Author Topic: Asset allocation less than ideal, but not sure how (or if) to rebalance  (Read 593 times)

RyanAtTanagra

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I'm starting to look more into asset allocation options and where I want to end up.  When I started I just threw all my money at index funds, which is fine for a while, but 10 years later and I'm realizing they may have not been the best funds.  The expense ratios are fine, but I was under the impression that an S&P500 index was essentially the same as Total Stock Market.  But now I'm looking into different asset allocations and playing around with things on Portfolio Charts and discovering this is not the case, and would like to diversify into TSM more.  Right now I'm at 80/20 domestic/international split, but like so:

Domestic S&P500 (PREIX) (Large Cap Blend?): 57%
Domestic TSM (VTSAX): 23%
International Large Cap (SWISX) (Large Cap Blend?): 8%
International TSM (VGTSX): 12%

The problem is the bulk of my LCB (domestic and intl) is in my taxable account, or in my 401k where there aren't really other options.  The Vanguard funds are in my IRA(s) and I'd rather not change those since they're ultimately where I want to be.  Given I'd like to diversify my equity holdings a bit more, how would you go about it?

1) Start buying small and mid cap funds to compensate for the heavy large cap weight?
2) Ignore the LC weighting and keep them and just buy TSM going forward.
3) Market's up a bit much right now to be trying to sell my taxable holdings to rebalance, but is ultimately an option.
4) Something else?

Appreciate any input.

Andy R

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Re: Asset allocation less than ideal, but not sure how (or if) to rebalance
« Reply #1 on: November 07, 2019, 07:52:53 PM »
How long have you been buying the total market funds, or rather how much gains do you have on them? If very little, is it worth considering selling those and replacing with an extended market fund (lc/sc) or small cap fund? Having 3 is more of a pain than just 2 which would accomplish the same thing but of course depends on your gains.

js82

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Re: Asset allocation less than ideal, but not sure how (or if) to rebalance
« Reply #2 on: November 07, 2019, 08:02:08 PM »
I'd focus in 2 areas:

1) some combination of choices #1 and #2 that you listed:  Instead of selling, use your contributions to rebalance your account toward your preferred asset allocation.  This takes time, but it doesn't incur a tax hit.
2) If it's an option, sell the PREIX/SWISX in your tax-exempt accounts and acquire either a total stock market fund or (if TSM isn't available) some small/mid cap index funds to balance out the large cap fund - this lets you get to your target asset allocation more quickly without incurring cap gains taxes.

I really don't see a reason to sell anything that would cause you to take a cap gains tax hit.  In the grand scheme of things, your asset allocation is still pretty reasonable even if it isn't "perfect" - this isn't an emergency, and certainly not a reason to inflict unnecessary expenses on yourself.
« Last Edit: November 07, 2019, 08:07:53 PM by js82 »

RyanAtTanagra

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Re: Asset allocation less than ideal, but not sure how (or if) to rebalance
« Reply #3 on: November 08, 2019, 12:07:15 PM »
How long have you been buying the total market funds, or rather how much gains do you have on them? If very little, is it worth considering selling those and replacing with an extended market fund (lc/sc) or small cap fund? Having 3 is more of a pain than just 2 which would accomplish the same thing but of course depends on your gains.

The TSM funds are in my IRA, so I could shuffle those around easily enough, but I'm hesitant to sell the funds I actually like in my portfolio :)

1) some combination of choices #1 and #2 that you listed:  Instead of selling, use your contributions to rebalance your account toward your preferred asset allocation.  This takes time, but it doesn't incur a tax hit.
2) If it's an option, sell the PREIX/SWISX in your tax-exempt accounts and acquire either a total stock market fund or (if TSM isn't available) some small/mid cap index funds to balance out the large cap fund - this lets you get to your target asset allocation more quickly without incurring cap gains taxes.

I really don't see a reason to sell anything that would cause you to take a cap gains tax hit.  In the grand scheme of things, your asset allocation is still pretty reasonable even if it isn't "perfect" - this isn't an emergency, and certainly not a reason to inflict unnecessary expenses on yourself.

Unfortunately the PREIX/SWISX are all in my taxable, but I agree I don't think it's worth taxing a tax hit over this.  Thanks for pointing out it's not an emergency :)

Right now I'm leaning towards just buying TSM going forward (just got our bonus and put in a big buy for VTI), as it's the easiest/cleanest.  I'll still be large cap heavy (decreasingly so), but since the LCB funds are in my taxable, once I FIRE and start drawing, and I'll be drawing from taxable first anyway, I'll just draw those down first and continue moving towards my ideal allocation.