Am I overfitting my allocation?

[aneel]

Each month, I have money transferred into my TIRA automatically, but I go in manually to buy the funds because I don't like the auto trading options that Schwab offers.  As a result I am assessing my Asset Allocation monthly, and I deposit funds such that when I complete the transaction, my account closely matches my desired AA.  In this way, I've never had to re-balance the account.

Is there a hidden risk to this method?  Do others do this?

Example:
Desired AA: 20% bond 80% Stock
Balance before monthly deposit of $1,000: Total - $9,000 --> $1,500 Bond (17%) || $7,500 Stock (83%)
Balance after monthly deposit of $1,000: $10,000 --> $2,000 Bond (20%) || $8,000 Stock (80%)

[SuperSecretName]

I do the same thing.

Nothing wrong with it as long as you actually make the purchases on schedule.  Don't try to time the market and wait for a better day.

[Kaspian]

Doing it manually, I'd very very cautious about favoring an asset class which is doing well and dumping more money there instead of where it really should go.  Without automation it's EXTREMELY difficult to overcome recency bias.  Even those keenly aware of it will somehow rationalize themselves into the bad behavior. 

But otherwise, yes--rebalancing with new money is great!  ...Until the portfolio gets large enough it's difficult to do.

[aneel]

Doing it manually, I'd very very cautious about favoring an asset class which is doing well and dumping more money there instead of where it really should go.  Without automation it's EXTREMELY difficult to overcome recency bias.  Even those keenly aware of it will somehow rationalize themselves into the bad behavior. 

But otherwise, yes--rebalancing with new money is great!  ...Until the portfolio gets large enough it's difficult to do.

I'm actually averse to buying into the ones doing well!  I always take the view that everything else is on sale.

[Retire-Canada]

Each month, I have money transferred into my TIRA automatically, but I go in manually to buy the funds because I don't like the auto trading options that Schwab offers.  As a result I am assessing my Asset Allocation monthly, and I deposit funds such that when I complete the transaction, my account closely matches my desired AA.  In this way, I've never had to re-balance the account.

Is there a hidden risk to this method?  Do others do this?

Example:
Desired AA: 20% bond 80% Stock
Balance before monthly deposit of $1,000: Total - $9,000 --> $1,500 Bond (17%) || $7,500 Stock (83%)
Balance after monthly deposit of $1,000: $10,000 --> $2,000 Bond (20%) || $8,000 Stock (80%)

I do that. I don't get too worried about rebalancing exactly, but I will look at my funds in the account I am adding to and throw money at the one that's furthest away from the desired allocation. There is no downside to doing this, but at the same time there is no reason to get things back to balance each month either.

[ChpBstrd]

Are you being charged transaction costs for doing it yourself?

[aspiringnomad]

I also do it this way with my Schwab account. If yours is also a taxable account, then rebalancing through new purchases is much more tax efficient than by selling recent winners and buying recent losers.

To ChpBstrd's question, hopefully the OP is buying one or more of the many ETFs in which Schwab charges no transaction fees.

[PaulMaxime]

My strategy is to put everything in to the one that is the farthest out of balance. Over time it evens out and if you have a transaction fee you are only paying one. Nothing wrong with what you are doing though.

[MustacheAndaHalf]

There is a hidden problem, but it's a good one when you hit it.  Eventually your collective assets may overwhelm your new contributions.  Maybe US stocks go +10% while international is a flat +0%, and your stock allocation has grown so large you can't make up the difference from new money you invest.  You could just keep trying with contributions, as long as things remain within the range you've set.  And if it swings too far it may mean your first time rebalancing.

[Cycling Stache]

Each month, I have money transferred into my TIRA automatically, but I go in manually to buy the funds because I don't like the auto trading options that Schwab offers.  As a result I am assessing my Asset Allocation monthly, and I deposit funds such that when I complete the transaction, my account closely matches my desired AA.  In this way, I've never had to re-balance the account.

Is there a hidden risk to this method?  Do others do this?

