Author Topic: Using asset allocation targets and rebalancing to manage investments  (Read 4037 times)

RootofGood

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A lot of people know that having an asset allocation and sticking to it is a decent way to manage your investments without getting sucked into market timing.  But how do you track your current asset allocation and compare it against your targets? 

I figured I would share how I do it, since I have recently streamlined the process a bit and it's pretty easy now. 

Here is the Root of Good portfolio with my target allocation, my current allocation, and a calculated amount I need to add or subtract to each asset class to reach the target:




I use Personal Capital to consolidate all investment holdings into one place.  Here's what the "holdings" screen looks like at PC:



I copy and paste the holdings data into my customized analysis spreadsheet to get the first table I show in this post.  The spreadsheet took a little time to set up like I wanted it, but now it only takes me about 2 minutes to copy/paste from Personal Capital and then I'm working in my analysis spreadsheet with updated holdings data. 

If you don't feel like building a custom analysis spreadsheet, Personal Capital has a built in portfolio analyzer that shows your portfolio composition broken into various asset classes:



I figured this might be useful to some, because I used to spend a lot of time visiting all my different brokerages, 401k's, and IRAs and manually downloading the data.  Now the holdings data are all in one place through PC.

If you are curious, I go into more detail on how I rebalance and give a few examples in a recently published article.


AlanStache

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Re: Using asset allocation targets and rebalancing to manage investments
« Reply #1 on: November 24, 2013, 12:31:25 PM »
Have never heard of Root of Good.  I use an excel spreadsheet saved in my dropbox account so I can use the same version at work and at home.  My spreadsheet is basically the same as what you set up.  If I were motivated I would set it up to pull current price data from yahoo-finance rather than entering gross balances manually.

mm31

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Re: Using asset allocation targets and rebalancing to manage investments
« Reply #2 on: November 24, 2013, 01:54:16 PM »
Like AlanStach, I just have 1 excel sheet that shows me all my current holdings and my overall asset allocation. I don't really need to break things down by asset class, just whether I'm holding stocks or bonds. Re-balancing is easier too, since I just have to worry about buying more stocks or bonds.

I'm keeping things simple because I'm still in the early accumulation phase. A sounds asset allocation and a high saving rate are enough to keep me on track for now. But one thing about personal finance is that different situations require different strategies. I expect I'll be doing something similar to RoofOfGood when I'm at the later stages of accumulation.

RootofGood

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Re: Using asset allocation targets and rebalancing to manage investments
« Reply #3 on: November 24, 2013, 02:06:34 PM »
I'm keeping things simple because I'm still in the early accumulation phase. A sounds asset allocation and a high saving rate are enough to keep me on track for now. But one thing about personal finance is that different situations require different strategies. I expect I'll be doing something similar to RoofOfGood when I'm at the later stages of accumulation.

This type of asset allocation and rebalancing applies more to those in the mid to late stages of accumulation.  I don't see a lot of sense in having 10 different asset classes if you have $10-20k invested.  In that case, I would probably pick a total US market index, a total international index, and if you want it, a bond fund.  Then if you want to try for a little extra return, diversify out into some other asset classes as you grow your portfolio. 

Abe

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Re: Using asset allocation targets and rebalancing to manage investments
« Reply #4 on: November 24, 2013, 02:27:45 PM »
Thanks for the example for managing asset allocation.  My wife and I are about 25 years from my goal retirement date (we enjoy the work so don't have a desire to retire particularly early), and mostly invested in the Vanguard total stock market index fund. At what point do you think I should start investing in bonds? Do you have recommendations about bond funds vs. treasury bonds? Right now, each year of earnings generates enough savings for 3 years of expenses. I was thinking about putting 1 year's worth in bonds and 2 in stocks, so that at the end of 30 years we will have enough saved in bonds alone to cover us in retirement. Whatever happens to the stocks could be used for an endowment or something.
Is this a correct way to think of asset allocation? Thanks!

RootofGood

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Re: Using asset allocation targets and rebalancing to manage investments
« Reply #5 on: November 24, 2013, 02:55:19 PM »
Thanks for the example for managing asset allocation.  My wife and I are about 25 years from my goal retirement date (we enjoy the work so don't have a desire to retire particularly early), and mostly invested in the Vanguard total stock market index fund. At what point do you think I should start investing in bonds? Do you have recommendations about bond funds vs. treasury bonds? Right now, each year of earnings generates enough savings for 3 years of expenses. I was thinking about putting 1 year's worth in bonds and 2 in stocks, so that at the end of 30 years we will have enough saved in bonds alone to cover us in retirement. Whatever happens to the stocks could be used for an endowment or something.
Is this a correct way to think of asset allocation? Thanks!

I always kept close to 100% in stocks while working.  I didn't have a retirement date set in stone, so I figured whenever the portfolio appreciates to the point at which I'm ready to retire, I'll retire.  Losing 30% of your portfolio while working isn't a big deal if you don't depend on it to fund your living expenses.

As for in retirement, you'll probably want 10-20% in bonds at a minimum.  When you make the switch to start investing more in bonds is up to you.  I think your approach will provide you with a successful retirement and near zero risk.

I don't particularly like bonds today because the rates are so low.  I would pick something with a short to intermediate duration so you don't take on a lot of interest rate risk.  Investment grade/corporate bonds pay more than treasuries, but you might have more volatility with investment grade if we have a big recession. 

Abe

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Re: Using asset allocation targets and rebalancing to manage investments
« Reply #6 on: December 02, 2013, 05:13:03 PM »
Thanks for the advice.  I think for now we can stomach a lot of losses with our investments since they aren't needed for quite some time. Maybe when we get to 20 years of working we'll start with bonds, that should give us funding even if the stocks fall significantly close to retirement.