 Bonds, 1/3 VTSAX and a little bit to Small Cap, by the end of the year I will only be about $15,000 short in bonds. I can fix that when I do my year end rebalance. I also think that eventually I am going to need to be a little more open to keeping some international in my 401(k) so I can add VTSAX in taxable (which will help a lot with adding new money to the most underweighted allocation as Grabiner suggested).

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Wiggums
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Re: Allocating new contributions/rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by Wiggums » Sun Apr 14, 2019 12:56 pm

grabiner wrote:
Sun Apr 14, 2019 10:47 am
I keep track of my overall asset allocation in a spreadsheet.

When I have new money to add to my taxable account, I added it to whatever asset class is most underweighted, among those I am willing to hold in my taxable account. For example, last week, I was underweighted in international small-cap, so I bought some VSS (Vanguard FTSE All-World Ex-US Small-Cap). I don't invest enough to make it worth splitting a single investment across multiple asset classes, as my new taxable investments are usually less than 1% of my total portfolio.

Similarly, dividends go to the money-market fund, instead of being reinvested, so that I can direct money where it is needed. The money VSS purchase included the March dividends from my other taxable holdings, in addition to salary I hadn't spent.

I rebalance within my tax-deferred account when possible. My Investment Policy Statement says that I will only sell for a capital gain to rebalance if I am outside the tolerance bands and do not expect that normal inflows will fix the problem. This has never happened to me in 22 years of taxable investing, although it came close in 2007; one more year of an emerging markets boom would have forced me to sell some Emerging Markets Index to reduce the specific risk. (Instead, the market crashed, and I was able to get rid of the overweight by selling Emerging Markets Index for a capital loss and buying into other funds.)
I do the same thing. I probably got the idea from you, now that I think about it :-)

Hydromod
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Re: Allocating new contributions/rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by Hydromod » Sun Apr 14, 2019 4:25 pm

A newbie question: Do you do convert all fund dollars to a common tax status when doing an asset allocation? This makes a bit of difference when the accounts are partitioned across different tax categories.

For example, a 60/40 portfolio with all equities in Roth and all bonds in traditional 401, corresponds to a 66/34 portfolio in after-tax dollars with a 22% tax bracket. The common strategy of putting equities in Roth may be a sneaky way of artificially inflating risk...

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CrazyCatLady
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Re: Allocating new contributions/rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by CrazyCatLady » Sun Apr 14, 2019 9:49 pm

Hydromod wrote:
Sun Apr 14, 2019 4:25 pm
A newbie question: Do you do convert all fund dollars to a common tax status when doing an asset allocation? This makes a bit of difference when the accounts are partitioned across different tax categories.

For example, a 60/40 portfolio with all equities in Roth and all bonds in traditional 401, corresponds to a 66/34 portfolio in after-tax dollars with a 22% tax bracket. The common strategy of putting equities in Roth may be a sneaky way of artificially inflating risk...
I think that is a good question and others may do that calculation, but it is way beyond my Excel skill levels :). I don't really worry about how taxes affect my allocations (though maybe I should) since I plan to follow Livesoft's method of selling equities in taxable and then selling bonds in tax deferred and buying the same equities I just sold in taxable. I figure that way it will all come out in the wash.

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grabiner
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Re: Allocating new contributions/rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by grabiner » Mon Apr 15, 2019 7:15 pm

CrazyCatLady wrote:
Sun Apr 14, 2019 9:49 pm
Hydromod wrote:
Sun Apr 14, 2019 4:25 pm
A newbie question: Do you do convert all fund dollars to a common tax status when doing an asset allocation? This makes a bit of difference when the accounts are partitioned across different tax categories.

For example, a 60/40 portfolio with all equities in Roth and all bonds in traditional 401, corresponds to a 66/34 portfolio in after-tax dollars with a 22% tax bracket. The common strategy of putting equities in Roth may be a sneaky way of artificially inflating risk...
I think that is a good question and others may do that calculation, but it is way beyond my Excel skill levels :).
I have a spreadsheet which does this: http://www.remarque.org/~grabiner/assetalloc.html
Wiki David Grabiner

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Re: Allocating new contributions/rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by MindBogler » Mon Apr 15, 2019 7:30 pm

Hydromod wrote:
Sun Apr 14, 2019 4:25 pm
A newbie question: Do you do convert all fund dollars to a common tax status when doing an asset allocation? This makes a bit of difference when the accounts are partitioned across different tax categories.

