Rebalancing in Real Life

Earlier today, Robert Brokamp wrote about the importance of rebalancing your investment portfolio. Over time, as your various investments rise and fall, your actual asset allocation drifts from your intended asset allocation, slowly pulling you away from your investment goals.

I've recently been working to rebalance my own investment portfolio, so I thought it might be instructive to walk through the process over the next couple of weeks as I try to bring things back into line. First, some background.

In the beginning…
Cats know all about re-balancing after a fall.When I started Get Rich Slowly, I had my investments at Sharebuilder. Sharebuilder was great for me because I could invest small amounts (I started with $25/week) on a regular basis. I set up a Roth IRA through Sharebuilder, and had a regular investment account too.

When I quit my day job, I needed to set up a retirement account for my business. My accountant recommended a self-employed 401(k). Sharebuilder didn't have one. By this time, I wanted to put my money with Vanguard anyhow, so I called them up to see what they offered. They didn't have a self-employed 401(k) either. (They offer one now, though.) So, I contacted the local Fidelity office. They had what I needed.

In late 2008, I moved all of my investment accounts to Fidelity:

  • I set up a self-employed 401(k) for my business.
  • I brought over my Sharebuilder accounts.
  • I moved my retirement savings from the box factory into a rollover IRA.
  • And I started a regular, taxable investment account.
Note: I'm not endorsing Fidelity. They're a fine company, and the local office has been very helpful. But there are lots of great options out there. If I were starting from scratch, Vanguard would still be the first place I'd look.

On 30 June 2009, once the dust had settled, my asset allocation looked like this:

  • 4.5% in Fidelity Canada (FICDX)
  • 4.5% in Fidelity Latin America (FLATX)
  • 9.0% in Fidelity Spartan International Index (FSIIX)
  • 9.0% in Fidelity Spartan Extended Market Index (FSEMX)
  • 15.0% in Fidelity Select Energy (FSENX)
  • 4.5% in Fidelity Real Estate Income (FRIFX)
  • 7.0% in Fidelity Four-in-One Index (FFNOX)
  • 46.5% in various bonds and bond funds

Why did I choose this particular asset allocation? That's a great question. I don't have a great answer. I know I spent a couple of days deciding on this particular mix, but I can't find my notes on the process. I do remember that I was still skitterish about the market, though, so loaded up on bonds and bond funds. But why so much in Canada? And energy? And where's a plain, vanilla U.S. stock index fund?

Note: Even though my account is with Fidelity, I don't have to buy only Fidelity funds. So far, that's what I've elected to do, but I'm sure that will change in the future.

Better to be lucky than good?
This goofy asset allocation has actually performed well. I've been lucky. But that's because we've been in a two-year bull market. Stocks have been soaring. As a result, my returns have been excellent. All together, my Fidelity portfolio is up 64.46% since I started it (for an annualized return of 22.03%). It's up 23.59% in the past year (which beats the S&P 500's 15.65% gain).

But I'm not willing to go on with this particular asset allocation. I want to rebalance my portfolio. This is partly because my allocation has shifted. It now looks like this:

  • 5.08% in Fidelity Canada (FICDX)
  • 5.41% in Fidelity Latin America (FLATX)
  • 9.45% in Fidelity Spartan International Index (FSIIX)
  • 11.69% in Fidelity Spartan Extended Market Index (FSEMX)
  • 18.16% in Fidelity Select Energy (FSENX)
  • 5.28% in Fidelity Real Estate Income (FRIFX)
  • 7.55% in Fidelity Four-in-One Index (FFNOX)
  • 37.39% in various bonds and bond funds

But it's mostly because this particular mix of investments isn't as diversified as I'd like; it's way too concentrated in certain areas. (I mean, come on, 18.16% in an energy fund? Yikes!) So, as I re-balance, I'm doing more than just shifting my assets around. I'm going to be re-evaluating which funds I own and why.

Back to the drawing board
In a way, I'm pleased with how I've treated my investments over the past two years. The old J.D. would have checked them every day and agonized over every rise and fall. The old J.D. would have wanted to trade all the time, meaning he'd give away a ton in transaction costs.

The new J.D. is willing to buy into a position and leave it alone for almost two years. He ignores the financial news and trusts what he's learned about smart investing. And, apparently, he talks about himself in the third person.

Still, it's important not to ignore your investments completely. You need a plan, and you should monitor your investments to be sure they're helping this plan come to fruition. That's not happening for me, so it's time to rebalance.

When I opened my accounts with Fidelity Investments in 2009, I chose an asset allocation (though I can't remember why). Because my investments have grown over the past two years, and because I think some of my former choices are goofy, I need to move some money around.

