Asset Allocation "new money" vs "all money"?

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ZWorkLess
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Asset Allocation "new money" vs "all money"?

Post by ZWorkLess »

Are there any articles out there exploring the approach of managing AA via only new money as opposed to the general AA approach of managing your total assets at any point in time in each class? I.e., I want a 50/50 "new money" AA, so each year, I put half my new investment monies into stocks, half into bonds. I re-invest earnings/dividends/interest into whichever asset class they were produced by.

In time, this would presumably mean that my overall AA would tilt much more towards stocks due to their expected faster growth. Presumably, this would result in one choosing a bond-heavier AA, say a 60/40 "new money" split instead of an 80/20 "all money" AA.

This has been muddling around in my brain for a while, but I haven't seen it discussed anywhere, nor have I found anything with a quick google (choosing the right search terms probably is a hindrance.) I was wondering if any numbers people have played with this approach? Any links or thoughts?

Thanks!
Thesaints
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Re: Asset Allocation "new money" vs "all money"?

Post by Thesaints »

For you as an investor, only the "all money" AA matters.
If you want to know how much the allocation shifts over time, just account for the different expected returns. It is straightforward algebra.
Triple digit golfer
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Re: Asset Allocation "new money" vs "all money"?

Post by Triple digit golfer »

Are you referring to never rebalancing? That is, choose your AA, invest money that way, but don't reallocate the balances?

Over time your AA will get pretty far out of whack. If you want to be at 60/40, why would you let your portfolio drift to 80/20?

If you really don't care if it drifts, that's fine and you have your answer. I've thought about something like this myself. Contribute 80/20 and let it go where it goes. I'm not married to any particular AA and chose 80/20 somewhat arbitrarily.
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ZWorkLess
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Re: Asset Allocation "new money" vs "all money"?

Post by ZWorkLess »

Triple digit golfer wrote: Thu Nov 18, 2021 5:37 pm Are you referring to never rebalancing? That is, choose your AA, invest money that way, but don't reallocate the balances?

Over time your AA will get pretty far out of whack. If you want to be at 60/40, why would you let your portfolio drift to 80/20?

If you really don't care if it drifts, that's fine and you have your answer. I've thought about something like this myself. Contribute 80/20 and let it go where it goes. I'm not married to any particular AA and chose 80/20 somewhat arbitrarily.
Yes, that is what I'm referring to. I'm curious to know if the math has been done by someone already, as it seems like a basic concept that presumably has been explored thoroughly.

I'm very comfortable with market risk for a variety of reasons (and have been in the market since the 90s, so through plenty of ups and down), so right now, I'm at about 80/20 in our early-mid 50s and likely will stay close to this AA until we approach retirement in 3 to 10 years and get a (very) big windfall at that time (more than equal to the rest of our assets, so we will have tons of lots of after-tax cash to balance things however we want at that time.) At that time, I will be essentially starting over with our AA with the windfall, and I am trying to prepare myself for that point by getting a plan in place and gaining a better understanding of the markets. While I'm pretty comfortable with my understanding of the stock market (in particular, US stocks), I feel much too ignorant wrt bond investing to develop a plan/strategy that I can feel confident in. I have a few years to dial in the strategy . . . so I'm in the learning phase.

Anyway, I've just started thinking more seriously about when/how to move some more assets into bonds as we get closer to retirement, and whenever I think about AA and rebalancing, it just seems kinda weird / self-defeating to constantly be taking earnings out of one "winning" asset class and moving it to a "less winning" class. I can't quite convince myself (yet) that it makes sense, which was why I was asking about it. I have a lot of respect for the Bogleheads approach and have been a Boglehead for decades prior to knowing what the word meant or who Bogle was (I.e., low cost broad market index funds, buy and hold, no blinking during downturns.) But I never owned bonds until 2015, when I started purchasing TD 2035. Prior to that I was only in SP500 and TSM funds (and individual stocks, which were gifted by my dad and which I translated into SP500 over time). I have yet to buy any bonds outside of TD2035.

So far, I've never needed to "rebalance" actively, as I have just aimed new money where I want it to go to nudge my AA towards wherever I want it to be, or very rarely, I have shifted a small chunk of money from one fund to the other for the same reason. Much of my liquid assets are in that TD2035 fund that rebalances itself. . . so I just keep putting new money into both that TD fund and a Total Stock Market fund . . . (as I want more US stock exposure and more stocks overall than my age-appropriate TD fund, and this seems like an easier way to achieve that than switching to a higher number of funds that I'd have to rebalance/etc.)

I don't have to think about AA more than once a year or so, when I might slightly shift the allocation of new funds to one account or another, or if I am starting a "new" savings strategy, I just aim that new money towards whatever end of things I feel I want to shift towards, and that keeps me on track. I tend to just nudge things towards where I want them to be, rarely making particularly significant moves. I.e., few months ago, I moved about 5% of my liquid assets from that TD2035 fund to Total Stock Market, and that was, by far, the biggest single shift I've ever made at one time, which actually only changed my stocks/bonds AA by a point or two (while also nudging up the US end of the US/world balance). Generally, my shifts are tiny and gradual and have generally just been keeping my AA at about 80/20 while my TD fund has been gradually shifting towards a more conservative allocation (73/26/1 today). . .

More recently, as I've been beginning to study up bonds and considering beginning to accumulate I-bonds, I'm finding that it's just hard to convince myself bonds are worth the bother or the reduced expectations on returns. So, I am exploring the whole concept of "why bother with bonds" and that prompted my query. I'm not arguing about it at all, just trying to educate myself.

Thanks much.
Triple digit golfer
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Re: Asset Allocation "new money" vs "all money"?

Post by Triple digit golfer »

The math will show that you're likely to beat a rebalanced portfolio. This isn't magic, but simply a function of holding a more aggressive AA. But with it comes risk.