Example:
Desired AA: 20% bond 80% Stock
Balance before monthly deposit of $1,000: Total - $9,000 --> $1,500 Bond (17%) || $7,500 Stock (83%)
Balance after monthly deposit of $1,000: $10,000 --> $2,000 Bond (20%) || $8,000 Stock (80%)

This approach generally seems fine, but sounds like a lot of work.  By comparison, I buy my international stocks through my retirement account because it has the lowest expense ratios, so I just set my entire retirement allocation for new purchases to international, and all the rest of my automatic investments in my other accounts to VTSAX or the equivalent.  That allows my new investments to go in at approximately the correct allocation without any work.

I then rebalance the accounts once per year to get the correct asset allocation. 

The advantages as I see it are (1) the allocation is never so far out of whack during the year that it would make a meaningful difference since it was set correctly at the beginning of the year, and the new investments come in at the same allocation; and (2) the investments happen automatically.

(2) is the area where I would worry slightly with your approach.  Doing things manually and looking at asset allocation each time increases the temptation to market time by either holding off investing or avoiding an asset class that's going down.  Of course that's not what you plan on doing, but it sometimes takes a lot of discipline to make the correct decision each time.  Thus, if there's a way to get what you want by automating the investments (I realize you say that the options for you aren't good), I would take that and rebalance once a year, even if it means your assets are not perfectly allocated during the year.

[Retire-Canada]

If you can't add a few $K to your investments and re-balance manually each month in a reliable fashion you've got bigger problems to worry about than whether or not your investments are closely matching your asset allocation or not.

[McStache]

I also follow this method.  I have a spreadsheet set up where I update my account balances and the ETF prices and it tells me what my allocation should be / target number of shares for each.  It's still manual, but I think having the spreadsheet takes away some temptation to deviate.

[moof]

This is exactly what outfits like Betterment do, they call it a feature.  New contributions are used to rebalance, and only when things get too out of whack are any assets actually sold/bought to rebalance.

[SuperSecretName]

I also follow this method.  I have a spreadsheet set up where I update my account balances and the ETF prices and it tells me what my allocation should be / target number of shares for each.  It's still manual, but I think having the spreadsheet takes away some temptation to deviate.

If you use google sheets, it can pull in share price automatically for you.

=GoogleFinance("VTI")
=GoogleFinance("VTI","closeyest")
=GoogleFinance("VTI","changepct")

[Mr Mark]

If you can't add a few $K to your investments and re-balance manually each month in a reliable fashion you've got bigger problems to worry about than whether or not your investments are closely matching your asset allocation or not.

Yep. Plus don't overdo the decimal points -  less than a few % off ain't going to make much difference.  If swinging a few points happens to minimise fees fear not.

[McStache]

I also follow this method.  I have a spreadsheet set up where I update my account balances and the ETF prices and it tells me what my allocation should be / target number of shares for each.  It's still manual, but I think having the spreadsheet takes away some temptation to deviate.

If you use google sheets, it can pull in share price automatically for you.

=GoogleFinance("VTI")
=GoogleFinance("VTI","closeyest")
=GoogleFinance("VTI","changepct")

Thanks for the advice! I use excel and I tried to do a similar thing, but it errored more than it worked so I decided it wasn't worth it for looking up three tickers

[aneel]

I also do it this way with my Schwab account. If yours is also a taxable account, then rebalancing through new purchases is much more tax efficient than by selling recent winners and buying recent losers.

To ChpBstrd's question, hopefully the OP is buying one or more of the many ETFs in which Schwab charges no transaction fees.

This exactly

[2Birds1Stone]

So far I have been rebalancing my portfolio with new money as well.

[WallStreetPhysician]

Each month, I have money transferred into my TIRA automatically, but I go in manually to buy the funds because I don't like the auto trading options that Schwab offers.  As a result I am assessing my Asset Allocation monthly, and I deposit funds such that when I complete the transaction, my account closely matches my desired AA.  In this way, I've never had to re-balance the account.

Is there a hidden risk to this method?  Do others do this?

Example:
Desired AA: 20% bond 80% Stock
Balance before monthly deposit of $1,000: Total - $9,000 --> $1,500 Bond (17%) || $7,500 Stock (83%)
Balance after monthly deposit of $1,000: $10,000 --> $2,000 Bond (20%) || $8,000 Stock (80%)

What you're doing is perfect, and the ideal way to rebalance your portfolio (using new money to rebalance instead of selling shares). However, doing it on a monthly basis may be a bit overkill. You could re-balance as infrequently as annually and get most of the benefit from rebalancing.

-WallStreetPhysician