Do you rebalance with new money, or do you stick with set percentage based contribution?

[Cranberry44]

Let's say you aim for 60% US and 40% international in equities (VTI and VXUS, for example).

On payday you have 1k to invest.

Does this mean you...

1) always put 600 into US and 400 in ExUS? (And therefore NOT rebalance back to target position, but you still hold steady at 60/40 purchases)

Or

2) first look at your current allocation percentages and then divide the 1k into the two pots in whatever way gets you closest to the target allocation?

What are the theories behind which of these is the better approach?

NOTE: I don't own any bonds. So I'm looking for advice for myself and others with equities only.

[pizzy]

We rebalance with new money for the contributions that aren't automated.

[Hyperchicken]

Rebalancing is simply a means of staying at (or returning to) your desired asset allocation. There is no deeper arcane significance behind it.

In taxable account, rebalancing with new money allows avoiding realizing gains.

In tax-advantaged accounts, it does not matter.

[Cranberry44]

Rebalancing is simply a means of staying at (or returning to) your desired asset allocation. There is no deeper arcane significance behind it.

In taxable account, rebalancing with new money allows avoiding realizing gains.

In tax-advantaged accounts, it does not matter.

So I guess my question is about NOT rebalancing. Is there a point in not rebalancing, but holding your contribution rate the same. E.G. 60/40 contribution, even if the current allocation has become 80/20.

[KlangFool]

OP,

None of the above.

Let's say my portfolio is 60% A and 40% B

1) Let's assume that A is under allocated

2) For every pay check, I put 1K into A.

3) 3 months later, I check whether A or B is under allocation, then I put 1K into either A or B and continue for another 3 months.

You could change the period from 3 months to 6 months or 12 months. When the portfolio is big enough as compared to the new contribution, it hardly matters.

KlangFool

[HomerJ]

For the past 5-10 years (as I've approached retirement), I've just put 100% of new money into stocks, and rebalanced in only one direction, when stocks have a big run, and go way up.

I'm basically 50/50, and if stocks have a nice run (or I guess my 100% contributions push me up there) and I get to 55/45 or so, I sell stocks and buy bonds back to 50/50.

If stocks fall and I find myself at 45/55, or 40/60, I don't rebalance from bonds into stocks, I just keep putting new money 100% in stocks, which slowly rebalances me, and so far, in the past decade, stocks recover within a year or so anyway.

If you're farther from retirement, rebalancing from bonds to stocks during those times when stocks drop, so far, would have made one extra money. But I was more concerned about conserving my "safe" money than increasing my returns.

(Don't count on quick recoveries every time! Someday, we'll probably have another 5+ year bear market.. Not knowing when that will happen is why I've been conversative, less than 5 years from retirement)

[Hyperchicken]

So I guess my question is about NOT rebalancing. Is there a point in not rebalancing, but holding your contribution rate the same. E.G. 60/40 contribution, even if the current allocation has become 80/20.

Not really. If you want to be 60/40, then get to 60/40 today.

[SnowBog]

The best approach is whatever works for you over the long run.

The reality is, the markets - and thus your AA - are always in flux. You might be able to nudge it back towards target via contributions, but some market event will come along where contributions aren't enough. So it's usually a requirement - at some point - to rebalance.

Personally, I sit down in December/January and look at my AA, my planned contributions, and my anticipated ending AA based on those planned contributions. Some things I don't change - 100% of our Roth goes to equities even if we are over our stock AA, likewise we plan to buy EE & I Bonds even if bonds are over. But for accounts like our 401k and Taxable, I'll adjust contributions to nudge us back towards target. For example, if equities are a little under, a larger % of contributions to 401k + Taxable will go to equities.

Usually, I don't change this mid-year... Our accounts are large enough now where the market changes can exceed our contributions - so fiddling with the contributions multiple times doesn't really impact much. If the markets change enough that brings us more than 5% away from AA, then I'll look to rebalance.