Right now, my investments are allocated like this:

  • 5.08% in Fidelity Canada (FICDX)
  • 5.41% in Fidelity Latin America (FLATX)
  • 9.45% in Fidelity Spartan International Index (FSIIX)
  • 11.69% in Fidelity Spartan Extended Market Index (FSEMX)
  • 18.16% in Fidelity Select Energy (FSENX)
  • 5.28% in Fidelity Real Estate Income (FRIFX)
  • 7.55% in Fidelity Four-in-One Index (FFNOX)
  • 37.39% in various bonds and bond funds

I'm on a quest to find an asset allocation that makes more sense for me. When I do, I'll rebalance my portfolio.

Meeting with Fidelity
Once I decided it was time to rebalance my portfolio, I made an appointment with my contact at Fidelity. About ten days ago, he and I spent an hour going over my investments.

My contact — let's call him Greg — is very careful not to give me investment advice. (I think perhaps he's not allowed.) Instead, he asks me leading questions. He's almost like an investment psychologist. He wants me to think about why I'm making certain choices. (I really like this, and it's one of the reasons I haven't switched from Fidelity.)

For instance, the first thing Greg did last week was to print out a chart of my asset allocation. “Does anything seem strange about this?” he asked.

“Well, it is a little odd that I have more than 18% of my portfolio in energy stocks,” I said. “That seems crazy.”

Greg kept a poker face. “Some might call it…imprudent,” he said. “If you think asset allocation is important, you have to follow it. You can't be circumventing it by dumping 18% into energy stocks.”

I had a copy of Your Money: The Missing Manual with me. (I carry it with me all the time. It's a constant reference.) Greg pointed to it. “What kind of investments do you recommend in your book?” he asked.

“Well, I like index funds,” I said. “They have low costs and good returns over the long term.”

“And how much of your portfolio is index funds now?” he asked.

I did some quick math. “Uh? 20%? 30%?” I said. Greg and I spent the next hour discussing how some of my choices were circumventing my stated goals. “Sometimes,” I said, “there's what I know I should do, and then there's what I'm actually doing.”

Greg and I talked about diversification. We talked about whether it's a good idea for me to have so much invested in bonds. (I want to put my age in bonds — so, 42% right now.) Greg asked me to think about why I'm picking this number.

Greg pointed out that if I'm being conservative with so much of my money, then I need to be more aggressive with the rest of it if I want to meet my goal of retiring early. “Think of your money in bonds as the cash you'll need early in your retirement — in ten years, maybe — and the money in stocks as the money you'll need later in retirement,” he said.

Greg also helped me to see the tax consequences of rebalancing. I can do some rebalancing by contributing new money. But some of it's going to have to come from selling gainers and buying losers. This not only incurs transaction costs; it will also spark long-term capital gains taxes. (I know that I shouldn't make investment decisions based on taxes, but it still hurts, you know?)

In the end, Greg and I agreed to meet again on May 2nd. At that time, I hope to have a plan. And I hope to use that plan to develop a new asset allocation.

Mental accounting
After meeting with Greg, I went home and began to read. All last week, while I should have been writing about money, I was reading about it instead. I re-read bits of The Four Pillars of Investing [my review]. I scanned The Quiet Millionaire [my review]. I brushed up on Fail-Safe Investing [my review].

I also read my own advice on asset allocation and rebalancing. I thought about what my goals are and how I want my investments to help me reach them. I played with asset allocation calculators online.

In order to retire early, I have to be moderately aggressive with my investments. But — and this is where things get complicated — my secondary goal is capital preservation. I don't want to lose money. In other words, like most investors, I want to get big returns without any risk of loss. Fat chance.

The only way to reconcile these two conflicting goals is through mental accounting, the process of framing funds as belonging in different buckets even though they're all a part of one large pile. For me, that means:

    • I'm designating one bucket as my “safe” bucket. This bucket contains money I'm unwilling to lose. Its size is my age (or 42%). My goal for the money in this bucket is to preserve it.
  • The other bucket — which therefor contains 58% of my funds — is designated for aggressive growth. I'm willing to take calculated risks with this money because I want it to grow quickly.

Now that I have that mental model in place, I need to decide what to put in each bucket. Actually, the “safe” bucket is fine. I'm happy with the bonds and bond funds I have. I just need to make sure the bucket contains the right amount of them. It's the stock bucket that I need to tinker with.

Walking through the numbers with Will
Last week, I had lunch with my friend Will. Will has been working in the investment industry for almost a decade, and he's studying to be a financial planner. He knows a lot about asset allocation and investing. He asked me about my investments.

“Well,” I said, rummaging in my backpack, “I just happen to have a bunch of notes with me.” I knew Will would ask me about my investments, so I'd come prepared.

I showed him my current asset allocation. I told him about my goals, and described how I've mentally divided my money into two buckets. He wasn't enthused about this. “A lot of people think like that,” he said, “but it's not necessarily a good idea. Really, you just have one big pool of money, right?”

“Right,” I said.

“If you split your money into two smaller pools, you have to treat each one as if it were your only account. That means you're duplicating effort by having to do some things twice.”

