Rebalancing - How to, when and so on

[Frugalchicos]

Hello Everyone,

First, I will give a little bit of background for you to understand better the situation:

Betterment hardcore user. Currently have a 90-10 portfolio, planning to retire in 4-5 years with close to $1M in investments.

Our plan is to move to a more conservative portfolio over time. We are thinking 65-35. We would also like to have enough money set aside in cash to cover 4 years of living expenses (about $70K)

So, my question is when do you consider a good time to rebalance? When the market is high or low? Would you do it gradually or perhaps shift to a 80-20 then 70-30 and so on over the years until desired allocation?

Appreciate your input, guys. Thanks!

[Bankai]

Timely post from ERN on this exact subject (his whole SWR series is well worth a read) - in short, it depends on what you're trying to optimise for; if your risk tolerance is high, you might even ride 100% equites all the way to firing:

https://earlyretirementnow.com/2021/03/ ... s-part-43/

[Qazwer]

How are you planning on unwinding the Betterment portfolio? You have a much more complicated question than you might realize given potential locked in capital gains and a large number of stocks.
You might want to break this into two parts therefore. Then, how do you unwind Betterment? How do you shift to your goal AA? Market timing which is your third question (your original one). But you might not be ready to figure that one out yet until you come up with the more basic issues.
See Tyler9000 writings and play with his website to figure out the importance of changing allocations when retired.

[Frugalchicos]

Already figured it out. I will manually change the autobalance option in Betterment and start buying only bonds until my portfolio is to my desired allocation. this is the only way I can do it without selling and creating taxable events which I totally don't want to have at any given point.

[Qazwer]

With that I think you will still be paying the extra costs of Betterment without any of the benefits
Or are you still getting the automatic TLH?
Can you transfer the stocks to low cost broker? Not sure of the logistics

[Frugalchicos]

Betterments price is just 0.25%. I find that pretty affordable for all the technology and service I get in return. My honest opinion is that it is a great tool if you are not an expert investor (I am not) but still understands the principles of it. I don't like messing around with my investments or pretend that I know what I am doing...so, I will stay with Betterment for a while.

I do get the automatic TLH. Betterment had turned off the auto-rebalancing on my behalf. Every deposit and dividends will be used to buy more bonds until we get to our desired allocation. There is no need to sell and/or create any taxable event.

[jacob]

0.25% of $1M is $2500/year. That's quite the price to pay to avoid learning how schedule D works.

Target retirement funds (typically composed of inhouse index funds + an extra fee, a fund of funds) usually charge less than that. They would not be tax optimized for your particular situation. However, it's plausible that the delta hit of the withdrawal would be less than 0.25% which is 6.25% of 4% SWR because the LT gains on the stock gains would be zero and bonds are not going much of anywhere.

Anyway, that was not your question ...

[Hristo Botev]

Admittedly DW and I don't really have much faith that much of our retirement funds will be there when we can access them in 20 years, so we no longer spend much time worrying about just sticking them in VG's target retirement fund (0.14%), which is a mix of VG's total stock market index (MMM and JCollins' favorite, IIRC), int'l stock index, total bond index, and int'l bond index; and VG does the rebalancing of that money for us. We also don't really put money into those accounts any more except what's needed to get employer matches.

As for the post-tax unrestricted investments, we don't do index funds anymore and are working our way towards some variation of Tyler9000's Golden Butterfly and the Permanent Portfolio with a sort of Dogs of the Dow component thrown in.

[Qazwer]

Betterment buys the individual stocks and becomes a mess when you want to at some point start to sell them. It TLH by assuming stocks in a class are simmilar enough (so will sell stocks that go down to book the capital loss and buy those that go up) and books losses early on the assumption that your tax rate will be lower later. So if you ever want to get out of it, you have 100’s of stocks with locked in gains. It is actually harder to deal with than a fund. The tax gains can be worth it, but it is definitely not a good tool for someone inexperienced (who they market to). You need a plan for when you want to eventually unwind your position which is not in their marketing material.

[Nomad]

I rebalance a when the prevailing CAPE/Shiller rate changes. Currently, that requires a tweak every month.

[Crusader]

Once a year (after I get my tax return), while purposefully resisting the urge to do it at another time in order to try to time the market.

My current asset allocation is 30-70, and I am thinking that I won't touch that, unless my fixed income portion gets used for a mortgage down-payment, in which case I'll consider my home equity + mortgage to be my (leveraged) fixed income portion, and the rest will be a small-ish emergency fixed income fund along with the rest being 100% stocks. I don't anticipate buying real estate any time soon, if ever, though.

[WFJ]

I am suspicious of Robo advisors that auto-rebalance as the taxes tend to add up and fees one pays to have this tax liability start to add up over time, significantly reducing one's return. One can easily mimic any Robo or Target date fund themselves and avoid any rebalancing tax hit. "To do nothing is also a good remedy" also applies to investing. KISS is also a good mantra to follow in investing.