Regarding rebalancing, think of it not as selling winners and buying losers, but as selling high and buying low, locking in equity profits after excellent market performance or buying cheap equities after poor market performance.
AnnetteLouisan
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Re: Asset Allocation "new money" vs "all money"?

Post by AnnetteLouisan »

So far, and I’m still earning my BH wings so this is not ideologically correct, nor do I have a taxable account yet, or a large portfolio, I just switch up the new money. I feel like whatever I already bought is bought, what’s done is done, and it’s hard to know if switching it up at today’s prices makes sense. So when I rebalance I just shift gears on new money. Of course that means the rebalance is slower.
Thesaints
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Re: Asset Allocation "new money" vs "all money"?

Post by Thesaints »

ZWorkLess wrote: Thu Nov 18, 2021 6:09 pm .. whenever I think about AA and rebalancing, it just seems kinda weird / self-defeating to constantly be taking earnings out of one "winning" asset class and moving it to a "less winning" class. I can't quite convince myself (yet) that it makes sense, which was why I was asking about it.
I think you are mixing two different concepts when you say "less winning". One thing is the expected return. Stocks have a higher expected return than bonds. So, why would anyone not invest 100% in stocks ?
Well, there is another side of the story, which has to do with volatility. Stocks are also much more volatile than bonds, which means that they are exposed to much larger swings. While on the long term a 100% stocks portfolio would tend to beat the return of a, let's say, 60% stocks portfolio, it would also experience much larger value swings in both directions.
Therefore, to answer your question, stocks are the "more winning" class only on average. Bonds will often beat stocks over shorter time spans and it makes total sense to take money out of the class that just won a lot to put it in the class that going forward my be the winning one.
Thesaints
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Re: Asset Allocation "new money" vs "all money"?

Post by Thesaints »

AnnetteLouisan wrote: Thu Nov 18, 2021 7:13 pm So far, and I’m still earning my BH wings so this is not ideologically correct, nor do I have a taxable account yet, or a large portfolio, I just switch up the new money. I feel like whatever I already bought is bought, what’s done is done, and it’s hard to know if switching it up at today’s prices makes sense. So when I rebalance I just shift gears on new money. Of course that means the rebalance is slower.
Depending on the size of your contributions compared to the size of your portfolio, you may never be able to fully rebalance.
That is, never, until the market will rebalance things for you, on the downside.
AnnetteLouisan
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Re: Asset Allocation "new money" vs "all money"?

Post by AnnetteLouisan »

I contribute over 60k a year and save over 80k a year on top of that but my portfolio is only 1.2 million. So I’m comparatively agile relative to the others here in that regard. I’m not even at my target AA yet and overshooting equity won’t kill me.
Thesaints
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Re: Asset Allocation "new money" vs "all money"?

Post by Thesaints »

AnnetteLouisan wrote: Thu Nov 18, 2021 7:48 pm I contribute over 60k a year and save over 80k a year on top of that but my portfolio is only 1.2 million. So I’m comparatively agile relative to the others here in that regard. I’m not even at my target AA yet and overshooting equity won’t kill me.
So you are contributing 140k/year ? It may seem a lot, but your portfolio value may skyrocket in just a few years and become heavy on stocks to such a measure that even contributing 140k in bonds may not be able to correct your AA substantially. Of course, if your target AA is 90% stocks, that is not an issue. It is if you are 50/50 instead: you will see your portfolio migrate to 70/30 and 140k in bonds may only correct it to 60/40.
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Re: Asset Allocation "new money" vs "all money"?

Post by AnnetteLouisan »

I’m 15/85 now, heading to 25/75 or max 30/70. My life story is in a nearby post (with about 200 comments).

I contribute the max to my t401k, catch up and rIRA, plus a very generous match on the 401, plus 10k in ibonds. It adds up to over 60k a year.

Yes, I also save 83k in banks. I’m trying to get more of that invested.

The whole situation is crazy. I only spend under 40k a year, partly because of my 76k a year tax bite on top of that, but mostly because I don’t have kids, a spouse or dependent relatives. I’m going to spend more soon because I need a new place to live.

But having too high an equity allocation Isn’t going to be one of my problems any time soon. My main issue now is not getting there fast enough.
Last edited by AnnetteLouisan on Sun Nov 21, 2021 3:52 pm, edited 1 time in total.
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Re: Asset Allocation "new money" vs "all money"?

Post by grabiner »

It doesn't make financial sense to allocate new and old money differently. If you have $30,000 in your IRA, with $6,000 just contributed, the best way to allocate the $30,000 doesn't depend on what the old $24,000 was previously invested in.

However, there may be tax reasons. If you are overweighted in US stock and all your US stock is in a taxable account, you may not want to sell any for a capital gain. New investments, and dividends from the US stock funds, can go to your international stock funds and bond funds to do a partial rebalance.

My own Investment Policy Statement says that I will only pay a capital-gains tax to rebalance if I am outside a tolerance band, and do not expect that normal inflows will fix this. I have never needed to do that, although I came close in 2007. My target allocation to emerging markets was 10%, and I was getting close to the 15% limit with the rise in emerging markets; I would have sold some if the bull market had continued one more year. Instead, all markets fell, allowing me to sell some of my overweighted position for a capital loss.

(edited to correct wording error).
Last edited by grabiner on Sun Nov 21, 2021 5:37 pm, edited 1 time in total.
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Mike Scott
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Re: Asset Allocation "new money" vs "all money"?

Post by Mike Scott »

It sounds like you need to back up a step and figure out a plan and AA. Then use your "new" money and dividends etc to move you in the direction of your plan. This should decrease, but may not eliminate, the need to do any major moves for rebalancing. if you want more stocks, just buy them. The new money is not different than the old money. Balanced funds will take care of all of this for you but are generally more tax efficient in tax advantaged accounts.
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ZWorkLess
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Re: Asset Allocation "new money" vs "all money"?