Like Greg at Fidelity, Will asked me a lot of questions about the funds I owned. He wanted to know why I owned each one. Unlike Greg at Fidelity, Will wasn't shy about letting me know some of my choices were stupid. Especially putting 18% into energy stocks.

After lunch, Will had me take an on-line risk tolerance profile. I scored a 59, which apparently means my risk tolerance is greater than 80% of the population at large. This means I'm comfortable taking some calculated risks: I'm willing to invest in a stock or fund that offers potentially large returns, even though there's also a greater potential for losses.

Mulling it over
After meeting with Greg from Fidelity, after having lunch with Will, and after reading all about asset allocation and rebalancing, I still hadn't made any decisions. I'm mulling things over.

I've decided to read one last book about investing: David Swensen's Unconventional Success, which is a highly-regarded manual for individual investors. Swensen suggests a target asset allocation for the average person, and he lays out the logic behind it. I'm leaning toward using this as a base to build upon.

I'd love to hear about your investment habits. Do you have an investment policy statement? Did you stick with the market even when it was rocky in 2008 and 2009? What have you done about your gains? If you rebalance, how do you do it?

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J.D. Roth
J.D. Roth
9 years ago

How much do I love you guys? I love you so much that I just spent ten minutes and five bucks to find a cat picture for this post. (This is because a couple of you requested one for this morning’s re-balancing article.) See how nice I am?

cerb
cerb
9 years ago
Reply to  J.D. Roth

I like cats. Good job.

Nicole
Nicole
9 years ago
William
William
9 years ago

My way to avoid needing to think about rebalancing is to buy auto-rebalancing funds. Both my employer-sponsored plan and my rothIRA are in year-targeted funds, meaning that not only do I not need to think about it for now, but I won’t in the future.

To make it even better, the employer sponsored plan has costs similar to vanguards and rebalancing daily.

It works for me, because I know I’d eventually make a balance mistake. My girlfriend redoes hers every year. It’ll be interesting to see who does better…

Linden
Linden
9 years ago

I do have an investment policy statement. My asset allocation is specified in terms of asset classes (large-cap US stocks, small-cap US stocks, REIT, emerging markets, etc.) and NOT in terms of funds. In my mind, the fund is the tool used to meet your goal, which is the asset allocation. So far, I’ve been able to rebalance with only new contributions and by shifting assets in tax-protected accounts. Each month, when it is time to invest, I put the money for the month into the asset class that is lagging. From time to time, I’ll also do a transfer… Read more »

Yellowdog
Yellowdog
9 years ago

I have 2 rules of thumb for my Fidelity 401k: 1) Rebalance once a year, around about my birthday. 2) Keep my stock market exposure equal to 110 minus my age (for example, if you’re 30, you would have 80% of your money in stocks, and 20% in bonds). My 401k money is invested in 5 index funds. Four are stock funds, one is a bond fund. Fidelity has a simple rebalancing tool, where you tell it what percentages you want each of your investments to contain, and it takes care of the rest. Each year, as my age goes… Read more »

MoneyCone
MoneyCone
9 years ago

I love Vanguard for their low cost, but like Fidelity for their site!

mary w
mary w
9 years ago

I look at my portfolio two different ways – stock/bond/real estate/cash mix and then type of stocks (large cap, value, etc.) Once a year or two I look at my portfolio. I rarely actually *move* money. Rather I direct new investments to undervalued areas. (However, I never had funds as narrow of JD’s Canada and Energy funds.) Also I have all dividends paid into cash accounts rather than reinvested in the same mutual fund. Primarily that’s because about 1/3 – 1/2 of my investments are in taxable accounts and I don’t want to cause capital gains issues with re-balancing. Fidelity… Read more »

Wearsunscreen
Wearsunscreen
9 years ago

I too use Fidelity, in my case because of the company 401(k). I’d like to add a note that you can trade 30 ishare ETFs commision free because of some arrangement they have with Fidelity.

I hate mutual funds paying brokerage houses to sell them to their clients. Hopefully this arrangement is completely different than that.

Jen
Jen
9 years ago

This is a great and timely post. I’m looking forward to the next set of posts about gathering information and more. I too have been lucky to achieve 20+% returns over the past 2 years (which is my average performance overall, since I only started investing after the market crashed). But I invested with my gut. I thought the VTI fund looked good, and some other random funds. I’ve got some funds for emerging economies and some in healthcare. But it was all a gut feeling – I want to rebalance soon but don’t know what I should be looking… Read more »

Rehan
Rehan
9 years ago

I don’t really have this problem yet. My net assets are almost all in my house and S&P 500 funds. The allocation has shifted in the last few years to be less in my house, since the price has dropped, but it’s not my choice and I have little control over it.