For example, a 60/40 portfolio with all equities in Roth and all bonds in traditional 401, corresponds to a 66/34 portfolio in after-tax dollars with a 22% tax bracket. The common strategy of putting equities in Roth may be a sneaky way of artificially inflating risk...
That's not really how taxes work. We have a progressive tax regime in the USA. The method you've detailed would only be correct if you plan to have precisely a 22% tax rate at withdrawal, which is unlikely. Even if you drew that much from the portfolio, a large percentage would be taxed at 0%, 10%, etc. Look into Roth conversion strategies and think about how one might amass a pile of taxable investments to live on and then pay almost nothing in tax on during retirement after successfully executing Roth conversions. Your spreadsheet is going to have to get a lot more complicated!

:sharebeer

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CrazyCatLady
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Re: Allocating new contributions/rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by CrazyCatLady » Mon Apr 15, 2019 7:42 pm

grabiner wrote:
Mon Apr 15, 2019 7:15 pm
CrazyCatLady wrote:
Sun Apr 14, 2019 9:49 pm
Hydromod wrote:
Sun Apr 14, 2019 4:25 pm
A newbie question: Do you do convert all fund dollars to a common tax status when doing an asset allocation? This makes a bit of difference when the accounts are partitioned across different tax categories.

For example, a 60/40 portfolio with all equities in Roth and all bonds in traditional 401, corresponds to a 66/34 portfolio in after-tax dollars with a 22% tax bracket. The common strategy of putting equities in Roth may be a sneaky way of artificially inflating risk...
I think that is a good question and others may do that calculation, but it is way beyond my Excel skill levels :).
I have a spreadsheet which does this: http://www.remarque.org/~grabiner/assetalloc.html
Nice, thanks for sharing! I've been using PoF's spreadsheet to do allocations across all porftfolios, but it doesn't go into any tax detail. Your spreadsheet will let me use PW that Livesoft posted about to see the exact breakdown of each fund instead of just "international, US, Fixed Income and Alternative" and also calculate taxes as well.

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Re: Allocating new contributions/rebalancing across accounts (need help from people mathematically smarter than me! :)

Post by grabiner » Mon Apr 15, 2019 7:50 pm

CrazyCatLady wrote:
Mon Apr 15, 2019 7:42 pm
grabiner wrote:
Mon Apr 15, 2019 7:15 pm
CrazyCatLady wrote:
Sun Apr 14, 2019 9:49 pm
Hydromod wrote:
Sun Apr 14, 2019 4:25 pm
A newbie question: Do you do convert all fund dollars to a common tax status when doing an asset allocation? This makes a bit of difference when the accounts are partitioned across different tax categories.

For example, a 60/40 portfolio with all equities in Roth and all bonds in traditional 401, corresponds to a 66/34 portfolio in after-tax dollars with a 22% tax bracket. The common strategy of putting equities in Roth may be a sneaky way of artificially inflating risk...
I think that is a good question and others may do that calculation, but it is way beyond my Excel skill levels :).
I have a spreadsheet which does this: http://www.remarque.org/~grabiner/assetalloc.html
Nice, thanks for sharing! I've been using PoF's spreadsheet to do allocations across all porftfolios, but it doesn't go into any tax detail. Your spreadsheet will let me use PW that Livesoft posted about to see the exact breakdown of each fund instead of just "international, US, Fixed Income and Alternative" and also calculate taxes as well.
Note that I use net risk, not net present value, in my adjusted allocation. That is, I don't treat a stock fund in a taxable account differently whether its basis is $5000 or $10,000; the fund with a $5000 basis turns into $750 less cash when sold, but that $750 is independent of the investments. But it does matter that the IRS will take a share of my capital gains and dividends in the stock funds, and give me back a share of any capital losses and the lost dividends from them, so a stock fund with $10,000 and a $10,000 basis is weighted less than a Roth IRA with $10,000.
Wiki David Grabiner

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