Asset allocation and rebalancing

[GreenSheep]

Just trying to decide whether I need to rebalance, and if so, how to do it as cheaply as possible. Thanks for any insights.

Since retiring 4 years ago, I've been neglecting my asset allocation. While still investing, I was aiming for 75%/25% stocks/bonds (all Vanguard, VTSAX and VBTLX), and I never actually rebalanced -- just adjusted the balance each time I invested what I'd saved from my income. I'm not even sure if that's an appropriate goal now, in my mid-40s. Now that the stocks have been growing more than the bonds, it's 86%/14%. If I were to rebalance it, the only way to do it (afaik) without having to pay taxes would be to do it all within my Roth IRA, and the amount I'd need to sell (stocks) and buy (bonds) is more than the entire amount in the Roth... but still enough to make a significant difference.

On the other hand... although I may be retired, my entire household is not. My husband is still working, and we live on his income, so we're not touching our retirement savings. He puts enough into his 401(k) to get the employer match, but that's all. So maybe having a rather aggressive asset allocation, even in our mid-40s, isn't such a terrible thing? I know JL Collins would say it's not...

Editing to add... I do have a SEP IRA as well, and it's much larger than the Roth. So maybe that would be the place to rebalance? Also, yes, as a couple we consider all of our finances to be one big pot.

[Sandi_k]

The Roth is supposed to have your growth investments, to maximize the "tax free forever" part of investment decision-making.

If you have issues re: AA, I would simply direct your spouse's new money into the bond portion; given your ages, having a higher percentage in stocks is not, IMO, a bad thing.

[Radagast]

I don't think there is any need to rebalance in your case. I'd hate to either incur capital gains tax or waste Roth space on bonds just to rebalance. Since you are just letting the money ride, might as well just let it ride. The only reason to rebalance, unless personal circumstances change, is because you genuinely think Top Is In For Real This Time and want to try your hand at market timing. Which can occasionally be the right choice, with similar odds to a stopped clock guessing the hour depending on your time frame.

[Heckler]

Not rebalancing is totally against the point of having an asset allocation, especially when you're 11% off and your IPS doesn't have a rebalancing threshold written in that you follow.

https://www.bogleheads.org/wiki/Investment_policy_statement#Asset_allocation_targets_and_rebalancing_ranges

One solution could be turning off equity dividend reinvesting and funnel new cash to fixed income, you could both build up fixed income in the coming years.  This assumes you both agree to treat all of your accounts as a single asset allocation and work as a team financially.

https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts

[GreenSheep]

Thank you all for your input! I'm mulling this over and will try to have something intelligent to say later. I'd love to hear from any others who want to add their thoughts.

Also, I edited my original post with a note at the bottom of it, in case those two things make a major difference.

[Radagast]

Fair enough, turning off dividend reinvesting would be a good way to steer a little money to bonds in a tax efficient way. It may unfortunately need to be a manual intervention. Edit to add: still not something I'd recommend though, unless you specifically want a bond allocation in a taxable account. You'll either pay higher taxes on the interest, or settle for lower yields with a tax exempt bond fund.

I actually googled just now, and it seems like if you have a brokerage account you can only do this by buying the stocks yourself, because dividends go straight to your money market settlement fund if not reinvested. If you have an older mutual fund account you might be able to set it up to automatically reinvest dividends in another fund.

[Radagast]

SEP IRA seems like a better place to rebalance, depending on its cost details and fund options.

[NotJen]

Editing to add... I do have a SEP IRA as well, and it's much larger than the Roth. So maybe that would be the place to rebalance? Also, yes, as a couple we consider all of our finances to be one big pot.

Yes, this is what I do.  My SEP holds almost all of my bond allocation (it's not that big, so there's a little in my IRA Rollover/former 401k, too).  My Roth is all VTSAX.

[Heckler]

Also, yes, as a couple we consider all of our finances to be one big pot.

which opens the possibility of his 401k being switched to all (mostly?) fixed-income.

[GreenSheep]

Hmm. It sounds like rebalancing is not absolutely necessary, and as far as the "how" goes, there's no easy answer without getting into adding to our tax burden, other than changing the 401(k) allocation from here forward, over whatever remaining years my husband wants to work. It wouldn't change things much, but it would move the needle slightly in the right direction, at least. I wonder how people do this over the course of a long retirement. Surely they're not paying capital gains taxes every year when they rebalance?!

If we just let this ride, I wonder where it would settle out eventually. I assume we'd never get to 100% stocks and 0% bonds, but maybe close to that, depending on how the market is doing. We're not the panicky type, so "smoothing the ride" isn't necessarily at the top of my list, and we do have about a year's worth of cash that we could live on in the event of a job loss plus terrible market, in order to avoid selling low -- or later, when both of us are retired, living on investments, and there's a bad market. (I'd be more comfortable with more like 3 years, but then there's even more lost potential interest.) So maybe a conservative asset allocation isn't really that big a deal in our case? I just don't want to be reckless about it. I didn't get to FIRE at age 40 by being reckless with my finances!