Tim
Tim
9 years ago

I have my Vanguard Roth IRA invested entirely in a targeted retirement account (2045), where they do the rebalancing for me. Because my 401(k) is really limited to crappy choices, about once a year I check the percent allocation and rate of return on the funds I’m in, adjusting the former based on the latter.

Hunter
Hunter
9 years ago

That is a big allocation towards energy. This heavy weighting will probably be a wise move considering the ever upwards trajectory of oil, and the viable replacements will not be any cheaper. I prefer target retiremnt funds. Yes, I can hear the groans. If you choose a plan with fair fees, and an aggressive mix of equities, I think it’s a cost effective way to stay rebalanced. I’ve had my Roth IRA with T.Rowe Price target date retirement accounts for 4 years and I have been impressed with the performance. I would love to do a comparison to see how… Read more »

MacroCheese
MacroCheese
9 years ago

I’ve really enjoyed reading through your old entries and admire you ability to quit your day job. Keep up the great work.

I tend to tinker with my money as well, but am gradually growing out of that bad habit!

Mike Piper
Mike Piper
9 years ago

My portfolio (as outlined here): 40% Total Stock Market 40% Total International 10% Short-Term Treasuries 10% REITs Reasoning: I place high values on both simplicity and on knowing exactly why each holding is in my portfolio I rebalance when I make new contributions–so, usually twice per year. It’s implemented via Vanguard index funds, but it could be done just as easily at Fidelity of course (or probably 20 other places using low-cost ETFs). The plan is basically to increase the Treasury allocation over time while cutting back on all three stock allocations. Also, eventually a portion of the bond allocation… Read more »

sashie
sashie
9 years ago

I have a pretty simple investment strategy. I decide how much money I will budget into investments at the beginning of the year, and set up automatic deposits at Vanguard. If I’ve decided to increase my equity position – I allocate more money to buy into an equity index fund. If I decided to increase the percentage of bonds I am holding, I add to a bond index fund. If I want to add a new area of investment, I will make sure I have the minimum amount necessarily and purchase into that. At the end of the year if… Read more »

El Nerdo
El Nerdo
9 years ago

Now that I think about it, I’m waiting for my “financial literacy month” lessons. We’ve gone from “wealth is what you make minus what you spend” to “here’s how to rebalance your portfolio!” I need the intermediate courses…

J.D. Roth
J.D. Roth
9 years ago
Reply to  El Nerdo

I know! I know! I was just thinking this earlier today. I started the month with the best of intentions, but I got side-tracked, as sometimes happens. (It’s because I have a “chore cloud” for the blog instead of a list!) So, Financial Literacy Month at GRS was basically Financial Literacy Day.

I’ll try to post a round-up of Financial Literacy stuff at the end of the month to make amends.

El Nerdo
El Nerdo
9 years ago
Reply to  J.D. Roth

Thanks man!

chacha1
chacha1
9 years ago

I’m currently almost entirely in managed funds in my employer’s 401(k). That will be changing very soon as I am changing employers.

Enough has settled in my life that I’ll be looking for a little more control (i.e. more ways to make direct choices with investments).

For a couple of years there, I just didn’t want to think about it. Was lucky and everything held together. In the 8 years before that, I had a self-directed 401(k) and rebalanced annually with some advice from my broker.

Petunia
Petunia
9 years ago

I don’t have a written policy, but I have learned over the years what is considered sound and unsound. Both my employer’s plan and my Roth are in target date funds, so no rebalancing needed. My traditional IRA is in ETFs and I keep it simple. I plan to always keep it simple, but just shift a bit towards bonds over the years. ETFs kick off dividends, and I use those for rebalancing. When necessary, I also rebalance by exchanging shares. I have: VG Total US Market Index, VG Total Intl Market Index, VG Small Value Index, VG Total Bond… Read more »

leslie
leslie
9 years ago

Funny…I have all my accounts at Fidelity but it appears that I buy mostly vanguard funds (80% of them or so). Not terribly efficient since I have a transaction fee to buy Vanguard funds in my fidelity accounts but so far it has worked well for me.

Charlotte
Charlotte
9 years ago

JD,

Have you tried fidelity freedom funds? I have some in my portfolio. For example FFTHX – auto rebalances until my theoretical retirement year of 2035.
I think I have some 2040 for a more aggressive approach. Everything else is in multiple index and bond funds.

-Charlotte

Carey
Carey
9 years ago
Reply to  Charlotte

You should really be wary of the named year when deciding between target retirement funds such as the fidelity 2035 vs 2040. The stock/bond mix is much more important. It’s worth spending a bit of time to look into the details of each fund rather than simply relying on the year designation.

Charlotte
Charlotte
9 years ago
Reply to  Carey

Thank you for the advice Carey. I’m new to investing so I’m learning.

DreamChaser57
DreamChaser57
9 years ago
Reply to  Carey

I’m a novice to investing as well – so if you can clarify your feedback that would be great. I thought the whole appeal of targeted funds was that the stock/bond mix was pre-determined and as your retirement date approaches, the portfolio becomes more heavily weighted with bonds. Is that not the case?