Post by ZWorkLess »

Thanks all for sharing your perspectives. As always, you're a veritable treasure trove of good thinking wrt finance.

I haven't answered my original question to my satisfaction yet . . . although you've all answered it sufficiently that I'm probably not going to even think about it anymore, lol.

But I thought y'all should know that you've convinced me (intentionally or accidentally) to take steps towards more bonds in my life. I opened TreasuryDirect accounts for myself and my spouse tonight and will buy 10k each in I bonds this week and repeat annually indefinitely.

I'm going to look at the I-bonds as emergency funds (after the first year, but that's not a problem to have just 20k locked up at a time) and then as part of our conservatively invested liquid reserves to facilitate pre-SS early retirement expenses. We probably won't need to use them (ever), but it is good to increase our liquidity over the next few years, and these I-bonds will help with that.

I'm happy with how the I bonds will help me balance our AA, as I like the idea of Target Date funds for retirement, but would prefer that the Vanguard Target Date funds be more heavily weighted towards US stocks and bonds. Besides adding more bonds to help nudge our portfolio back towards the stock:bond ratio we want, the annual I bond purchases will also help push our AA towards where I want it to be wrt US vs international . . . as by adding the I bonds to our taxable portfolio along with the Total Stock Market that I already hold in the taxable account will improve that balance, IMHO.

Oh, also, @Mike Scott -- I do have a plan and an AA . . . it's just a bit complicated and not easy to translate into bogleheads speak as most of our assets are tied up in our business and RE, so our retirement plan is very complex, and the stocks:bonds part of it isn't terribly important right now, but WILL be very important when we cash out our business & RE in a few years and then have to live off that windfall . . . so I'm mostly in the learning stage now, as I'm really just "playing" with maybe 20% of our actual retirement monies . . . as the rest is totally tied up and not in the markets. I just need to be ready to do a great job managing it when we do get that windfall, and I need to do what I can now to maximize our options later -- like starting stashing money in I bonds since you're limited to 20k/yr . . . etc.

Anyway, just wanted y'all to know your words weren't wasted and to thank you all for taking the time to share your thoughts with me. THANK YOU!
dbr
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Re: Asset Allocation "new money" vs "all money"?

Post by dbr »

ZWorkLess wrote: Tue Nov 23, 2021 9:00 pm
Oh, also, @Mike Scott -- I do have a plan and an AA . . . it's just a bit complicated and not easy to translate into bogleheads speak as most of our assets are tied up in our business and RE, so our retirement plan is very complex, and the stocks:bonds part of it isn't terribly important right now, but WILL be very important when we cash out our business & RE in a few years and then have to live off that windfall . . . so I'm mostly in the learning stage now, as I'm really just "playing" with maybe 20% of our actual retirement monies . . . as the rest is totally tied up and not in the markets. I just need to be ready to do a great job managing it when we do get that windfall, and I need to do what I can now to maximize our options later -- like starting stashing money in I bonds since you're limited to 20k/yr . . . etc.

In such a case the dominant consideration may be how your stock and bond investments interact with your other businesses. For example I could easily imagine that someone with a small business and real estate would want all cash liquid holdings as a reserve for the businesses. Your risk for return proposition is in the businesses. Or maybe it doesn't work that way. You would have to tell us.

In any case the question about new and old money does not make any investment sense generally.
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ZWorkLess
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Re: Asset Allocation "new money" vs "all money"?

Post by ZWorkLess »

dbr wrote: Wed Nov 24, 2021 10:35 am
ZWorkLess wrote: Tue Nov 23, 2021 9:00 pm
Oh, also, @Mike Scott -- I do have a plan and an AA . . . it's just a bit complicated and not easy to translate into bogleheads speak as most of our assets are tied up in our business and RE, so our retirement plan is very complex, and the stocks:bonds part of it isn't terribly important right now, but WILL be very important when we cash out our business & RE in a few years and then have to live off that windfall . . . so I'm mostly in the learning stage now, as I'm really just "playing" with maybe 20% of our actual retirement monies . . . as the rest is totally tied up and not in the markets. I just need to be ready to do a great job managing it when we do get that windfall, and I need to do what I can now to maximize our options later -- like starting stashing money in I bonds since you're limited to 20k/yr . . . etc.
In such a case the dominant consideration may be how your stock and bond investments interact with your other businesses. For example I could easily imagine that someone with a small business and real estate would want all cash liquid holdings as a reserve for the businesses. Your risk for return proposition is in the businesses. Or maybe it doesn't work that way. You would have to tell us.

In any case the question about new and old money does not make any investment sense generally.
Well, we keep cash reserves in the business -- essentially it has its own emergency fund and also a fund for capital improvements, etc. (We are now able to pay cash for all improvements/new equipment/etc, whereas in the early years, those were paid for over time. The only debt we now have associated with work is a relatively small mortgage with under 6 years remaining.) Our industry is consistent and dependable and impossible to outsource. We've weathered all sorts of trials over the span of ownership (2 recessions & 1 pandemic, etc.), and started out (massively) in debt. So, as far as risk at work, right now it is very low comparatively and primarily really only around my spouse (key producer) getting ill. For that, we have massive amounts of disability insurance and those emergency funds/cash buffers at work and at home, along with a "disaster plan" to facilitate liquidation if the worst case arose.

Overall, we have taken MASSIVE financial risks since starting taking loans for school a quarter century ago . . . and lived on the edge (very, very deeply in debt) financially through our 20s to 40s. We got out of the red only maybe a decade ago, and have rapidly been improving our position in the black since then. We've been lucky, gritted it out through scary times, and we've worked our butts off. :) We took tons of risks for decades and it worked out well for us, and we're definitely now in the position of enjoying reducing our risks, which is lovely.

