Rebalancing a portfolio

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Topic Author
ArboristInTraining
Posts: 27
Joined: Thu Jan 09, 2020 2:35 am

Rebalancing a portfolio

Post by ArboristInTraining » Fri Feb 14, 2020 1:43 am

Hello!

I've recently moved my portfolio over to vanguard, sold the high expense ratio mutual funds I was in, and replaced them with a two fund VTI/VXUS portfolio at an allocation of 60/40.

My question, how often should I balance a portfolio like this? And how would I go about doing that? I wonder if it's as simple as setting up a cross multiplication ratio, finding the percentage of each fund, and then buying more of the fund that's lower than the target 60/40 allocation. Does that make sense or is it gibberish? I'd really appreciate some clarification on this topic.

All best,
Your infant boglehead.

theorist
Posts: 125
Joined: Sat Sep 28, 2019 11:39 am

Re: Rebalancing a portfolio

Post by theorist » Fri Feb 14, 2020 1:58 am

Here is a helpful reference explaining some common rebalancing practices, and their effects:

https://www.vanguard.com/pdf/ISGPORE.pdf

There are various simple methods:

— rebalance back to 60/40 when your funds shift out of “bands” of +/- 5% of what you want (so if your 60/40 skews to 55/45 or 65/35)

— rebalance once a year, or once every 6 months, or ...

The main point of the document linked above is that different practices don’t produce wildly different results, so just pick a reasonable method and stick with it!

If you are doing this in a taxable account, I’d recommend choosing a less frequent rebalancing scenario (or reasonable band size), just because you will perhaps be generating taxable events when you rebalance if you sell one type of fund to buy the other. If on the other hand you rebalance simply by making new contributions preferentially to the fund that is beneath its allocation, this won’t be a concern.

Good luck!

fwellimort
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Re: Rebalancing a portfolio

Post by fwellimort » Fri Feb 14, 2020 2:01 am

1. Is this taxable account (a regular brokerage account) or a tax advantaged account (ira/401k/hsa/403b/etc).
If the first, try rebalancing say once a year because rebalancing will bring taxes (after all, when you sell with a profit, you need to pay taxes on that profit).
If the latter, no real issues rebalancing as much as you want. There's no "set rebalancing". Some do it once a quarter. Some once a year. Some once half a year. Some do once every two weeks. Some do when portfolio off by 3%. Some do when portfolio off by 5%. etc.
The idea is to stick with a plan. Ideally, you want to re-balance when your portfolio drifts too much from your set allocation but it can get annoying to manage (hence why lots of people here just do once every year -say on your birthday-).

2. And yes. Cross multiplication. Yap.
Fund A is $50. Fund B is $50.
To get 60/40, sell $10 from Fund B and put $10 to Fund A. Done.
If that's too much work for you, you can also always opt to just purchase VT (Vanguard World Market) which is currently about 56% US, 44% International (though unlike a set 60/40, this will change by market cap of the world).
Or you can open an automatic re-balancing brokerage like M1Finance and just make it auto re-balance every few months or every time your portfolio drifts by a set percentage.

But yes, it's just simple (total worth) * 0.60 and (total worth) * 0.40

Topic Author
ArboristInTraining
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Joined: Thu Jan 09, 2020 2:35 am

Re: Rebalancing a portfolio

Post by ArboristInTraining » Fri Feb 14, 2020 3:05 am

Thanks for the replies! It is indeed a taxable account.

I didn't consider the tax event implications, so I appreciate you bringing that to my attention. Considering that, I'm going to try to go with the approach of buying more shares of the stock that's below its target allocation, up until I reach the desired 60/40 allocation.

I like the suggestion of making a plan and sticking with it, that seems a common trend on the forum. I think I'll pass on doing it on my birthday however :p

Triple digit golfer
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Re: Rebalancing a portfolio

Post by Triple digit golfer » Fri Feb 14, 2020 5:42 am

Since it's a taxable account and we're just talking equities, I would only rebalance by through contributions or selling at a loss. I would not incur capital gains just to switch my U.S./ international ratio.

Dandy
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Re: Rebalancing a portfolio

Post by Dandy » Fri Feb 14, 2020 7:32 am

Your allocation is an educated guess at what it should be to fit your risk tolerance -- which is also an educated guess. Then you pick the funds that seem to fit both educated guesses. Point is what you end up with isn't an exact science. So, don't get too trigger happy with rebalancing.

Usually, if you set some plus/minus brackets -- e.g. allocation of 60/40 and rebalance when that varies by 5 points (e.g. equities exceed 65%) then you will likely not have to rebalance often. Also, when your portfolio signals it is time to rebalance it isn't a fire alarm it is time to take some action -- could be an exchange or a change to your contributions or withdrawals etc. The risk difference between an equity allocation of 60 vs 66% isn't usually a major change in risk - you just usually want to be aware of the rising (or declining) risk and adjust it.

rkhusky
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Re: Rebalancing a portfolio

Post by rkhusky » Fri Feb 14, 2020 7:41 am

You will see recommendations for international to be anywhere from 0% to 50% of your stock portfolio. So, the mix is not especially critical. As others have said, don't incur capital gains tax through rebalancing the US/Int'l allocation in a taxable account.

Rebalancing between stocks and bonds is much more important.

Also, you should consider all your investments as one large portfolio. Do you have IRA and/or 401k accounts?

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Duckie
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Re: Rebalancing a portfolio

Post by Duckie » Fri Feb 14, 2020 4:57 pm

ArboristInTraining wrote:I didn't consider the tax event implications, so I appreciate you bringing that to my attention. Considering that, I'm going to try to go with the approach of buying more shares of the stock that's below its target allocation, up until I reach the desired 60/40 allocation.
The best way to handle rebalancing in a taxable account is to make sure all the funds/ETFs are NOT set to automatically reinvest anything. Set all distributions to be funneled into the settlement account. At that point you can purchase whichever fund/ETF is below its AA without triggering any taxes. The two ETFs you've chosen pay dividends once a quarter.

Topic Author
ArboristInTraining
Posts: 27
Joined: Thu Jan 09, 2020 2:35 am

Re: Rebalancing a portfolio

Post by ArboristInTraining » Fri Feb 14, 2020 10:48 pm

I appreciate that suggestion!

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