[NotJen]

and as far as the "how" goes, there's no easy answer without getting into adding to our tax burden, other than changing the 401(k) allocation from here forward, over whatever remaining years my husband wants to work. It wouldn't change things much, but it would move the needle slightly in the right direction, at least. I wonder how people do this over the course of a long retirement. Surely they're not paying capital gains taxes every year when they rebalance?!

Would you mind sharing approximate details of balances/allocations?  I have a hard time believing your only option is to use your taxable account to rebalance.

Can't you change your 401k investments without penalty?  Not just redirect new money, but change what's already invested?  (I'm thinking I did this while working, but details are fuzzy, and I know all 401k plans are different.)

My investments are 69% in tax-advantaged accounts, and 31% in taxable accounts.  I can rebalance to my heart's content in the tax-advantaged accounts, so I'm not worried about capital gains.  I also have never had the need to rebalance yearly.

My taxable account dividends (which I'm paying taxes on anyway) DON'T automatically reinvest, so I can decide each quarter to throw them where they are needed AA-wise.

[GreenSheep]

Would you mind sharing approximate details of balances/allocations?  I have a hard time believing your only option is to use your taxable account to rebalance.

Can't you change your 401k investments without penalty?  Not just redirect new money, but change what's already invested?  (I'm thinking I did this while working, but details are fuzzy, and I know all 401k plans are different.)

My investments are 69% in tax-advantaged accounts, and 31% in taxable accounts.  I can rebalance to my heart's content in the tax-advantaged accounts, so I'm not worried about capital gains.  I also have never had the need to rebalance yearly.

My taxable account dividends (which I'm paying taxes on anyway) DON'T automatically reinvest, so I can decide each quarter to throw them where they are needed AA-wise.

Looks like maybe the SEP is the way to go, if possible. Only about 6% is in the Roth, 6% in the 401k, 37% in the SEP, and the rest in taxable. The bonds are almost exclusively in the SEP. I'll have to look into making changes to the 401k. I haven't had a reason to look into it since we first set it up years ago.

[Ron Scott]

I think rebalancing is good for people who are concerned about risk and get nervous when they see too much volatility in their portfolio balances. Also, if your portfolio is getting extremely heavy in stocks, say 80%+, your portfolio can suffer a bit over many years at a stretch.

I’m a basic 6040 type, retired, and have never rebalanced. I’ve only sold shares in the 1 single stock I hold and reinvested the proceeds in a total stocks fund, to increase diversification.

If you’re not skittish about investing in equities I’d say forget rebalancing.

[ChpBstrd]

Well you retired 4Y ago, so in theory you should have had a bond tent for the past few years, and spent the bonds down until you arrive at a more long-term AA.

I don't think 86/14 is a particularly bad idea. It's near the optimums calculated by earlyretirementnow.com. What if you had a plan to taper down your 25% bond allocation at retirement until you arrived at a 14% bold allocation 4 years later? In that scenario, you'd be right on target. 

Then again, that may not be a valid way to look at the situation because you're not yet living off your money. You're living off of one job's wages. Is DH still working because you don't have a large enough stache to both retire, or does he just like his job and you're padding your portfolio for a FatFIRE? If the former, then yea maybe consider the bond tent. If the latter, and you're well above 25x, leave your AA alone.

[GreenSheep]

Is DH still working because you don't have a large enough stache to both retire, or does he just like his job and you're padding your portfolio for a FatFIRE? If the former, then yea maybe consider the bond tent. If the latter, and you're well above 25x, leave your AA alone.

I should have been more clear about this. He loves his job and has no desire to retire, ever. I assume he'll change his mind eventually, but for now, he's happy, and neither of us is complaining about the income! So yes, his income is "extra" and we're padding for FatFIRE.

[GreenSheep]

Somewhere deep in the bowels of our Vanguard account, where all of our investments are (except DH's 401k), I came across this. Kinda puts things in perspective.

[ChpBstrd]

Somewhere deep in the bowels of our Vanguard account, where all of our investments are (except DH's 401k), I came across this. Kinda puts things in perspective.

Now that's pretty cool! Wish my broker had something similar.
I also wish they posted the Sharpe Ratio for each.

[Ron Scott]

Somewhere deep in the bowels of our Vanguard account, where all of our investments are (except DH's 401k), I came across this. Kinda puts things in perspective.

I like this feature of the Vanguard site too. Imagine how easy life would be if long-term future returns could actually be predicted from the past!