Rebalance with I bonds

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Brianjp18
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Rebalance with I bonds

Post by Brianjp18 »

I’m currently at 90/10 with my 10% in bonds being 10k in Ibonds. From this point on my contributions will go into VTSAX at 90% and total bond fund at 10%, but currently I don’t have any bond money in a mutual fund to make rebalancing easy.

If the stock market drops to a degree where I would have to rebalance and buy more VTSAX, any suggestions on rebalancing considering my entire bond allocation is currently in an I bond?

I would imagine it will take awhile to build up my total bond fund as it is slowly accumulating with my work 401k contributions. My other contributions go into My Roth IRA which I’m trying to keep 100% equity.
tashnewbie
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Re: Rebalance with I bonds

Post by tashnewbie »

Options that come to mind (I'm not necessarily suggesting any of them):

Switch 401k contributions to 100% VTSAX.

Sell I bonds and max the Roth IRA and increase 401k contributions (if you're not already maxing), and if those buckets are full, put into taxable in VTSAX or a similar stock index fund like VFIAX (S&P 500).

Live with the slight imbalance until you can get more money into VTSAX.
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JoMoney
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Re: Rebalance with I bonds

Post by JoMoney »

In my opinion Series I Savings Bonds are a great "bond" option for a lot of purposes, but not so great if you're planning on trading or rebalancing with them. If it were me, I would just direct my new contributions to whichever was out of line and continue doing that until it was back in line with my desired allocation. I wouldn't worry about actually trading anything to rebalance in a hurry.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
lakpr
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Re: Rebalance with I bonds

Post by lakpr »

Brianjp18 wrote: Mon Sep 13, 2021 7:54 am I’m currently at 90/10 with my 10% in bonds being 10k in Ibonds. From this point on my contributions will go into VTSAX at 90% and total bond fund at 10%, but currently I don’t have any bond money in a mutual fund to make rebalancing easy.

If the stock market drops to a degree where I would have to rebalance and buy more VTSAX, any suggestions on rebalancing considering my entire bond allocation is currently in an I bond?

I would imagine it will take awhile to build up my total bond fund as it is slowly accumulating with my work 401k contributions. My other contributions go into My Roth IRA which I’m trying to keep 100% equity.
I suggest investing in a balanced fund AND VTSAX, so that the rebalancing is done automatically for you. I am not sure what your take on international equities is, but in the example below let me assume that you are investing purely in domestic equities.

Take VBIAX (Vanguard Balanced Index Fund) for example. It has a 60:40 ratio of stocks to bonds.
Your aim is to have 10% bonds
If you invest 25% of your all future investments in VBIAX, you will have 40% * 25% = 10% in bonds.
Remainder 75% of your future investments will go completely to VTSAX.

Let us say the stock market drops by 30%. Your VBIAX balance decreases by 18% (60% stocks * 30% drop, bonds retain the value), and your VTSAX drops by 30%. Your net drop is 25% * 18% + 75% * 30% = 4.5% + 22.5% = 27%. Exactly the same as a 90:10 portfolio performance (90% * 30% drop = 27% drop in stocks, 10% bonds retain their value).

===============================
The only issue that I have with this scheme is that the VBIAX fund is not very tax efficient. The bond portion of it throws off non-qualified dividends that are taxed as ordinary income. But then, if you are maxed out of I-bonds space and must invest in bonds in a taxable account, I suppose you are taking on the tax-inefficiency on-board any way.

A better way to invest would be to invest purely in VTSAX in taxable account, and increase the bonds in your tax-advantaged space (401k etc.). But then you will have to rebalance, you have to take the initiative, and do it without emotions when you have just seen your taxable account cut by a third and you are "potentially" exposing even your tax-advantaged account for possible future losses. Are you sure you can bring yourself to do it? What did you actually do in March 2020, going by the most recent downturn?