That's part of the reason I just have trouble embracing bonds --- By managing all that financial craziness for a couple decades, I've essentially inured myself against financial stress. The level of risk & stress we faced for years makes jiggles/drops/bounces in the stock market seem like nothing. Also, my experiences holding stocks/bonds began with a gift of $1200 worth of an about-to-go-public stock in my mid 20s. That super volatile (and very lucrative) stock was my first experience with the market, but it didn't lead me to buy any other individual stocks (ever), and I cashed it all out over several years . . . (over 6 figures in total). And I've held SOME stocks ever since then -- but only broad market indices, never another individual stock or even any managed funds -- so I've seen things go up/down/stagnant for extended periods numerous time and am pretty blasé about the whole thing. Markets go up, they go down, just like the sun. Whatever.

I simply choose to have faith that "if we keep doing the right things, it'll work out IN THE END." That's essentially the mantra that kept me from actually going insane when our debt mountain looked like Everest and the path to financial security looked perilous and nearly impossible. I'd make a plan, I'd track our progress, and we'd just keep trucking. It's worked so far, and I choose to have faith that it'll keep working out.

I'm a "big picture" "in the end" thinker . . . which is good in that I really do NOT fall prey to impulse fear-based financial decisions. It also means that I largely ignore the random ups/downs of various investment choices -- only really giving consideration to the expected long term outcome & the risks associated with the LONG TERM outcome. I don't care if my portfolio rocks up and down like it's a dinghy in a hurricane; as long as that dinghy lands on a tropical island with nice linens & drinks with umbrellas, I'm good with it. :)
dbr
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Re: Asset Allocation "new money" vs "all money"?

Post by dbr »

ZWorkLess wrote: Wed Nov 24, 2021 2:59 pm
dbr wrote: Wed Nov 24, 2021 10:35 am
ZWorkLess wrote: Tue Nov 23, 2021 9:00 pm
Oh, also, @Mike Scott -- I do have a plan and an AA . . . it's just a bit complicated and not easy to translate into bogleheads speak as most of our assets are tied up in our business and RE, so our retirement plan is very complex, and the stocks:bonds part of it isn't terribly important right now, but WILL be very important when we cash out our business & RE in a few years and then have to live off that windfall . . . so I'm mostly in the learning stage now, as I'm really just "playing" with maybe 20% of our actual retirement monies . . . as the rest is totally tied up and not in the markets. I just need to be ready to do a great job managing it when we do get that windfall, and I need to do what I can now to maximize our options later -- like starting stashing money in I bonds since you're limited to 20k/yr . . . etc.
In such a case the dominant consideration may be how your stock and bond investments interact with your other businesses. For example I could easily imagine that someone with a small business and real estate would want all cash liquid holdings as a reserve for the businesses. Your risk for return proposition is in the businesses. Or maybe it doesn't work that way. You would have to tell us.

In any case the question about new and old money does not make any investment sense generally.
Well, we keep cash reserves in the business -- essentially it has its own emergency fund and also a fund for capital improvements, etc. (We are now able to pay cash for all improvements/new equipment/etc, whereas in the early years, those were paid for over time. The only debt we now have associated with work is a relatively small mortgage with under 6 years remaining.) Our industry is consistent and dependable and impossible to outsource. We've weathered all sorts of trials over the span of ownership (2 recessions & 1 pandemic, etc.), and started out (massively) in debt. So, as far as risk at work, right now it is very low comparatively and primarily really only around my spouse (key producer) getting ill. For that, we have massive amounts of disability insurance and those emergency funds/cash buffers at work and at home, along with a "disaster plan" to facilitate liquidation if the worst case arose.

Overall, we have taken MASSIVE financial risks since starting taking loans for school a quarter century ago . . . and lived on the edge (very, very deeply in debt) financially through our 20s to 40s. We got out of the red only maybe a decade ago, and have rapidly been improving our position in the black since then. We've been lucky, gritted it out through scary times, and we've worked our butts off. :) We took tons of risks for decades and it worked out well for us, and we're definitely now in the position of enjoying reducing our risks, which is lovely.

That's part of the reason I just have trouble embracing bonds --- By managing all that financial craziness for a couple decades, I've essentially inured myself against financial stress. The level of risk & stress we faced for years makes jiggles/drops/bounces in the stock market seem like nothing. Also, my experiences holding stocks/bonds began with a gift of $1200 worth of an about-to-go-public stock in my mid 20s. That super volatile (and very lucrative) stock was my first experience with the market, but it didn't lead me to buy any other individual stocks (ever), and I cashed it all out over several years . . . (over 6 figures in total). And I've held SOME stocks ever since then -- but only broad market indices, never another individual stock or even any managed funds -- so I've seen things go up/down/stagnant for extended periods numerous time and am pretty blasé about the whole thing. Markets go up, they go down, just like the sun. Whatever.

I simply choose to have faith that "if we keep doing the right things, it'll work out IN THE END." That's essentially the mantra that kept me from actually going insane when our debt mountain looked like Everest and the path to financial security looked perilous and nearly impossible. I'd make a plan, I'd track our progress, and we'd just keep trucking. It's worked so far, and I choose to have faith that it'll keep working out.

I'm a "big picture" "in the end" thinker . . . which is good in that I really do NOT fall prey to impulse fear-based financial decisions. It also means that I largely ignore the random ups/downs of various investment choices -- only really giving consideration to the expected long term outcome & the risks associated with the LONG TERM outcome. I don't care if my portfolio rocks up and down like it's a dinghy in a hurricane; as long as that dinghy lands on a tropical island with nice linens & drinks with umbrellas, I'm good with it. :)
Thanks for talking about your journey. :sharebeer
Jimsad
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Re: Asset Allocation "new money" vs "all money"?

Post by Jimsad »

One thing OP has to consider is one’s risk tolerance may change as their portfolio size grows .
I did not care much in 2008 crash when my portfolio was very small
Now that it is >15 times bigger , I do not think I would be able to handle the same % loss of my portfolio as I lost then in a crash

Especially as OP said he will get a large inheritance soon , he may want to be more conservative
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ZWorkLess
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Re: Asset Allocation "new money" vs "all money"?