Carey
Carey
9 years ago
Reply to  DreamChaser57

It’s true, target date funds do indeed adjust automatically. The problem is they can vary quite a bit in their level of risk at any given time. So a 2040 fund from company A may be much riskier than one from company B. The key is to ignore the date and look at the stock/bond ratio for the fund at different times in its cycle. Once you find one that best matches your need and ability for risk, you can sit back and let its automatic rebalancing do the hard work.

Tara
Tara
9 years ago

I find it interesting that you have the Fidelity Canada fund. I want to diversify more out of the US stock market and I’ve been eying the Fidelity Canada fund and the iShares MSCI Canada Index ETF for awhile now. It looks to me that the Fidelity Canada fund isn’t an ETF though, so I’ll likely end up going with the ETF. What I’ve found helps me to not check my investments daily is the fact that the numbers invested from my 401(k) are strange decimals and don’t multiply easily, so I can’t now how much I have contributed without… Read more »

Tara C
Tara C
9 years ago

My investments are all in my company 401K, which is run by Fidelity, but there are an assortment of Vanguard and other funds available for us to choose from. My portfolio is 35% US large cap, 5% US mid cap, 20% US small cap, and 40% international (including Europe, Asia and emerging markets). I rebalance once or twice a year and only check the account maybe once a month. I look more at year over year improvements than daily/weekly gyrations. I haven’t had any success with bond funds so I skip those.

Aliotsy
Aliotsy
9 years ago

I use a variation of Harry Browne’s Permanent Portfolio. I have to thank J.D. and Get Rich Slowly for featuring a post about it two years ago. It sounded too good to be true to me, so I spent a few months reading about it, and then tried it out with a little bit of my own money. I’ve stuck with it ever since. Have yet to rebalance, but know exactly what percentages the various assets need to hit before I do so. One of the intents of the portfolio is to have you ignore the financial news and get… Read more »

bethh
bethh
9 years ago

Oh I’m excited for this series. I’ve taken stabs at balancing & rebalancing, based on the so-called no-brainer portfolio you posted about in June 2009…sorta. That allocation calls for 25% in each of four funds: 500 index, small-cap, international, and bonds. I don’t really line up with that yet, though: As of January 2011 I had: 24% broad-market 24% 500 index 17% small cap 18% international 6% mid cap 10% bonds I think 25% bonds is too high for someone my age, so was shooting for 10-15% in bonds. I’ve never been able to figure out when a mid-cap index… Read more »

Carey
Carey
9 years ago
Reply to  bethh

Some people swear by mid caps. Try a Google search for “Mel’s unloved midcaps”, it should be a fun read. I stick with the simplicity of small and large caps, but there are certainly more important considerations (such as fees, fees, and perhaps fees).

You calculate growth by adding up all your contributions and comparing that number to your current balance. For example, if you’ve put in $250 a month for the past 4 years, your contributions are $12,000. If your balance is $15,000, you’ve gained $3,000 in returns.

Carey
Carey
9 years ago
Reply to  bethh

I should add, if you didn’t keep track of your contributions, you can download recent statements and usually there’s a way to request old statements. This might get a bit tedious but it could be the only way to reconstruct what you did.

bethh
bethh
9 years ago
Reply to  Carey

Thanks Carey, that’s really helpful. I do my investing with Vanguard so I don’t think the fees, fees, fees are a problem, but it would be clever of me to actually compare what they charge for the various fund types and see if they differ by much.

wearsunscreen
wearsunscreen
9 years ago

Enough of us readers, and JD too keep up the long but steady progress long enough and he’ll need to rename gotrichslowly.org.

Sun W Kim
Sun W Kim
9 years ago

How much overhead do I save by using an automated index fund vs a managed fund? How much is appropriate percentage to the management of the fund? Are the return rates you stated after paying the house (fund manager)?

Jeff
Jeff
9 years ago
Reply to  Sun W Kim

Anything over 0.5% is too much to be paying as an expense ratio, in my opinion. There is a lot of good research out there showing that actively managed funds regularly underperform passive index funds once expense ratios are taken into account. In general, about 1/3 active funds beat their index and 2/3 fall short, however its not the same 1/3 every year, so it is best to stick with passive funds. Check out bogleheads.org for more on it, it’s a great forum. As to your first question, lets say you invest $100,000 in two funds, one with an expense… Read more »

imelda
imelda
9 years ago

Man, I am just too lazy to rebalance. I’ve invested in an S&P index fund, and a REIT index fund, and that’s just the way it’s gonna stay. Sure I’ve had my portfolio go down in past dips/recessions, but it’s still way above where I started.

Also, I have a question: I’m 25 years old. Is there any reason why I should not be 100% invested in stocks? Retirement is probably 40 years away, so I feel like I have time to recover from anything. Why should I invest in any bonds at all?