==============================

A very-far out target retirement fund (like Target Retirement 2065 for example), carries a 90:10 portfolio and that could be a one-fund solution that does the automatic rebalancing for you. Their glide path does not start until 25 years before the target date (so not until 2040 for the 2065 fund, for example); until then they stick with the 90:10 allocation. But this is where my first comment of "I do not know what your take on international equities is" comes in. These target funds carry 40% of their investments in international equities. To me, that is quite high, twice of what I would want in my portfolio.
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Brianjp18
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Re: Rebalance with I bonds

Post by Brianjp18 »

JoMoney wrote: Mon Sep 13, 2021 8:11 am In my opinion Series I Savings Bonds are a great "bond" option for a lot of purposes, but not so great if you're planning on trading or rebalancing with them. If it were me, I would just direct my new contributions to whichever was out of line and continue doing that until it was back in line with my desired allocation. I wouldn't worry about actually trading anything to rebalance in a hurry.
Fair enough. That was my initial thought. It will be a slow rebalance (if there was a significant stock drop), but at least I’d be going in the right direction. Just feels like a slow process would not take advantage of stocks “on sale” if I slowly rebalance by switching my contribution allocation to all equities. Makes sense though, thanks for the feedback.
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Brianjp18
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Re: Rebalance with I bonds

Post by Brianjp18 »

lakpr wrote: Mon Sep 13, 2021 12:25 pm
Brianjp18 wrote: Mon Sep 13, 2021 7:54 am I’m currently at 90/10 with my 10% in bonds being 10k in Ibonds. From this point on my contributions will go into VTSAX at 90% and total bond fund at 10%, but currently I don’t have any bond money in a mutual fund to make rebalancing easy.

If the stock market drops to a degree where I would have to rebalance and buy more VTSAX, any suggestions on rebalancing considering my entire bond allocation is currently in an I bond?

I would imagine it will take awhile to build up my total bond fund as it is slowly accumulating with my work 401k contributions. My other contributions go into My Roth IRA which I’m trying to keep 100% equity.
I suggest investing in a balanced fund AND VTSAX, so that the rebalancing is done automatically for you. I am not sure what your take on international equities is, but in the example below let me assume that you are investing purely in domestic equities.

Take VBIAX (Vanguard Balanced Index Fund) for example. It has a 60:40 ratio of stocks to bonds.
Your aim is to have 10% bonds
If you invest 25% of your all future investments in VBIAX, you will have 40% * 25% = 10% in bonds.
Remainder 75% of your future investments will go completely to VTSAX.

Let us say the stock market drops by 30%. Your VBIAX balance decreases by 18% (60% stocks * 30% drop, bonds retain the value), and your VTSAX drops by 30%. Your net drop is 25% * 18% + 75% * 30% = 4.5% + 22.5% = 27%. Exactly the same as a 90:10 portfolio performance (90% * 30% drop = 27% drop in stocks, 10% bonds retain their value).

===============================
The only issue that I have with this scheme is that the VBIAX fund is not very tax efficient. The bond portion of it throws off non-qualified dividends that are taxed as ordinary income. But then, if you are maxed out of I-bonds space and must invest in bonds in a taxable account, I suppose you are taking on the tax-inefficiency on-board any way.

A better way to invest would be to invest purely in VTSAX in taxable account, and increase the bonds in your tax-advantaged space (401k etc.). But then you will have to rebalance, you have to take the initiative, and do it without emotions when you have just seen your taxable account cut by a third and you are "potentially" exposing even your tax-advantaged account for possible future losses. Are you sure you can bring yourself to do it? What did you actually do in March 2020, going by the most recent downturn?

==============================

A very-far out target retirement fund (like Target Retirement 2065 for example), carries a 90:10 portfolio and that could be a one-fund solution that does the automatic rebalancing for you. Their glide path does not start until 25 years before the target date (so not until 2040 for the 2065 fund, for example); until then they stick with the 90:10 allocation. But this is where my first comment of "I do not know what your take on international equities is" comes in. These target funds carry 40% of their investments in international equities. To me, that is quite high, twice of what I would want in my portfolio.
Nice idea, I didn’t think of that possibility. Thanks for doing the math. Saves me the hassle of rebalancing bonds as well.