Post by ZWorkLess »

Jimsad wrote: Thu Nov 25, 2021 4:07 pm One thing OP has to consider is one’s risk tolerance may change as their portfolio size grows .
I did not care much in 2008 crash when my portfolio was very small
Now that it is >15 times bigger , I do not think I would be able to handle the same % loss of my portfolio as I lost then in a crash

Especially as OP said he will get a large inheritance soon , he may want to be more conservative
I'm sorry I wasn't clear in the OP. I don't have any inheritances in my future. The expected windfall is from the sale of our small business and the associated real estate -- which will occur when we are about ready to retire in probably 4 to 8 years.

I do understand about risk tolerances shifting. That's a good point. I anticipate that happening the day we cash out of our business & commercial RE (where the majority of our wealth now resides -- about as illiquid as you can get, even harder to liquidate than our house), thereby suddenly increasing our portfolio of liquid assets from X to, for example, 5X AND also have now essentially gotten the last windfall we can ever reasonably expect to get AND we are now at or near the starting line of Retirement.

So, I'm essentially looking ahead towards that big day right now, trying to anticipate what I will want our portfolio to look like from then onwards. I know that will involve much more bonds than the 80/20 split I've been maintaining; likely closer to 60/40. Beginning maximum I bond purchases NOW seems smart since annual purchases are so restricted. It's not like I could dump 1/2 our windfall into I-bonds (ever, let alone at one time), so starting now helps move the needle on our current and future AA & also lays some groundwork for being a bit closer to my ideal retirement AA when we get there and have that cash (already taxed) windfall to allocate.

I am force-feeding myself shifting towards a gradually more conservative allocation now, in any event. That's why I'm buying 20k in I bonds this week and will do it again annually. That's not huge, but it makes a nibble towards a more conservative allocation and will continue to do so as we purchase annually.

FWIW, our TD funds (probably 2/3 our total stocks/bonds) are, of course, on a glide path towards more bonds, too. I had been buying TSM in our accounts essentially to prevent that glide path from actually gliding, while also helping me more heavily weight US stocks. Adding the I-bonds to the mix will allow our glide path to actually glide. :)
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Re: Asset Allocation "new money" vs "all money"?

Post by FoundingFather »

ZWorkLess wrote: Thu Nov 18, 2021 5:10 pm Are there any articles out there exploring the approach of managing AA via only new money as opposed to the general AA approach of managing your total assets at any point in time in each class? I.e., I want a 50/50 "new money" AA, so each year, I put half my new investment monies into stocks, half into bonds. I re-invest earnings/dividends/interest into whichever asset class they were produced by.

In time, this would presumably mean that my overall AA would tilt much more towards stocks due to their expected faster growth. Presumably, this would result in one choosing a bond-heavier AA, say a 60/40 "new money" split instead of an 80/20 "all money" AA.

This has been muddling around in my brain for a while, but I haven't seen it discussed anywhere, nor have I found anything with a quick google (choosing the right search terms probably is a hindrance.) I was wondering if any numbers people have played with this approach? Any links or thoughts?

Thanks!
The best data I found on this point was a paper by vanguard a few years back that discussed the benefits and downsides of rebalancing (attempted to place a link below). The quick summary is that rebalancing causes you to have a lower return, over time, when you are selling a potentially high return asset (i.e. stocks) to rebalance into a lower return asset (i.e. bonds), but that it does reduce volatility, and improves your risk adjusted return.

Since I don't mind volatility, I have decided to simply allocate new money according to my desired asset allocation, and to let it ride however it wants. I also like how much this simplifies my investing. If I have $100,000 to invest, and I am 80/20, then I already know how to place my money, without having to make calculations involving my entire portfolio. I consider this soft rebalancing, since it involves new money only. Test it in portfolio visualizer and you can see what you think of how it makes your portfolio act.

https://personal.vanguard.com/pdf/ISGGBOT.pdf

Founding Father
“They accomplished a revolution... [and] reared the fabrics of governments which have no model on the face of the globe... which it is incumbent on their successors to improve and perpetuate.” James Madison
dbr
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Re: Asset Allocation "new money" vs "all money"?

Post by dbr »

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Last edited by dbr on Fri Nov 26, 2021 11:23 am, edited 1 time in total.
dbr
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Re: Asset Allocation "new money" vs "all money"?

Post by dbr »

FoundingFather wrote: Fri Nov 26, 2021 11:02 am
The best data I found on this point was a paper by vanguard a few years back that discussed the benefits and downsides of rebalancing (attempted to place a link below). The quick summary is that rebalancing causes you to have a lower return, over time, when you are selling a potentially high return asset (i.e. stocks) to rebalance into a lower return asset (i.e. bonds), but that it does reduce volatility, and improves your risk adjusted return.

Since I don't mind volatility, I have decided to simply allocate new money according to my desired asset allocation, and to let it ride however it wants. I also like how much this simplifies my investing. If I have $100,000 to invest, and I am 80/20, then I already know how to place my money, without having to make calculations involving my entire portfolio. I consider this soft rebalancing, since it involves new money only. Test it in portfolio visualizer and you can see what you think of how it makes your portfolio act.

https://personal.vanguard.com/pdf/ISGGBOT.pdf

Founding Father
There is nothing wrong with that if the consequences fit your objectives.

The general overall concept behind rebalancing is to control risk, and the scenario in which risk materializes is that more risky higher returning assets come to dominate the holdings and must be sold down to limit risk. Obviously that results in a lower returning portfolio than one would have if one just let the portfolio run to higher returning more risky assets.

If an investor is indifferent to risk then he would not rebalance when risk increases. One could ask in the context of asset allocation why such an investor would not just invest 100% in the highest risk asset all along.