Debbie M
Debbie M
9 years ago
Reply to  imelda

Because bonds tend to go up and down at different times than stocks. When stocks get expensive and bonds are cheap, you can sell stocks to get bonds. Then when bonds are expensive and stocks are cheap, you can do the reverse. Having 10% bonds tends not to reduce your returns and has the advantage of reducing the hugeness of the swings in value.

imelda
imelda
9 years ago
Reply to  Debbie M

Thank you for the response!

I don’t really “sell” anything I hold. I just put money in my IRA each month, buying more of my index fund. The whole dollar-cost-averaging thing.

However, are you saying I should buy bond funds when the stock market is high, and then sell those to buy stocks when the market is low? Isn’t that getting into market timing?

Debbie M
Debbie M
9 years ago
Reply to  imelda

Yep. When interest rates are this close to 0%, it seems quite likely that they will not get much lower. And rising interest rates for new bonds make your old bonds less valuable if you sell before they mature.

But you can do some market timing by rebalancing. For example, if you’re going for a 90/10 stock/bond ratio, when your stocks go over 90%, buy bonds next time, and when your bonds go over 10%, buy stocks next time.

Luke
Luke
9 years ago

As a new investor (just started my second year of investor school – like Hogwarts but with the magic of compounding returns) – this will be my first rebalancing. I can’t make my mind up whether that sounds more like something you have done to your car, or a coming of age ceremony! My investment policy statement favours relatively high risk areas (with consistent fund managers); equities over bonds (I’m only 28) and growth as a primary concern. Just now I’m aiming for roughly: 25% UK equity (tracker) 25% EU equity (managed fund, quite volatile) 25% US equity (mid caps,… Read more »

Debbie M
Debbie M
9 years ago

J.D., do you even have transaction costs? Vanguard lets me buy and sell into index funds without any transaction costs (so long as I don’t do it too often). And selling within retirement accounts won’t lead to any tax consequences. As I learn more, I keep adjusting what my ideal portfolio is. All my gains are automatically reinvested. I rebalance by calculating how many shares I would have in each fund if I had the ideal percentages. I sell the appropriate amount from the funds that have more and buy the appropriate amounts of the funds that have less. Sadly,… Read more »

jessie
jessie
9 years ago

@Debbie- “Or since Canada (and Australia, etc.) are associated with Great Britain, why can’t they be included in European funds?”. Too funny.

Luke
Luke
9 years ago
Reply to  jessie

Jessie – I did a double take at that comment as well – last time I checked Canada, Australia and the UK had their own currencies 😀

jessie
jessie
9 years ago
Reply to  Luke

It’s true! It may be in wacky colors, but it’s our very own! 🙂

Greg
Greg
9 years ago
Reply to  jessie

I had to reply to this too. Canada, the UK, and Australia are three very different economies in three different corners of the globe!

I’m a Canadian, definitely not a European 🙂

brooklyn money
brooklyn money
9 years ago

JD! Are you 60 years old? Your bond allocation is what a 60 year old should have, roughly! Think how much more $ you would have made over this bull market if you’d had more in stocks. To each their own, but just thought I’d point that out.

I’m going to a free session w/ a financial planner at the library tonight to refine my asset allocation, so not like I have all the answers either.

J.D. Roth
J.D. Roth
9 years ago
Reply to  brooklyn money

Ha! 🙂 No, I’m not a sixty-year-old. But sometimes I act like one. See, that’s the problem. I’m a crazy mix of aggressive and conservative. There’s no in-between. I think it’s in part two of this series that I talk about how I’ve mentally divided my money into two buckets — the “safe” bucket and the “grow” bucket. For the record, though, since writing this post, my reading has, indeed, led me to believe that I don’t need more in bonds. So, I won’t be adding anything there. But I’m not taking anything out, either. I’m going to let the… Read more »

Kevin M
Kevin M
9 years ago

I value-average for my 401(k) using a spreadsheet that basically tells me what the value should be every month so I reach my end goal. I make changes quarterly – investing or selling as needed, otherwise the money stays in a intermediate bond fund which is pretty stable. In our Roths I invest strictly in individual dividend stocks according to certain criteria. Re-balancing happens in the 401(k) annually based on the total value of all investments (Roth included). Looking forward to hearing more about the re-balancing process and fund evaluation JD. It seems like a lot of your current funds… Read more »

JMV
JMV
9 years ago

First of all, I think it is important to point out that re-balancing a non-qualified (non-retirement) account creates a taxable event. I’d hate to have your readers experience a nasty surprise at the end of the year. I don’t get too hung up on re-balancing my portfolio…I think its more important to pick great investments and make consistent deposits. Dollar cost averaging is extremely important. I make a point of investing in energy and health care stocks. I feel like my fellow Americans will pay anythings for these ‘rights’ so I might as well make money off of it. Terrible,… Read more »

