Author Topic: General question about rebalancing  (Read 895 times)

rudged

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General question about rebalancing
« on: March 03, 2018, 09:23:30 AM »
I understand why, if you are in what JL Collins refers to as the wealth preservation stage and have a portfolio with both stocks and bonds, you would want to rebalance on a regular basis. It also seems pretty clear that if you are in the wealth accumulation stage and are investing 100% in VTSAX there is no need to rebalance. So far so good.

But what about someone who is in the wealth accumulation stage and investing in a tax advantaged account (e.g. a 403(b)) who does not have access to VTSAX? JL Collins (http://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/) draws attention to how the following mix would be roughly equivalent:

~81% Large cap (an S&P 500 fund)
~6% Mid cap
~13% Small cap

Two questions: (1) Given how heavily weighted the composition is towards large cap index funds, are the fees associated with rebalancing on a yearly basis (even in the absence of taxable events) worth it? (2) Couldn't one simply address any minor shifts amongst the three funds by simply altering how one makes new contributions (rather than selling existing assets)?

P.S. The plan I'm enrolled in through my employer doesn't even have a mid cap index.

mjb

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Re: General question about rebalancing
« Reply #1 on: March 03, 2018, 11:07:30 AM »
Two questions: (1) Given how heavily weighted the composition is towards large cap index funds, are the fees associated with rebalancing on a yearly basis (even in the absence of taxable events) worth it?

What fees would there be to rebalance in a tax-deferred account?

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(2) Couldn't one simply address any minor shifts amongst the three funds by simply altering how one makes new contributions (rather than selling existing assets)?

Absolutely, that's the easiest method and what I do personally. When you're in the "wealth-building" phase, I personally don't think it's useful to be slavishly devoted to your asset allocation -- your savings rate has a bigger impact than your asset allocation for the near future.

You may find this link useful for rebalancing via new contributions: https://www.millennial-revolution.com/invest/workshop-invest/investment-workshop-48-rebalancing-portfolio/

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P.S. The plan I'm enrolled in through my employer doesn't even have a mid cap index.

Directly beneath the asset mix you posted from Jim's blog, is this advice:

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This usually comes up when a 401(k)-type plan offers an S&P 500 fund but not a total stock market fund. Personally, I wouldn’t bother. VFIAX (S&P 500 index fund) will perform within a hair of VTSAX so I’d keep it simple and just go with that.

Keep it simple!

rudged

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Re: General question about rebalancing
« Reply #2 on: March 03, 2018, 11:44:21 AM »
Two questions: (1) Given how heavily weighted the composition is towards large cap index funds, are the fees associated with rebalancing on a yearly basis (even in the absence of taxable events) worth it?

What fees would there be to rebalance in a tax-deferred account?

Thanks for your reply. I presume my plan (TIAA) would charge me to do yearly rebalances, but I have to admit I've never asked.

rudged

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Re: General question about rebalancing
« Reply #3 on: March 06, 2018, 11:25:53 AM »
TIAA just told me they do not charge for rebalancing within my 403(b)! Did not expect this.