With the potential exception if our "planned" contributions might get us back to be within 5%. As an example, we max out 401k (mix of equities and bonds) first, then switch to "Mega Backdoor Roth" (100% equities). So if our stocks AA is > 5% off, but after the planned MBR it is expected to be < 5%, I'll wait until the MBR is done and reassess. But when it's clear we can't "nudge" our way back - then I rebalance as appropriate.

[Doctor Rhythm]

Your example is a little different from the way this question usually comes up - which is rebalancing between assets that have very different expected risks and returns (eg, stocks:fixed income). There, letting your allocation drift over time would be expected to increase both returns and risk — which is what would happen if you contributed in a fixed ratio.

Most of my investments are automated, so I guess I’m in the fixed contribution camp. I’m also able to rebalance manually without incurring taxable gains, which is something to consider.

[HomerJ]

Rebalancing is simply a means of staying at (or returning to) your desired asset allocation. There is no deeper arcane significance behind it.

In taxable account, rebalancing with new money allows avoiding realizing gains.

In tax-advantaged accounts, it does not matter.

So I guess my question is about NOT rebalancing. Is there a point in not rebalancing, but holding your contribution rate the same. E.G. 60/40 contribution, even if the current allocation has become 80/20.

Hmm.. that seems weird to me. If my current allocation had drifted that far from my target allocation, I'd probably rebalance by selling stocks and buying bonds back to 60/40. Or I suppose you could change your new contributions to 0/100 bonds to try and rebalance back to 60/40 slowly.

[Cranberry44]

Your example is a little different from the way this question usually comes up - which is rebalancing between assets that have very different expected risks and returns (eg, stocks:fixed income). There, letting your allocation drift over time would be expected to increase both returns and risk — which is what would happen if you contributed in a fixed ratio.

Most of my investments are automated, so I guess I’m in the fixed contribution camp. I’m also able to rebalance manually without incurring taxable gains, which is something to consider.

I see. That makes sense. I don't own bonds right now, so that's why I'm thinking about it from this perspective.
Thanks!

[SmileyFace]

I only have US equities in Taxable so any extra money always goes to US equity.
A few times a year I rebalance in IRAs/401K to get back to my target allocation (when I am more than 2% over/under).

[Doctor Rhythm]

Your example is a little different from the way this question usually comes up - which is rebalancing between assets that have very different expected risks and returns (eg, stocks:fixed income). There, letting your allocation drift over time would be expected to increase both returns and risk — which is what would happen if you contributed in a fixed ratio.

I see. That makes sense. I don't own bonds right now, so that's why I'm thinking about it from this perspective.
Thanks!

Your case depends on how you view international equity versus US equity. Do you believe one has higher expected returns or higher volatility? Do you think owning international adds useful diversification over US-only? It’s a perennial debate here, which I’ll steer clear of, other than to say I’ve become more agnostic and don’t care if this ratio drifts.

[Cranberry44]

Your example is a little different from the way this question usually comes up - which is rebalancing between assets that have very different expected risks and returns (eg, stocks:fixed income). There, letting your allocation drift over time would be expected to increase both returns and risk — which is what would happen if you contributed in a fixed ratio.

I see. That makes sense. I don't own bonds right now, so that's why I'm thinking about it from this perspective.
Thanks!

Your case depends on how you view international equity versus US equity. Do you believe one has higher expected returns or higher volatility? Do you think owning international adds useful diversification over US-only? It’s a perennial debate here, which I’ll steer clear of, other than to say I’ve become more agnostic and don’t care if this ratio drifts.

Thanks -- this framing helped understand the kinds of questions I need to ask/answer to come to a reasonable solution.

[IowaFarmBoy]

We rebalance with new money for the contributions that aren't automated.

This what we did when we were contributing (before retirement). It kept us close. As time has passed I have realized that "close" is as good as "exact" when it comes to re-balancing.

[donaldfair71]

I contribute set amounts then rebalance in the Summer. Just works best for me but not right for everyone.

[Wiggums]

We only rebalance once a year and we try not generate a lot of extra taxes. I.e., makes changes on pretax side, adjust with new money or withdrawals coming out for living expenses.