SK
SK
9 years ago

I would love to see you do a future post on ETF’s as part of an investment portfolio.

postparty82
postparty82
9 years ago

I’m still relatively young and opened up a Roth through Sharebuilder last year, thanks to this site and the great article “How to Open a Roth IRA (and where to do it)”. Just wanted to comment that this site and that article in particular have gotten me working towards my goals and being realistic about retirement. I have all my money in stocks currently (feeling risky since I’m younger). 4 stocks : EWC, SPY, EWJ, C. I’ve made money on all the stocks except for Citigroup (C). I bought EWJ (Japan index) 2 days after the earthquake/tsunami when it was… Read more »

SLCCOM
SLCCOM
9 years ago

Be careful! If you inherit stocks, and are in a position to leave an estate, consult someone with appropriate expertise. If you mindlessly rebalance by selling inherited stocks that do well, it will cost you an arm and a leg and really screw things up while spending money unnecessarily.

Nicole
Nicole
9 years ago

Why are you in Fidelity if you don’t have to be in Fidelity? Why not move everything over to Vanguard? I’m in Fidelity because I have to be, that’s the cheapest of the companies I can get for my 403(b). If I could move to Vanguard I would! Moving to Vanguard has several big advantages. The first, and most important, their fees are absolutely the lowest. They’re not about profit-maximization for the company, they’re about good investment options for people. The second, especially if you’re not sure what to do, they have TONS of helpful advice from Bogleheads investing books… Read more »

Fish Finder
Fish Finder
9 years ago
Reply to  Nicole

Amen sister, can’t beat the Bogleheads forum and books.

Nicole
Nicole
9 years ago
Reply to  Nicole

Here’s the awesome GRS post on target date funds from last July: https://www.getrichslowly.org/choosing-a-target-date-fund/

Fidelity target-date funds are over-priced and I wouldn’t recommend them, especially for the relatively young.

J.D. Roth
J.D. Roth
9 years ago
Reply to  Nicole

You know, I have read the Boglehead book, but not in a long time. And I wasn’t ready for it when I read it. Does that make sense? Now, though, I probably am ready. I should read it again.

Tim
Tim
9 years ago
Reply to  J.D. Roth

JD,

Slow down a bit. Spend the next month reading the boogleheads forum daily. There is some very good investment advise discussed on a wide variety of investments, strategies, importance of risk, etc. The references provided are top notch as well.

William
William
9 years ago

Will second the thumbs up for Vanguard. Have my $$ that I can with those guys, love the low low fees.

Not that you need anything else to read 🙂 — but I HIGHLY recommend “Get Rich Slowly” by William Spitz, the former treasurer at Vanderbilt University here in Nashville. Not only is the name of the book spot on (heh), he provides some very sound models for asset allocation at different points in your life — and is a big advocate for index funds. Have been using his approach with good success. Worth a look!

J.D. Roth
J.D. Roth
9 years ago
Reply to  William

I have a copy of Get Rich Slowly on my shelf. (I found it at a used book store about six months after I started this site. I groaned when I saw the title.) I’ve never read it. Maybe I should.

Deserat
Deserat
9 years ago

The early-retirement forums had a thread on asset allocation – plus, most of the contributors have retired early and have discussed how they did that – some with pensions, some with investments, many with a combination. Very different risk tolerances/etc, but the basic ideas for retiring early are the same.

http://www.early-retirement.org/forums/

Moneycone
Moneycone
9 years ago

If you find the time, may I also suggest: The Only Guide to a Winning Investment Strategy You’ll Ever Need.

Surprisingly an easy read with facts backed up with data.

Bruce
Bruce
9 years ago

Yup, start with Bogleheads as a basis for not only what to own and in what percentage but which investment vehicle (tax deferred, etc) to have the assets in. Then tilt from there. If you need higher returns to hit your retirement date you’ll either need to work longer or take more risk. On the other hand, if you don’t need high returns than there is no need to have more risk than you need. As they say once you’ve won the game you don’t have to continue to play it.

Mark
Mark
9 years ago

I agree with Nicole and Bruce. After figuring out what you want your AA to be, get with Vanguard and get into one of their Target Date funds that looks the most like your AA. Then forget it – it rebalances automatically and becomes more conservative the closer you get to your target date.