For simplicity, I just said all my equities were in VTSAX, but I’m actually 80/20 domestic/international.

Thanks for the response!
Ed 2
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Re: Rebalance with I bonds

Post by Ed 2 »

Brianjp18 wrote: Mon Sep 13, 2021 4:42 pm
JoMoney wrote: Mon Sep 13, 2021 8:11 am In my opinion Series I Savings Bonds are a great "bond" option for a lot of purposes, but not so great if you're planning on trading or rebalancing with them. If it were me, I would just direct my new contributions to whichever was out of line and continue doing that until it was back in line with my desired allocation. I wouldn't worry about actually trading anything to rebalance in a hurry.
Fair enough. That was my initial thought. It will be a slow rebalance (if there was a significant stock drop), but at least I’d be going in the right direction. Just feels like a slow process would not take advantage of stocks “on sale” if I slowly rebalance by switching my contribution allocation to all equities. Makes sense though, thanks for the feedback.
I held I Bonds since 1999 close to 90k with unrealised gains on them. We sold all IBond and bought AAPL and VTSAX first and last time I pulled the trigger and guess when? Drums...... you guessed it , in March 2020 . Unless you have super sale in equities you can successfully “rebalance”. Keep in mind you would have to pay tax on capital gains . In my situation it was good move for us . We had huge enough return after rebalancing and gladly paid taxes as the result.
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
exodusNH
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Re: Rebalance with I bonds

Post by exodusNH »

Brianjp18 wrote: Mon Sep 13, 2021 7:54 am I’m currently at 90/10 with my 10% in bonds being 10k in Ibonds. From this point on my contributions will go into VTSAX at 90% and total bond fund at 10%, but currently I don’t have any bond money in a mutual fund to make rebalancing easy.

If the stock market drops to a degree where I would have to rebalance and buy more VTSAX, any suggestions on rebalancing considering my entire bond allocation is currently in an I bond?

I would imagine it will take awhile to build up my total bond fund as it is slowly accumulating with my work 401k contributions. My other contributions go into My Roth IRA which I’m trying to keep 100% equity.
If you're at 90/10, it sounds like you've got a long investing path ahead of you. You don't need to rebalance monthly or even quarterly. If your allocation gets out of whack for a few months, it's not going make a big difference long-term. Just have your new money go in at your desired allocation or to whatever is too low.

After 12 months, you can sell your I Bonds by sacrificing the last 3 months of interest. At that point, you could consider it part of your emergency fund. They are the best inflation-protected option available since the Treasure doesn't clawback any interested credited in the event of deflation like they do with TIPS. Of course, as you've experienced, not being able to rebalance them is a bit of an annoyance.
MattB
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Re: Rebalance with I bonds

Post by MattB »

exodusNH wrote: Mon Sep 13, 2021 4:57 pm If you're at 90/10, it sounds like you've got a long investing path ahead of you. You don't need to rebalance monthly or even quarterly. If your allocation gets out of whack for a few months, it's not going make a big difference long-term. Just have your new money go in at your desired allocation or to whatever is too low.
This.

Don't worry about selling bonds to buy stocks when your portfolio is $100k. The difference between 90/10 and 80/20, for example, isn't significant when you're just getting started. Just direct new contributions to whichever asset class is underweight.
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beyou
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Re: Rebalance with I bonds

Post by beyou »

You can only buy so much in I bonds. Do not sell them to rebalance. Keep buying stocks or bonds in your brokerage and annually get more ibonds. Over time the ibonds will be a smaller part of your portfolio and you will have other bonds to sell or more income to buy new equity when prices are depressed.

I do count ibonds (and E) as part of my portfolio but have never sold them ever. Some do count them as emergency funds (not part of AA). But then I would have to sell when I have an emergency. I think of the savings bonds as part of my 401k/IRA tax deferred account, for use in retirement.
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Brianjp18
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Re: Rebalance with I bonds

Post by Brianjp18 »

exodusNH wrote: Mon Sep 13, 2021 4:57 pm
Brianjp18 wrote: Mon Sep 13, 2021 7:54 am I’m currently at 90/10 with my 10% in bonds being 10k in Ibonds. From this point on my contributions will go into VTSAX at 90% and total bond fund at 10%, but currently I don’t have any bond money in a mutual fund to make rebalancing easy.

