Author Topic: Rebalancing? General Confusion Regarding Asset Allocation  (Read 655 times)

FIRE-Man

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Rebalancing? General Confusion Regarding Asset Allocation
« on: July 09, 2018, 07:31:44 PM »
Fellow Mustachians,

I could really use some help with how to rebalance, along with some advice on if/how to diversify. Currently I feel very exposed as the majority of our holdings are equities (AA below), and I'm starting to wonder if the steam in the stock market is finally letting up. I know we can't time the market, and I'm not interested in doing so, but I would like to once and for all have a "set it and forget it" way to invest. Here is the current AA and strategy....

160k TSP in L2040 - Maxing each year
175K TSP in 100% C - Maxing each year

Roth IRA - 50k in VTSAX - Maxing each year
Separate Roth IRA - 25K VTSAX 12K VBTLX (Total 37K) - Maxing each year

Brokerage Account - 28K VTSAX - 9600/year

40K Emergency Fund

My question is how do I rebalance, and should I? Should I simply sell VTSAX and buy more VBTLX to an 80/20 ratio? Will I lose money doing so ? Does Vanguard have a good "one and done" fund with similar broad US equity AND bond exposure, and insanely low expense ratio ? Is there another fund with international exposure and all the aforementioned ? SO MANY QUESTIONS!

I thought I had all this down pretty good, but basically we've just been good at saving, and not actually tracking progress. Any help here would be greatly appreciated.

Frankies Girl

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Re: Rebalancing? General Confusion Regarding Asset Allocation
« Reply #1 on: July 09, 2018, 08:40:44 PM »
You're listing your funds you're invested in, but that's not saying how much of what type of fund you planned to hold, and your reasoning for why and what your goals are, etc.

So: you need to figure out how much of what type of funds you want to hold, based off of your goals/risk assessment, etc... and to figure this, may also help to figure out your investment policy statement to help guide you.

Reading material:
https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Investment_policy_statement
https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

If you are wanting a super simple 80/20 stock/bond holding in index funds, then you're just needing to sort out which is closest to the lowest cost available in your accounts (if unable to use VTSAX and VBTLX across the board). And yes, trying to figure out when the market may or may not be running out of steam is a fool's game. Just figure out a nice and simple index fund portfolio, figure out your goals and triggers and get it all properly laid out in an IPS and refer back to it in times of worry; that's your blueprint for the future no matter what the markets do, follow your own path marked down and you'll likely end up where you planned to be.

And if you're using Vanguard's index funds (VTSAX and VBTLX for the most part), then you are already diversified quite nicely. Index funds are by their very nature "buying the entire market" so they contain thousands of companies currently trading. They are the definition of being diversified.

So as far as figuring an AA and rebalancing...

For an example, I have my asset allocation set to be:

75% stock
10% REIT (real estate fund)
10% bonds
5% cash (high interest savings acct)

I have in my IPS that I don't rebalance until it's out of range more than 5% in any direction and I'll check it at most every 6 months. So a few times a year, I'll run the numbers and not bother if it's only 2-4% or so. I use Squawkfox's free excel rebalance sheet (4 square US couch potato).

If it is out of range, then I sell the high flyer and buy the low/sale priced of the funds I chose to hold to get them back into acceptable range; and I make sure to do so in the account(s) that are going to be the most tax efficient (like I'll only have my bonds in a tax sheltered account). Very simple.

terran

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Re: Rebalancing? General Confusion Regarding Asset Allocation
« Reply #2 on: July 09, 2018, 08:41:10 PM »
If you want set and forget it you could look at a target date fund. I'm guess thats what L2040 is in your TSP. Here's the vanguard 2040 fund: https://investor.vanguard.com/mutual-funds/profile/VFORX. Looks like it's about 85/15 stocks/bonds right now. Vanguard target date funds hold international as 40% of their stock allocation. They also hold international bonds in addition to domestic.

MDM

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Re: Rebalancing? General Confusion Regarding Asset Allocation
« Reply #3 on: July 09, 2018, 08:41:26 PM »
Does Vanguard have a good "one and done" fund with similar broad US equity AND bond exposure, and insanely low expense ratio ?
Vanguard LifeStrategy Funds or Vanguard Target Retirement Funds, depending on whether you want your asset allocation constant or following a preset "glide path", would work.