So the problem that actually is hard and not completely obvious is how to optimize combinations of return and risk. One example of that problem is trying to maximize safe withdrawal income from a portfolio where the ability to do so increases with return but is depressed by risk (meaning volatility) due to the negative effect of bad sequences of return. Note that if you manage to accumulate enough wealth you don't have to worry about optimizing safe withdrawal rate. Also, insufficient accumulation of wealth can't be rectified by messing with asset allocation. Also, taking maximum risk does not guarantee accumulating sufficient assets.
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ZWorkLess
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Re: Asset Allocation "new money" vs "all money"?

Post by ZWorkLess »

FoundingFather wrote: Fri Nov 26, 2021 11:02 am
ZWorkLess wrote: Thu Nov 18, 2021 5:10 pm Are there any articles out there exploring the approach of managing AA via only new money as opposed to the general AA approach of managing your total assets at any point in time in each class? I.e., I want a 50/50 "new money" AA, so each year, I put half my new investment monies into stocks, half into bonds. I re-invest earnings/dividends/interest into whichever asset class they were produced by.

In time, this would presumably mean that my overall AA would tilt much more towards stocks due to their expected faster growth. Presumably, this would result in one choosing a bond-heavier AA, say a 60/40 "new money" split instead of an 80/20 "all money" AA.

This has been muddling around in my brain for a while, but I haven't seen it discussed anywhere, nor have I found anything with a quick google (choosing the right search terms probably is a hindrance.) I was wondering if any numbers people have played with this approach? Any links or thoughts?

Thanks!
The best data I found on this point was a paper by vanguard a few years back that discussed the benefits and downsides of rebalancing (attempted to place a link below). The quick summary is that rebalancing causes you to have a lower return, over time, when you are selling a potentially high return asset (i.e. stocks) to rebalance into a lower return asset (i.e. bonds), but that it does reduce volatility, and improves your risk adjusted return.

Since I don't mind volatility, I have decided to simply allocate new money according to my desired asset allocation, and to let it ride however it wants. I also like how much this simplifies my investing. If I have $100,000 to invest, and I am 80/20, then I already know how to place my money, without having to make calculations involving my entire portfolio. I consider this soft rebalancing, since it involves new money only. Test it in portfolio visualizer and you can see what you think of how it makes your portfolio act.

https://personal.vanguard.com/pdf/ISGGBOT.pdf

Founding Father
I have to say it's a relief to see someone can articulate the benefits as well as the risks of rebalancing! Thanks for the link --- that's really helpful! I think I've had trouble with the concept since most of our long term investments have been in things that you can NOT rebalance. You can't exactly (easily) sell off part of a building when it goes up in value relative to the rest of your holdings, lol. When wealth is built on a small number of large, indivisible, long term investments (for us, our commercial RE, our business that lives on the commercial RE, and our home . . . outside of the stocks/bonds), rebalancing doesn't really factor into your thinking. I think you've nailed it with rebalancing reducing returns while also reducing volatility, and that article you linked points to an improved "risk adjusted return" from rebalancing. . . That all makes sense to me and also explains why my instinct has been to not rebalance, since volatility doesn't bother me. It also makes sense to reduce volatility/risk when those investments become shorter term (I.e, we get older and closer to needing to spend it) and/or we become more dependent on them (again, as we get closer to retirement.) I think I can generally stick with rebalancing via new money for now, and will just need to get a real handle on tax-managing rebalancing before we get that windfall in a few years and have large taxable investment accounts.

Thanks all for an interesting discussion!
exodusNH
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Re: Asset Allocation "new money" vs "all money"?

Post by exodusNH »

ZWorkLess wrote: Thu Nov 18, 2021 5:10 pm Are there any articles out there exploring the approach of managing AA via only new money as opposed to the general AA approach of managing your total assets at any point in time in each class? I.e., I want a 50/50 "new money" AA, so each year, I put half my new investment monies into stocks, half into bonds. I re-invest earnings/dividends/interest into whichever asset class they were produced by.

In time, this would presumably mean that my overall AA would tilt much more towards stocks due to their expected faster growth. Presumably, this would result in one choosing a bond-heavier AA, say a 60/40 "new money" split instead of an 80/20 "all money" AA.

This has been muddling around in my brain for a while, but I haven't seen it discussed anywhere, nor have I found anything with a quick google (choosing the right search terms probably is a hindrance.) I was wondering if any numbers people have played with this approach? Any links or thoughts?

Thanks!
You can certainly direct new money into the under-represented asset. With taxable accounts, this is often the best option. With tax-deferred, it depends on what the size is of your new contributions vs what's already there. E.g., if you have a $2M 401k, $20K isn't going to many any real difference in your allocation. You'll need to handle that by buying/selling.

You don't need to maintain your AA on a day-by-day basis. Quarterly to yearly is all you need. It's perfectly fine to choose a allocation for new money once a year after you've rebalanced to your target AA. You don't need to maintain your AA to even 1%. E.g., if your target is 75/25, you don't need to rebalance if it gets to 76/24. (In fact, you'll probably do better if you let it drift between 80/20 and 70/30 before rebalancing.)

https://www.kitces.com/blog/best-opport ... hresholds/

As you get closer to retirement, you want to make sure you have enough in cash and bonds (after pension/social security) to fund all of your expenses for some number of years, probably 5-10. This way, if you happen to retire at the start of a bear market, you don't kneecap your returns for the rest of your life. Having one or two bad years at the start of retirement, where you're forced to sell stocks when they're down is a big problem and basically impossible to recover from for a typical retiree. (Sequence of returns risk, sometimes abbreviated as SORR.) People who retire with >=40x expenses don't have to worry about such things if they're not hoping to leave a large inheritance.
inbox788
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Re: Asset Allocation "new money" vs "all money"?

Post by inbox788 »

ZWorkLess wrote: Wed Nov 24, 2021 2:59 pmI'm a "big picture" "in the end" thinker . . .
So what's your desired AA glidepath? To me, that's the big picture, and seems missing. We know the TD glidepath, which is very different from yours in many ways. All these are variances are dancing around the "true" target, if that's really your goal. And if not, what is?

