Author Topic: Rebalancing during accumulation: Bonds with high expense ratios  (Read 1553 times)

neo von retorch

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Rebalancing during accumulation: Bonds with high expense ratios
« on: January 13, 2017, 09:13:59 AM »
So I have 3 investment accounts:

Vanguard (taxable)
Vanguard (IRA)
401K

For my 401K contributions, I went with the lowest expense ratio funds available (0.5-0.75% ugh) and they are all US Stocks. This has the unintended effect of pushing my AA towards stocks and away from any bonds (my desired AA is 90/10). Now that I'm ready to rebalance, my only straight forward way of rebalancing through contribution is by adding to my taxable account, which isn't the ideal place for bonds. Checking out my 401K options, and the Target Date funds have an expense ratio of 1.26%. There's a bond fund, but it's class A (meaning there's load) so the load is 4.5 and the expenses are 0.85%.

So my options are
1) Purchase Vanguard bond funds in my taxable account; pay taxes on dividends
2) Purchase overpriced bond funds in my 401K account; pay up-front load and relatively high expense ratio
3) Sell some stocks in my IRA account to buy bonds in my IRA account

Right now, #3 actually seems like my best option. (My new contributions would then go towards Vanguard International Stocks and/or US Stocks as needed.)

Any corrections or words of advice?

terran

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Re: Rebalancing during accumulation: Bonds with high expense ratios
« Reply #1 on: January 13, 2017, 09:50:37 PM »
Yes, load up on bonds in your IRA. There's no penalty for selling in an IRA.

Radagast

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Re: Rebalancing during accumulation: Bonds with high expense ratios
« Reply #2 on: January 13, 2017, 11:04:05 PM »
Yup, IRA seems best. Probably. What is your tax rate and what bond fund? Tax exempt bonds may also be appropriate depending on your objective.

neo von retorch

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Re: Rebalancing during accumulation: Bonds with high expense ratios
« Reply #3 on: January 14, 2017, 05:38:21 AM »
My upper slice of income is on the 25% range (Iie I think that translates to 15% capital gains but I'm not sure how qualified dividends are taxed.) My goal is simplicity, so I'm using Vanguard Total funds. IRA rebalance seems easy to do. Glad we thought of it :)

neo von retorch

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Re: Rebalancing during accumulation: Bonds with high expense ratios
« Reply #4 on: January 14, 2017, 06:01:51 PM »
Another question - since the target is to "rebalance 1-2 times per year" per your investment policy statement, but I'm contributing every month, do I ignore market fluctuations the other 5 (or 11) months of the year and just divide my contributions according to my target asset allocation?

TheAnonOne

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Re: Rebalancing during accumulation: Bonds with high expense ratios
« Reply #5 on: January 14, 2017, 06:12:38 PM »
Another question - since the target is to "rebalance 1-2 times per year" per your investment policy statement, but I'm contributing every month, do I ignore market fluctuations the other 5 (or 11) months of the year and just divide my contributions according to my target asset allocation?

It's a matter of preference. During accumulation you can either split it 50/50 per purchase and re-balance once a year. (assuming AA=50/50)

OR

You can (on buy) at that point buy the one that is "low" which probably negates the need for re-balancing unless there was some major market movement.

neo von retorch

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Re: Rebalancing during accumulation: Bonds with high expense ratios
« Reply #6 on: January 14, 2017, 06:40:43 PM »
Interesting. Since I'm going 100% US Stocks in my 401k, I can spread the rest of the AA each month based on the contribution amount... (or take a few minutes to update my spreadsheet with current values and rebalance throughout.) It'd probably be easier but I transferred funds from Betterment to Vanguard, so I have ~8-10 funds in there instead of 3-4 like I'd prefer... someday I'll have to fix that.

Thanks!