Author Topic: Best approach for changing allocation percentages?  (Read 723 times)

mmm_tasty

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Best approach for changing allocation percentages?
« on: November 30, 2018, 10:28:12 AM »
tl;dr: What are your mechanics for altering your asset allocation? Do you do it over time or in one swift action? How do you avoid using this as an outlet for speculation?

mid length read:

I currently have an allocation of 80% VTSAX and 20% cash.

I've recently warmed up to the idea of moving to a larger house, perhaps at some point in the next 6 years. If housing happens to go "on sale" I could see making a purchase in about 2-3 years. I would keep my existing house and turn it into a rental property.

Such being the case, I see value in having more cash on hand than I currently do. I'd hate to pull money out of VTSAX when it's potentially on a low (imagine a bad stock and housing market at the same time). I would need a decent chunk of cash by my standards as I do not like to carry a mortgage, or much of one. My current property is paid off.

This being said, what is the best approach for changing an allocation percentage, such as to one of 70% to 30%? Is it done over time? Should I force myself to only do it at a specific point in the year, thus minimizing how much this masquerades as an allocation change but is actually my monkey brain finding a way to speculate about the market?

Another tidbit worth knowing: I receive a large distribution from my company quarterly. Currently, it's about 10% of my net worth each time. This could also be used to change the balance.

Boofinator

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Re: Best approach for changing allocation percentages?
« Reply #1 on: November 30, 2018, 11:16:47 AM »
I'm a fan of the new money approach to changing asset allocation. This way the changes aren't too drastic, and therefore I don't end up with short-term regrets. Example: Let's say I wanted to go from 100/0 to 90/10 equities/bonds. I'd simply buy bonds until my desired asset allocation was achieved.

So I can understand your risk avoidance, but why 20% cash? At the very least you should be able to invest in a risk-free asset and earn something, right?

2Birds1Stone

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Re: Best approach for changing allocation percentages?
« Reply #2 on: November 30, 2018, 11:24:56 AM »
Like Boofinator, I like to "rebalance" with new money as well.

flipboard

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Re: Best approach for changing allocation percentages?
« Reply #3 on: November 30, 2018, 12:32:26 PM »
I'm a fan of the new money approach to changing asset allocation. This way the changes aren't too drastic, and therefore I don't end up with short-term regrets. Example: Let's say I wanted to go from 100/0 to 90/10 equities/bonds. I'd simply buy bonds until my desired asset allocation was achieved.

So I can understand your risk avoidance, but why 20% cash? At the very least you should be able to invest in a risk-free asset and earn something, right?
Depending on OP's country, cash might be the highest earning risk-free asset.

If you are planning to buy a house in 6 years, you should just put future income into risk-free allocations (bonds, cash, etc.). I personally treat house saving completely separately from my other investing: at the moment 0 for house saving, in a few years I'll start saving seriously and keep the money as cash or bonds. I'm not going to put any money aside for housing right now because saving cash/bonds for housing earlier is a waster of time when it can grow in the market for retirement savings and I am going to continue steady income in the next few years (if the latter part changes - e.g. I lose my job or can't work - I'll also scrap the house-buying plan, in which case no loss either way).

mmm_tasty

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Re: Best approach for changing allocation percentages?
« Reply #4 on: November 30, 2018, 12:43:47 PM »
So I can understand your risk avoidance, but why 20% cash? At the very least you should be able to invest in a risk-free asset and earn something, right?

It's cash in a high yield savings account, currently getting 2%. I figure that's close enough to a short-term bond that it's just as easy to keep there. Also nice to have if a large tax liability sneaks up on me at filing time.

What risk-free alternative would you suggest?

Boofinator

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Re: Best approach for changing allocation percentages?
« Reply #5 on: November 30, 2018, 02:11:23 PM »
So I can understand your risk avoidance, but why 20% cash? At the very least you should be able to invest in a risk-free asset and earn something, right?

It's cash in a high yield savings account, currently getting 2%. I figure that's close enough to a short-term bond that it's just as easy to keep there. Also nice to have if a large tax liability sneaks up on me at filing time.

What risk-free alternative would you suggest?

You're right, that's close enough to a short-term bond that it probably doesn't make a big difference. Short-term bonds are yielding close to 3% (treasuries high 2%), but it comes with a little risk if interest rates rise right before you pull out (if they rose tomorrow, no big deal because you have enough time until maturity plus you'll start getting the higher interest rate after the initial dip).