New money with wide rebalance bands is a tax efficient way to rebalance taxable accounts that allow some more mistracking for tax efficiency. An acceptable tradeoff. Using the TD may wind up causing more deviation and course corrections, which may be an unnecessary complication. Too many changes or rebalancing too frequently doesn't add value, and might actually be worse. And fewer rebalancing often give you higher risk AA, which is likely to outperform at a riskier level, which is not a bad thing, but do it because it's planned, not accidentally.
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Re: Asset Allocation "new money" vs "all money"?

Post by AnnetteLouisan »

I like that articulation of the mindset, “big picture, in the end thinker,” in which medium term volatility is ok because of confidence that it will all work out in the end.

It highlights why other mindsets struggle with the risks of investing, fundamentally not having that confidence, and reflect that in their AA. I think it’s not enough to say one mind set is just a worrier, but obviously having a big picture vision and faith in the future help greatly in any ambitious endeavor.
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ZWorkLess
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Re: Asset Allocation "new money" vs "all money"?

Post by ZWorkLess »

inbox788 wrote: Sun Nov 28, 2021 4:19 am
ZWorkLess wrote: Wed Nov 24, 2021 2:59 pmI'm a "big picture" "in the end" thinker . . .
So what's your desired AA glidepath? To me, that's the big picture, and seems missing. We know the TD glidepath, which is very different from yours in many ways. All these are variances are dancing around the "true" target, if that's really your goal. And if not, what is?

New money with wide rebalance bands is a tax efficient way to rebalance taxable accounts that allow some more mistracking for tax efficiency. An acceptable tradeoff. Using the TD may wind up causing more deviation and course corrections, which may be an unnecessary complication. Too many changes or rebalancing too frequently doesn't add value, and might actually be worse. And fewer rebalancing often give you higher risk AA, which is likely to outperform at a riskier level, which is not a bad thing, but do it because it's planned, not accidentally.
Thanks for your comments and questions. Composing my reply has actually been really helpful to me, as I've slogged through formalizing my ISP just over the last few days, and articulating my thoughts clearly enough for someone else to understand them is really helpful in editing that ISP -- both in my head and in my written ISP.

In writing this up, I have realized that essentially, long term, I am going to likely need to move to a 3 fund style portfolio. Right now, I'm able to maintain my AA goals with what I've got, but I now realize that after our windfall and once we're in retirement, rebalancing will become difficult if I keep owning TD funds alongside all the individual indexes/items. The TD fund has offered me simplicity which has been really valuable, and I had thought I wanted to be able to mostly use the TD fund long term. However, I've come to appreciate the flexibility and tax-management advantages of the "3 fund" approach, and since the bulk of our retirement savings will be in taxable accounts, the TD fund makes less sense overall. And, keeping any significant amount of TD funds just makes it MORE complicated to manage our AA long term. So, migration to a "3 fund" style (actually 5 to 7 items) portfolio is coming my way.

Planned long-term 5-7 item portfolio of:

1) Total US Stock Index (taxable & tax-deferred)
2) Total International Stock Index (taxable & tax-deferred)
3) Total US Bond Index (tax-deferred only)
*4) Consider possibly also a TIPS Index of some sort (recommendations welcome!) (tax-deferred only)
5) Tax Managed US Bond Index of some sort (recommendations welcome!) (taxable only)
6) I-Bonds (taxable only)
*7) Consider possibly adding an International Bond Index fund (tax-deferred only)

* Maybe or maybe not include these two.

Currently, I just have:

1) TD2025 (tax deferred only)
2) Total Stock (taxable and tax-deferred)
3) I bonds (taxable only)

Of note, other significant holdings that we will still have post-retirement, which I am including in case they influence thoughts on the above items:

A) We will own our home(s) outright within a few years of retirement if we haven't already paid off our small, low interest, remaining mortgage.

B) +/- May retain part or all of the commercial RE associated with our business when we sell the business at/near retirement. If we end up retaining the RE (which we will own outright by retirement), we'd have an income stream from a long term lease that would cover 1/3 or more of our monthly budget. This decision on keeping the RE or not will totally depend on the details of the exact deal. If we end up retaining the RE, that means we'd most likely have gotten top dollar for the business (because the buyers who don't want the RE are also the buyers who pay very high multiples for our business type), in which case, we wouldn't actually be dependent on that RE income at all, as our retirement $$ goals would have already been met, because, barring health or other catastrophe, we won't put the business for sale until we're confident that the sale could meet our goals even if we got the low end of the market value. If we did retain all the RE, it's value would be about 20% of our nest egg. We could sell off parts of it, though (without impacting the value of the part we'd lease), in which case the retained/leased RE might only represent more like 10-15% of our nest egg.

FWIW, including our home, at the time of retirement (very variable depending on timing and market conditions), we'll be at very roughly 20% deferred tax accounts, 40% brand new already-taxed money to the taxable account, 20% taxable that has been building value over 0-10 years (so holds varying amounts of capital gains), 15-20% a paid off overly large/expensive home, but we'd probably keep this much money in our home even if we moved.)

*****

So, let's see . . . more answers from my ISP . . . (It's complicated, and it's in progress, so please be patient).

Yes, I have what I think are wide rebalance bands, planning for an annual rebalancing/review/plan update and using RMDs (Inherited IRA) and new money to maintain my AA. Since the large majority of our portfolio is now in tax-deferred space, and will remain so until retirement when our windfall is received/taxed/invested, maintaining our AA w/o any tax consequences is easy for now. But I see that maintaining target AA will become difficult once most of our funds are in taxable accounts and also when the "old money" is dwarfing "new money," so migration to 3 fund style portfolio is now the plan.

