Author Topic: Index fund allocation and rebalancing questions  (Read 2891 times)

Norwegian72

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Index fund allocation and rebalancing questions
« on: October 26, 2014, 08:45:55 AM »
Hello,

Any input on this would be much appreciated.

My SO and I have x dollars in cash. I am currently in the process of transferring this into index funds. I am averaging this over a period of total 12 months. There is a limit of available index funds here in Norway, but the number is growing. We are 4 months into this transfer process.

My planned allocation is as follows:
1/12 in Norwegian Index Fund
1/6 in Nordic Index Fund
1/4 in Emerging Market Index Fund (I may not have the term right, but it is mainly Asian, Latin America, Europe and Africa in decreasing order of allocation)
1/2 in Global Index Funds (we use 2 different index funds, but they seem to correlate, about 50% exposure to USA, the rest in other developed markets)

Any thoughts on the allocation?

When our transfer is complete, we will probably continue to save a fixed amount each month which fingers crossed should be reasonably substantial.

Can we use the buy-in from when our transfer is complete (May next year) to achieve rebalancing in the beginning? I was thinking that we would buy into these index funds so that the allocation we have is reasonably intact. Any thoughts on whether this is a viable/smart strategy?

Also, are there any views on number of rebalances per year? I am going for once a year, if it is needed, as recommended by many sources.

Best Regards

TN_Steve

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Re: Index fund allocation and rebalancing questions
« Reply #1 on: October 26, 2014, 10:33:16 AM »
Norway may be (probably is) different in legal and organizational structure for funds from where most people on this site are posting. 

In US, funds not in a retirement sheltered account would be subject to taxes (if owed) on any rebalancing--including during your twelve month funding exercise.  Thus, if I were doing that, I'd try to keep the initial funding close to targets by allocating the last several transfers to whichever funds were out of line after 6-9 months (if any).

As for rebalancing, in the US markets, there have been several studies indicating that a period longer than 1 year may be optimal, albeit carrying more risk.  Example:   http://www.efficientfrontier.com/ef/100/rebal100.htm   In any event, one year is the generally accepted rule of thumb in our markets, and doing anything shorter tends not to help much on returns--and runs into higher tax liabilities under US law if you are in a non-sheltered account.

Probably best for you to find local sources though.  Good luck!

Mr. Frugalwoods

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Re: Index fund allocation and rebalancing questions
« Reply #2 on: October 26, 2014, 10:40:58 AM »
My planned allocation is as follows:
1/12 in Norwegian Index Fund
1/6 in Nordic Index Fund
1/4 in Emerging Market Index Fund (I may not have the term right, but it is mainly Asian, Latin America, Europe and Africa in decreasing order of allocation)
1/2 in Global Index Funds (we use 2 different index funds, but they seem to correlate, about 50% exposure to USA, the rest in other developed markets)

Any thoughts on the allocation?

I have no specific knowledge of Norwegian fund access, but that seems like an OK allocation for the equities part of your portfolio.  I'm assuming you also have a bonds/cash allocation?

Quote
When our transfer is complete, we will probably continue to save a fixed amount each month which fingers crossed should be reasonably substantial.

Can we use the buy-in from when our transfer is complete (May next year) to achieve rebalancing in the beginning?

Yes.  It's pretty common to use your continuing investments to re-align your portfolio with your chosen allocation percentages.  In years where you are investing a lot or the markets don't dramatically move... this might take care of it.  In big years though you'll need to actually sell and buy securities.

Quote
Also, are there any views on number of rebalances per year? I am going for once a year, if it is needed, as recommended by many sources.

Once a year is pretty standard and seems fine to me.  I'd only want to incur transaction costs once a year.

Norwegian72

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Re: Index fund allocation and rebalancing questions
« Reply #3 on: October 26, 2014, 11:13:49 AM »
Thank you for your responses.

To add a little more information. After transfer we will have:
25% in index funds.
12,5% in a single stock which pays dividends. This is a company we are heavily invested in and which we have little fear should deprecate in value.
62,5% cash

This is our liquid assets, in addition we also have retirement funds. These are I believe untouchable until retirement. I have transferred all of mine into a single index fund (only 1 was available in the portfolio out of 70), whereas we couldn't find a better allocation for my wife's retirement fund, these are managed funds unfortunately. There are limitations due to choice determined by employer.

I am in my early forties so no bonds yet. We are happy with taking on risk considering where we are at today.

I know we have a lot of cash, however we might need this for short term expenses due to reallocation. They are in high-interest accounts (of course today this barely keeps up with inflation).

Norwegian72

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Re: Index fund allocation and rebalancing questions
« Reply #4 on: October 26, 2014, 11:16:58 AM »
I forgot to mention, the aforementioned index funds (apart from the retirement funds) are not in sheltered.

I believe we will rebalance going forward as we buy in, and on a year by year basis should the need arise. Any selling would incur taxes on the gains.

Another question, is rebalancing also done if everything underperforms?

TN_Steve

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Re: Index fund allocation and rebalancing questions
« Reply #5 on: October 26, 2014, 11:45:03 AM »

Another question, is rebalancing also done if everything underperforms?

If you are rebalancing, yes, it is done whether funds lose or gain--unless they all perform more or less equally.  (One approach is to not even bother rebalancing if things are not more than X% out of whack, which could sometimes lead to no action.  Of course, to get the benefit of rebalancing, X has to be pretty small number, and you should have it as a hard number not subject to fudging.)

Note that at some US institutions, you can have the rebalancing scheduled to happen automatically on, say, January 15 of every year.  To my limited knowledge though, that is only readily available for funds held in employer-sponsored tax sheltered accounts....