Author Topic: Asset Allocation and Rebalancing  (Read 1761 times)

Alchemisst

  • Stubble
  • **
  • Posts: 194
Asset Allocation and Rebalancing
« on: February 08, 2020, 03:38:08 AM »
A lot of resources say you should rebalance your allocation e.g 70/30 stocks/ bonds quarterly or annually etc. However how necessary is this? Is holding a few years worth of cash/ bonds a viable alternative? As rebalancing a portfolio incurs brokerage fees and taxes on any capital gains

Juan Ponce de León

  • Stubble
  • **
  • Posts: 134
Re: Asset Allocation and Rebalancing
« Reply #1 on: February 08, 2020, 05:40:12 AM »
This is easy.  When you make your regular purchases you just buy whichever investment is under your target allocation percentage.  Since these targets are just arbitrary numbers you've made up, there's absolutely no need to sell and buy diversified investments in the name of 'rebalancing', IMO.

IsThisAGoodUsername

  • 5 O'Clock Shadow
  • *
  • Posts: 84
  • Location: USA
Re: Asset Allocation and Rebalancing
« Reply #2 on: February 08, 2020, 08:27:14 AM »
A lot of resources say you should rebalance your allocation e.g 70/30 stocks/ bonds quarterly or annually etc. However how necessary is this? Is holding a few years worth of cash/ bonds a viable alternative? As rebalancing a portfolio incurs brokerage fees and taxes on any capital gains

If possible, make the various trades/exchanges in your tax-deferred account(s) so that you do not incur trading fees.

Or if your AA is just slightly off from where you want it, you can get back to your target AA by making new contributions to the asset class that is a bit lower than your target. This can be a slower process, and is sometimes referred to as 'organic', but it should get you back to where you want to be.  For example, if you want to be at 70% stocks / 30 % bonds, and you're making monthly 401k contributions to stocks and bonds, but your current AA has drifted to 78% stocks / 22% bonds: change your 401k contributions be all bonds. Over the next few pay cycles, you'll catch up with more bonds and your overall AA will move back to 70/30. Of course, this all depends on how large your total portfolio is, how much you're contributing per pay period, and how frequently you're paid. But that should give you the general idea of how to organically rebalance.

deborah

  • Senior Mustachian
  • ********
  • Posts: 12033
  • Location: Australia or another awesome area
Re: Asset Allocation and Rebalancing
« Reply #3 on: February 08, 2020, 12:45:11 PM »
This is easy.  When you make your regular purchases you just buy whichever investment is under your target allocation percentage.  Since these targets are just arbitrary numbers you've made up, there's absolutely no need to sell and buy diversified investments in the name of 'rebalancing', IMO.
+1
If you’ve gone to the trouble of deciding on an allocation that’s appropriate for you, you should try to keep your investment allocation in that range, or else review whether that’s still an appropriate allocation.

marty998

  • Walrus Stache
  • *******
  • Posts: 7249
  • Location: Sydney, Oz
Re: Asset Allocation and Rebalancing
« Reply #4 on: February 08, 2020, 02:59:49 PM »
A lot of resources say you should rebalance your allocation e.g 70/30 stocks/ bonds quarterly or annually etc. However how necessary is this? Is holding a few years worth of cash/ bonds a viable alternative? As rebalancing a portfolio incurs brokerage fees and taxes on any capital gains

If possible, make the various trades/exchanges in your tax-deferred account(s) so that you do not incur trading fees.

Or if your AA is just slightly off from where you want it, you can get back to your target AA by making new contributions to the asset class that is a bit lower than your target. This can be a slower process, and is sometimes referred to as 'organic', but it should get you back to where you want to be.  For example, if you want to be at 70% stocks / 30 % bonds, and you're making monthly 401k contributions to stocks and bonds, but your current AA has drifted to 78% stocks / 22% bonds: change your 401k contributions be all bonds. Over the next few pay cycles, you'll catch up with more bonds and your overall AA will move back to 70/30. Of course, this all depends on how large your total portfolio is, how much you're contributing per pay period, and how frequently you're paid. But that should give you the general idea of how to organically rebalance.

Not many Australians running around with 401k's mate.

IsThisAGoodUsername

  • 5 O'Clock Shadow
  • *
  • Posts: 84
  • Location: USA
Re: Asset Allocation and Rebalancing
« Reply #5 on: February 08, 2020, 03:15:58 PM »
Whoops, didn't realize which forum I was in. Ignore my daft suggestions.

mrmoonymartian

  • Bristles
  • ***
  • Posts: 287
  • Age: 39
  • Location: Brisbane
Re: Asset Allocation and Rebalancing
« Reply #6 on: February 08, 2020, 07:56:31 PM »
Whoops, didn't realize which forum I was in. Ignore my daft suggestions.
A low-tax rose by any other name would smell as sweet. The suggestions are still good - we just call ours something else.

OP, holding a few years of cash/bonds is fine as long as the cash/bonds is also included in your asset allocation decisions. For example, it can be good if you are doing a 'bond tent' to reduce SORR. But it isn't necessary just for rebalancing since you can do that in super and gradually by targeted accumulations/withdrawals.

How necessary is rebalancing at all? This old paper may help you decide that... https://www.vanguard.com/pdf/ISGPORE.pdf
It shows that the purpose of rebalancing is for maintaining the desired risk-return profile.