If the stock market drops to a degree where I would have to rebalance and buy more VTSAX, any suggestions on rebalancing considering my entire bond allocation is currently in an I bond?

I would imagine it will take awhile to build up my total bond fund as it is slowly accumulating with my work 401k contributions. My other contributions go into My Roth IRA which I’m trying to keep 100% equity.
If you're at 90/10, it sounds like you've got a long investing path ahead of you. You don't need to rebalance monthly or even quarterly. If your allocation gets out of whack for a few months, it's not going make a big difference long-term. Just have your new money go in at your desired allocation or to whatever is too low.

After 12 months, you can sell your I Bonds by sacrificing the last 3 months of interest. At that point, you could consider it part of your emergency fund. They are the best inflation-protected option available since the Treasure doesn't clawback any interested credited in the event of deflation like they do with TIPS. Of course, as you've experienced, not being able to rebalance them is a bit of an annoyance.
Good advice, thanks 👍
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Brianjp18
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Re: Rebalance with I bonds

Post by Brianjp18 »

beyou wrote: Mon Sep 13, 2021 8:45 pm You can only buy so much in I bonds. Do not sell them to rebalance. Keep buying stocks or bonds in your brokerage and annually get more ibonds. Over time the ibonds will be a smaller part of your portfolio and you will have other bonds to sell or more income to buy new equity when prices are depressed.

I do count ibonds (and E) as part of my portfolio but have never sold them ever. Some do count them as emergency funds (not part of AA). But then I would have to sell when I have an emergency. I think of the savings bonds as part of my 401k/IRA tax deferred account, for use in retirement.
That’s a good approach. They are such a steady risk-free way to save money, I too would rather just leave them alone rather than selling to rebalance or dedicating to emergency fund.
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Brianjp18
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Re: Rebalance with I bonds

Post by Brianjp18 »

MattB wrote: Mon Sep 13, 2021 6:09 pm
exodusNH wrote: Mon Sep 13, 2021 4:57 pm If you're at 90/10, it sounds like you've got a long investing path ahead of you. You don't need to rebalance monthly or even quarterly. If your allocation gets out of whack for a few months, it's not going make a big difference long-term. Just have your new money go in at your desired allocation or to whatever is too low.
This.

Don't worry about selling bonds to buy stocks when your portfolio is $100k. The difference between 90/10 and 80/20, for example, isn't significant when you're just getting started. Just direct new contributions to whichever asset class is underweight.
That’s a good point. I’m probably to caught up in trying to maintain the exact targeted AA, when it probably isn’t that crucial early on. If my stocks allocation gets low, I will just direct all new money into stocks rather than trying to sell bonds and buy stocks.
exodusNH
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Re: Rebalance with I bonds

Post by exodusNH »

Brianjp18 wrote: Mon Sep 13, 2021 8:59 pm
MattB wrote: Mon Sep 13, 2021 6:09 pm
exodusNH wrote: Mon Sep 13, 2021 4:57 pm If you're at 90/10, it sounds like you've got a long investing path ahead of you. You don't need to rebalance monthly or even quarterly. If your allocation gets out of whack for a few months, it's not going make a big difference long-term. Just have your new money go in at your desired allocation or to whatever is too low.
This.

Don't worry about selling bonds to buy stocks when your portfolio is $100k. The difference between 90/10 and 80/20, for example, isn't significant when you're just getting started. Just direct new contributions to whichever asset class is underweight.
That’s a good point. I’m probably to caught up in trying to maintain the exact targeted AA, when it probably isn’t that crucial early on. If my stocks allocation gets low, I will just direct all new money into stocks rather than trying to sell bonds and buy stocks.
At the beginning, your savings rate is the biggest driver of how much you'll retire on. For example, if my portfolio increases by a nominal 6%, that's nearly 3x what I can contribute. But I've been putting money in my 401k for 22-24 years.