My desired glide path moves about a point a year and then holds steady at 60:40 for the duration. Starting at 75:25 now, 70:30 in 2025, 65:35 in 2030, 60:40 >=2035. If we retire before 2035 (likely between 2028 and 2030), I would move the AA to 60:40 at that time (easy to adjust AA at that time due to windfall). Rebalancing to occur when I exceed 3% deviation (ie, stocks over 78 or under 72 right now). Currently, I'm right at 77:23 (recently nudging down from 81:19 ish), so in the sweet spot.

Post-windfall, we'll plan to hold steady at 60:40 (+/- 3%) indefinitely, with a final decision on that once we're at that windfall moment, because if we're are substantially above the high end of our target nest egg goal, then I'll reserve a minimum set $$ amount in bonds (essentially 40% of my goal nest egg) and allow the rest of the $$ to be in stock.

US:International stocks target stays steady at 70-75% US: 25-30% International with annual rebalancing occurring when deviating 3+ points out of the range, so when International is less than 22% or more than 33%. Currently, I'm right at 29% International, so in the zone. Current new-money AA should keep this in the zone for at least the next year, but can rebalance with new funds (or shifts within tax-deferred space) as needed.

US:International bond target is 0-20% International, >80% US. Rebalancing whenever exit the target zone, but not beginning rebalancing until 2023 (or after 2022 I bond purchases at the earliest), as I'm overhauling that segment right now with the new addition of I bonds to the portfolio. Currently, I'm at 26% International, which is a huge improvement over the 60:40 that was my pre-I-bond-addition since all my bond holdings were then within the TD fund (with a 60:40 allocation in that fund). When I thought I'd keep the TD fund long term, I figured that I'd only buy other bonds that were US bonds. Now that I've decided to drop the TD fund, I am leaning towards sticking with 0% International, but I may end up adding an International Bond Index. If I did that, I'd keep it in tax-deferred and keep it at maybe 10-15% of bonds, which would only be 4-6% of portfolio, which seems so small as to probably not be worth the bother. I'll be thinking on this and won't act on adding an International Bond fund anytime soon. Probably would add it in at the time of the windfall if ever.

Thank you all again for helping me think through this all! It's amazing how the process of writing out and then talking through my investment strategy significantly helps me improve that strategy! (I guess that's why we're all here!)
inbox788
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Re: Asset Allocation "new money" vs "all money"?

Post by inbox788 »

ZWorkLess wrote: Sun Nov 28, 2021 10:45 amThanks for your comments and questions. Composing my reply has actually been really helpful to me, as I've slogged through formalizing my ISP just over the last few days, and articulating my thoughts clearly enough for someone else to understand them is really helpful in editing that ISP -- both in my head and in my written ISP.
Glad to see you're making progress on your IPS and understanding the issues TD funds have in a taxable account.
A) We will own our home(s) outright within a few years of retirement if we haven't already paid off our small, low interest, remaining mortgage.
I expect the mortgage will become insignificant. Owning a home outright is great longevity insurance. Maintenance (taxes, repairs, etc.) is the biggest risk, but hopefully not a burden (larger home = larger maintenance), especially if it's a small fraction of rent or mortgage payments. And as a last resort, that larger home can get you a larger reverse mortgage or you can downgrade and cash out.
FWIW, including our home, at the time of retirement (very variable depending on timing and market conditions), we'll be at very roughly 20% deferred tax accounts, 40% brand new already-taxed money to the taxable account, 20% taxable that has been building value over 0-10 years (so holds varying amounts of capital gains), 15-20% a paid off overly large/expensive home, but we'd probably keep this much money in our home even if we moved.)
With only 20% in tax-deferred, looks like you'll wind up doing most of the AA adjustments in taxable. For tax efficiency, that 20% tax-deferred might best be used for all bonds, and as long as equities outperform, that percentage will shrink. I've been looking at the "tax deferred bomb or torpedo" issue, but haven't found my answer, just that it requires a lot of consideration for individual situation and future knowledge. I haven't found a number or a good way to get a number to figure out if it's becoming a problem, but keeping the total amount in tax deferred lower most probably better as the accounts grow larger.
My desired glide path moves about a point a year and then holds steady at 60:40 for the duration. Starting at 75:25 now, 70:30 in 2025, 65:35 in 2030, 60:40 >=2035. If we retire before 2035 (likely between 2028 and 2030), I would move the AA to 60:40 at that time (easy to adjust AA at that time due to windfall). Rebalancing to occur when I exceed 3% deviation (ie, stocks over 78 or under 72 right now). Currently, I'm right at 77:23 (recently nudging down from 81:19 ish), so in the sweet spot.
When you're starting out, new contributions make can make a big difference to AA, but as the account grows large, the new contributions become minor tweaks. Adding $25k one year to a $100,000 account can change your 75/25 AA to anywhere between 60/40 to 80/20 (75k/50k to 100k/25k), while an account over $1M barely moves the needle. Ultimately, the market is in charge and a 25% market move on $75k is $18.75k vs $187.5k+. There's a limit to using current year additions to correcting for big market moves, and you have to decide to actively rebalance or live with wider deviation from desired AA. I don't think there's a right or wrong answer, just whether you planned for it or not, and if you did, whether you're following the plan.
Post-windfall, we'll plan to hold steady at 60:40 (+/- 3%) indefinitely, with a final decision on that once we're at that windfall moment, because if we're are substantially above the high end of our target nest egg goal, then I'll reserve a minimum set $$ amount in bonds (essentially 40% of my goal nest egg) and allow the rest of the $$ to be in stock.
I'm not quite there yet, but I see all bonds in my tax-deferred accounts in the not so distant future, and I've got to decide whether to pay some capital gains tax selling stocks to buy bonds in taxable accounts or allow my AA to drift a bit more. You might face this type of decision on an ongoing basis, especially if you hold on to a tight 3% rebalance band as well as deciding if you really want 60/40 or allow the stocks to grow out of range.
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