You can rebalance within tax-advantaged accounts without tax consequences.

Meeting your target AA within "several" percent is quite good enough.  The definition of "several" in this case is vague, but 5% is a reasonable guess for a lower bound.

jacoavluha

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Re: Rebalancing? General Confusion Regarding Asset Allocation
« Reply #4 on: July 09, 2018, 09:28:34 PM »
Gotta know your desired US and Intl stock and bond allocation to be able to help much.

The Lifestrategy and target funds at Vanguard are good but not quite as cheap as their constituent parts and not tax efficient if held in taxable brokerage.

If youre goal is about 80/20 with some Intl and lots of simplicity you could do L2050 in TSP, Lifestrategy growth in Vanguard tax protected accounts, then Id consider your brokerage and emergency funds combined and do something like 50:50 VT:VTEB ETFs

FIRE-Man

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Re: Rebalancing? General Confusion Regarding Asset Allocation
« Reply #5 on: August 05, 2018, 07:44:23 PM »
All,

Thank you for getting back to me, and sorry it took so long to respond. Work has been crazy, and with the wife deployed, it makes things chaotic for sure.

I appreciate the reading materials listed, and have determined that due to my time horizon (greater than 10 years), appetite for risk (moderate to high), and stability if income (very stable), I feel like the best allocation for my family would be 70% stocks, and 30% percent bonds. My questions are below:

1. Do I treat all money in taxable accounts the same ? If I have a total of 50k bonds between two different tax-advantaged accounts, can I simply raise the amount of bonds in ONE account to bring the overall portfolio into balance ? It seems to me that 30 percent bonds, is 30 percent bonds, no matter where you allocate it. Is this correct ?

2. Would you recommend that I take my TSP and move them to an L2050 fund ? or simply do a 70/30 split allocation to C (S&P 500) and F (Fixed Income/Barclay Aggregate Bond Index) funds ?

3. With the Roth IRA's do I simply sell the VTSAX and buy more VBTLX ?

4. Am I diversified enough ? I know some would recommend some international exposure, but it seems like other countries are getting no love/support from the US right now... Just a thought.

Thank you all again for the help and support. It means a lot.

terran

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Re: Rebalancing? General Confusion Regarding Asset Allocation
« Reply #6 on: August 05, 2018, 09:03:04 PM »
1) Yes that's exactly right. It's easiest just to consider you whole portfolio as one rather than trying to create your desired asset allocation in every account. This is also better from a tax efficiency standpoint because, for example, bond interest is taxed at higher earned income rates while most of the income from stocks will be qualified dividends and long term capital gains which are taxed at lower capital gains rates, so it's best to keep bonds in tax advantaged accounts.

2) Both of those options would be reasonable. The target date fund is more diversified, which is generally a good thing. It looks like L2040 (what you're in now) is 72% stock (C, S, and I funds) and 28% bonds (G and F funds). L2050 is more like 82/18. Both have international as 30% of their stock. Both have small caps (S fund) as about 23% of the domestic holdings, which makes them a good approximation of the total US stock market in terms of their US holdings (comparable to VTSAX). Generally target date funds have a higher expense ratio than other mutual funds, but I'm not sure that's the case with the TSP. Do you know if the expense ratio is different for the different options in the TSP?

3) Yes, you can just buy and sell investments in your IRA without any tax consequences. You might consider holding your bond allocation in the TSP since stocks have a higher expected growth and Roth withdrawals are tax free while traditional are not, so putting the higher growth thing in Roth makes sense.

4) You're right, all the trade war talk is hammering international stocks pretty good right now. That's a short term thing though, and it's just making international stocks cheaper to buy. If you think international companies are going to be significantly less profitable in the future than US companies,  then yeah, don't invest in them. If you think international companies might be profitable in the future and want some diversification in case they're more profitable than US companies in the future then you probably should invest in them. I would encourage you to consider making international 20-40% of your stock holdings.