Save as much as you can while you are young. Time is your friend. Drive your car for an extra year or three. Don't feel the need to buy a house just because your friends do. But also don't live so frugally that you deprive your current self in favor of your future self, but driving a car for 12 years instead of 10 is not really a sacrifice.

Oh, and at some point, you're going to meet someone at a work event that tries to sell you Whole Life/Universal Life/permanent life insurance. Run away from them!
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Clever_Username
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Re: Rebalance with I bonds

Post by Clever_Username »

While I do use Series I savings bonds as part of my conservative asset allocation, I have enough other bonds in tax-advantaged accounts that I can use to rebalance. At the moment, it's an old 403(b) with a good number of total bond and total market that I can rebalance with.

If your current portfolio is sufficiently small that one year's worth of Series I Bonds is a significant portion, then contributions matter a lot more than getting asset percentages exactly, or even nearly, right. Keep buying them and later on you can figure out how to get the right percent of bonds at various spots -- such as when you have a workplace plan with good bond and stock funds available, or a sizable IRA from rollovers.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
Topic Author
Brianjp18
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Re: Rebalance with I bonds

Post by Brianjp18 »

exodusNH wrote: Mon Sep 13, 2021 11:12 pm
Brianjp18 wrote: Mon Sep 13, 2021 8:59 pm
MattB wrote: Mon Sep 13, 2021 6:09 pm
exodusNH wrote: Mon Sep 13, 2021 4:57 pm If you're at 90/10, it sounds like you've got a long investing path ahead of you. You don't need to rebalance monthly or even quarterly. If your allocation gets out of whack for a few months, it's not going make a big difference long-term. Just have your new money go in at your desired allocation or to whatever is too low.
This.

Don't worry about selling bonds to buy stocks when your portfolio is $100k. The difference between 90/10 and 80/20, for example, isn't significant when you're just getting started. Just direct new contributions to whichever asset class is underweight.
That’s a good point. I’m probably to caught up in trying to maintain the exact targeted AA, when it probably isn’t that crucial early on. If my stocks allocation gets low, I will just direct all new money into stocks rather than trying to sell bonds and buy stocks.
At the beginning, your savings rate is the biggest driver of how much you'll retire on. For example, if my portfolio increases by a nominal 6%, that's nearly 3x what I can contribute. But I've been putting money in my 401k for 22-24 years.

Save as much as you can while you are young. Time is your friend. Drive your car for an extra year or three. Don't feel the need to buy a house just because your friends do. But also don't live so frugally that you deprive your current self in favor of your future self, but driving a car for 12 years instead of 10 is not really a sacrifice.

Oh, and at some point, you're going to meet someone at a work event that tries to sell you Whole Life/Universal Life/permanent life insurance. Run away from them!
Sound advice, as always. thanks! This last year I have switched my mindset to focus on saving. Really, this is year one of learning about investing. I had some money managed by an advisor my dad used, but once I started reading I realized I needed to take control immediately. Looking forward to a lifetime of learning about the subject.
Topic Author
Brianjp18
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Re: Rebalance with I bonds

Post by Brianjp18 »

Clever_Username wrote: Mon Sep 13, 2021 11:19 pm While I do use Series I savings bonds as part of my conservative asset allocation, I have enough other bonds in tax-advantaged accounts that I can use to rebalance. At the moment, it's an old 403(b) with a good number of total bond and total market that I can rebalance with.

If your current portfolio is sufficiently small that one year's worth of Series I Bonds is a significant portion, then contributions matter a lot more than getting asset percentages exactly, or even nearly, right. Keep buying them and later on you can figure out how to get the right percent of bonds at various spots -- such as when you have a workplace plan with good bond and stock funds available, or a sizable IRA from rollovers.
Good advice. Starting to see some consistency through several responses and I will definitely be following the advice to focus more on contributions and not be worried about exact AA this early on.
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