Comments on: Rebalancing With New Cash http://thefinancebuff.com/rebalancing-with-new-cash.html like a friend telling you about money ... Fri, 10 Feb 2012 17:31:35 +0000 hourly 1 http://wordpress.org/?v=3.1.2 By: Jay Muntz http://thefinancebuff.com/rebalancing-with-new-cash.html#comment-277 Jay Muntz Fri, 05 Oct 2007 03:55:00 +0000 http://blog.thefinancebuff.com/?p=180#comment-277 My hunch is that you're going to run into this sooner than you think. I just think it's pretty easy to imagine that your 60/40 allocation becomes 85/15 because of market moves, and you find that your monthly contribution only improves this to 83/17, or something. Then, you may start worrying about it.<br/><br/>You could also divert your distributions to the underweighted asset class. In other words, divert the distributions from your stock fund to the bond fund or vice versa. My hunch is that you’re going to run into this sooner than you think. I just think it’s pretty easy to imagine that your 60/40 allocation becomes 85/15 because of market moves, and you find that your monthly contribution only improves this to 83/17, or something. Then, you may start worrying about it.

You could also divert your distributions to the underweighted asset class. In other words, divert the distributions from your stock fund to the bond fund or vice versa.

]]> By: TFB http://thefinancebuff.com/rebalancing-with-new-cash.html#comment-276 TFB Thu, 04 Oct 2007 23:23:00 +0000 http://blog.thefinancebuff.com/?p=180#comment-276 Ted, instead of using a multiple of income and assuming an investment rate, I think it's easier to use a multiple of new cash. By my calculation, using 10% return for stocks, 5% return for bonds, and 60/40 allocation, as long as the new cash is equal or greater than ~2% of the portfolio size, one can direct all new cash to bonds and maintain the 60/40 allocation without having to sell stocks. That's a 50x multiple over new contributions.<br/><br/>For a couple contributing the maximum to 2 401k's and 2 IRAs, the portfolio size has to be over $2 million before it overwhelms the contributions.<br/><br/>This has not become a problem for me yet. It will be a good problem to have though, because it means the portfolio has reached a decent size. Ted, instead of using a multiple of income and assuming an investment rate, I think it’s easier to use a multiple of new cash. By my calculation, using 10% return for stocks, 5% return for bonds, and 60/40 allocation, as long as the new cash is equal or greater than ~2% of the portfolio size, one can direct all new cash to bonds and maintain the 60/40 allocation without having to sell stocks. That’s a 50x multiple over new contributions.

For a couple contributing the maximum to 2 401k’s and 2 IRAs, the portfolio size has to be over $2 million before it overwhelms the contributions.

This has not become a problem for me yet. It will be a good problem to have though, because it means the portfolio has reached a decent size.

]]> By: Ted Valentine http://thefinancebuff.com/rebalancing-with-new-cash.html#comment-275 Ted Valentine Thu, 04 Oct 2007 19:49:00 +0000 http://blog.thefinancebuff.com/?p=180#comment-275 I played around yesterday with what Jay was saying.<br/><br/>Assuming a 10% equity return and 5% fixed income return at 60/40, critical mass would take over a portfolio approximately 16 times income if your investment rate was 20%. But that's under "normal" conditions.<br/><br/>Does that number seem about right? I played around yesterday with what Jay was saying.

Assuming a 10% equity return and 5% fixed income return at 60/40, critical mass would take over a portfolio approximately 16 times income if your investment rate was 20%. But that’s under “normal” conditions.

Does that number seem about right?

]]> By: Jay Muntz http://thefinancebuff.com/rebalancing-with-new-cash.html#comment-273 Jay Muntz Thu, 04 Oct 2007 13:52:00 +0000 http://blog.thefinancebuff.com/?p=180#comment-273 Edleson does talk about the "no sell" strategy in his book. It results in a slightly lower overall return but it has all of the advantages you state.<br/><br/>I don't think this strategy can completely replace periodic rebalancing. As your portfolio grows over time, your monthly contributions will become too small relative to the size of your portfolio to have any real affect on your asset allocation. You'll still need to rebalance if you ever want to get back to your target allocation.<br/><br/>As an example, during the late 1990s a strategy of "not buying any more stock" would not have been enough to reduce your exposure to stocks. You would have needed to rebalance at some point to avoid becoming completely overweighed in stocks. If you didn't do it, you would have eventually gotten clobbered. Edleson does talk about the “no sell” strategy in his book. It results in a slightly lower overall return but it has all of the advantages you state.

I don’t think this strategy can completely replace periodic rebalancing. As your portfolio grows over time, your monthly contributions will become too small relative to the size of your portfolio to have any real affect on your asset allocation. You’ll still need to rebalance if you ever want to get back to your target allocation.

As an example, during the late 1990s a strategy of “not buying any more stock” would not have been enough to reduce your exposure to stocks. You would have needed to rebalance at some point to avoid becoming completely overweighed in stocks. If you didn’t do it, you would have eventually gotten clobbered.

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