Barry
Barry
9 years ago

Put some thought into your bond allocations qe2 ends in June .Which should drive interest rates up and bond prices down having a negative impact on your existing principal .No guarantees this will happen but it is highly probable Bill Gross thinks this way and he is a master in the bond markets. Times are very uncertain right now Qe has probably propped up equity prices and the fiscal situation could create a great deal of volatility going forward.”poor Charlie’s almanac k” is also a great read its about how to think rather than how to do.Unconventional times call for… Read more »

just saying
just saying
9 years ago

Just putting in another target date vote. The kids’ 529s are all with Vanguard and are automatically rebalanced. Oldest child started college fall of 2009. Remember 2009? The 529 had rebalanced however, and while growth was small that last year, we still had more money than we’d put in by a large margin. Oldest child also had a UGMA opened and run by a relative. Relative didn’t rebalance. That account had had a value almost twice as large as the 529. It lost half by the time it came to child. 🙁 Not entirely sure about the fates of the… Read more »

Dan
Dan
9 years ago

JD, Timely post. My company switched 401k providers and I finally got around to picking my new selections last night. Why is having 18% in energy dumb? Is it because it’s out of balance with the other selections? Given the economic outlook for the US, I’m not hopeful that blue chip (large cap) stocks are going to provide much growth for my portfolio in the next few years. I left 20% in a Vanguard large-cap growth fund as a safety net. 20% in emerging markets, 20% in international growth, 20% in small cap growth, and the rest in a health-care… Read more »

Tyler Karaszewski
Tyler Karaszewski
9 years ago
Reply to  Dan

Why is having 18% in energy dumb?

This is an excellent question that the post doesn’t address. It seems J.D. just assumes that the answer to this question is obvious.

Mike Holman
Mike Holman
9 years ago

Having 1/5 of your portfolio in one concentrated sector is not dumb as long as it fits your investment goals and investment plan.

JD didn’t really clarify his exact investment plan in the post, but he mentioned liking [broad based] low cost index funds. This implies a desire to keep his costs low and be a couch potato investor. 18% in energy does not fit his investment profile.

J.D. Roth
J.D. Roth
9 years ago
Reply to  Dan

Having 18% in energy is dumb because it’s not practicing diversification, a principle I know about and try to follow. If I had concrete reasons for believing energy stocks would perform well over the long term, it might make sense to tilt this heavy toward energy. I do think energy is going to be more productive than other sectors, and that’s fine. But that means I should own maybe 5% in an energy fund — not 18%.

Megan
Megan
9 years ago

I have a question about bonds. Are you investing in government bonds? My dad has had success with this, and my grandpa, but I’m 30 and afraid that if I invest in bonds by the time I go to retire the government deficit will be so bad that they will renege on the bonds.

If anyone has any thoughts on this, I’d love to hear them.

Nicole
Nicole
9 years ago
Reply to  Megan

The federal government will inflate or raise taxes before reneging on bonds. If the federal gov’t reneges on bonds then that reneging will be the least of our worries.

Jackie
Jackie
9 years ago

These posts have gotten me thinking about my own asset allocation. I kind of think I’m actually low in bonds and cash equivalents, but will have to check into it more.

Tyler Karaszewski
Tyler Karaszewski
9 years ago

My current 401k (also at Fidelity) allocation is: 95.46% SPTN 500 INDEX INV 2.61% OPPHMR DEV MKTS 1.93% SPTN INTL INDEX INV The names of the funds are FUSEX, ODVYX, and FSIIX if anyone is curious. The reason the international and developing markets funds have so little invested in them is just because I only added them recently, and had previously been putting everything in the (domestic) index fund. Living dangerously! (but it doesn’t bother me) Also, you say your advisor wanted to know *why* you chose to put your age in bonds, but you never answered that question. It… Read more »

J.D. Roth
J.D. Roth
9 years ago

My reason for having my age in bonds is arbitrary. It’s an attempt to be conservative about my investments, but as I’ve read over the past two weeks (and as I’ve talked with other people), I’ve come to believe that I’m actually being too conservative. I’m not going to sell anything from the bond part of my portfolio to rebalance, but I’m not going to put any more money into them, either. As stocks (generally) rise over the next few years, I’ll let the bond portion of my portfolio become smaller. Right now, I’m targeting 32% (age-10%). That could change… Read more »

Frugal Savvy
Frugal Savvy
9 years ago

It is always good to try to rebalance your portfolio to make sure your investments are showing positive upward trends.

Suter
Suter
9 years ago

J.D., I think you already have enough knowledge to make a good decision. Reading more books will not make up your mind or give you more insight into the future. It seems like you need a little push from someone as you can not make up you mind on your own. Maybe that’s why you’re talking to other people about what decision YOU should make. If you can not make up you mind, invest in target founds like most people who has no idea about markets do. I wouldn’t be surprised if YOU know much more about investing than a… Read more »

J.D. Roth
J.D. Roth
9 years ago
Reply to  Suter

This is a very astute comment. Part of the problem here is that I’m unwilling (or unable) to make a decision on my own, so I keep seeking more advice. But more advice just makes it tougher. It’s almost like I’m making things too complicated. Also, I do agree that the market has climbed a lot over the past couple of years and is likely to shift directions. I think that’s probably a year away, but that’s just a guess, right? I think that gives me time to make some slow, considered decisions. But it’s also a reason I want… Read more »

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