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Market Turmoil, Portfolio Drift, and Asset Allocation: Time to Rebalance?

Written by Nickel - 10 Comments

Last night, I decided to login to Vanguard to check out the damage from the recent market turmoil. Their Portfolio Watch feature actually makes this very easy, as I can now see our entire portfolio (including non-Vanguard investments) on a single screen.

Surveying the damage

What I learned upon logging in was mildly depressing. Not surprisingly, our investments have taken a beating. Along with the overall decrease in our holdings, our 80%/20% stock/bond allocation has drifted down to 76%/24% stocks/bonds. Moreover, our equity allocation has drifted from a 70%/30% domestic/international split down to 65%/35% domestic/international.

Given that domestic stocks have been at the epicenter of recent troubles, this shift was to be expected. In fact, if it wasn’t for our ongoing contributions of the prescribed percentages into each asset class, it would’ve been even worse. But now I’m left with a quandary. To rebalance or not to rebalance, that is the question…

Where to from here

In the past, I’ve usually rebalance on a (somewhat) set schedule. Every 12 months or so, I’ve checked on things and rebalanced as necessary. More recently, I’ve considered rebalancing as soon as our allocation gets more than a certain amount out of whack, but I never really defined that cutoff. As things stand right now, our bond allocation is about 20% high (24% vs. 20%), though our stock allocation is only about 5% low (76% vs. 80%).

The good news is that the majority of our investments are in tax sheltered accounts. Thus, I can rebalance our portfolio without triggering a taxable event. Nonetheless, I’m leaning toward just leaving things alone for the time being. If we get too much further out of line (e.g., dropping to 75%/25% stocks/bonds) I’ll probably consider rebalancing, but for now I’m content.

What about you? How is your allocation holding up?

Published on September 19th, 2008 - 10 Comments
Filed under: Saving & Investing

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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10 Responses to “Market Turmoil, Portfolio Drift, and Asset Allocation: Time to Rebalance?”

  1. 1
    Tyler Says:

    HI,
    My allocation is not holding up well either. But our of whack asset allocations are a signal of long-term opportunity.
    I am in the accumulation phase and have been adding money to stocks and ETF’s as opportunities present themselves. My short-term results are not great over the past several weeks, but if I was willing to buy great companies last year, I am more than happy to buy them this year at a discount.
    As long as my stocks keep paying dividends and growing earnings, I am happy to see them “on sale”.

  2. 2
    Steve Says:

    Be careful using the portfolio watch tool. While I do find it useful, it routinely mis-classifies some of my holdings, most notably a recent glitch is causing it to register Vanguard’s own Total International Stock Index as “other” rather than “stock”, as it had been for years. For some reason it also classifies Canadian National Railway (CNI) as a domestic equity and does not puts its weight in the Canada section.

    That said I do like the tool. Just dig deeper before making any investing decisions based on it.

  3. 3
    nickel Says:

    Steve: I’ve seen the same thing, but it’s easy enough to add the ‘Other’ category to the stock holdings to get my stock percentage. I believe that Vanguard is aware of the problem and working on a fix.

  4. 4
    Mr. ToughMoneyLove Says:

    My allocations are doing fine and I haven’t changed anything. Of course, mine may be a bit more diverse than yours, with ten distinct non-correlated asset categories. Two of them actually showed positive movement on the worst negative days, which tempered my losses.

    You were right to do nothing. If you had moved out of equities on Wednesday, you would have locked in your losses and missed out on the upward surges of Thursday and Friday.

  5. 5
    Dylan Says:

    For me, rebalancing is more of a question of how often to check. If I don’t have my target allocation when I check, I fix it. If for some reason I had occasion to review my allocation sooner than scheduled and found it to be off, I’d fix it unless it would be cost prohibitive. I usually try to maintain my allocation using cash flows first.

    @ Mr. ToughMoneyLove – If he rebalanced, he’d have bought stock, not sold it.

  6. 6
    nickel Says:

    Dylan: Correct, I would’ve sold bonds and moved more into stocks, going heavier into domestic than international. As things stand, I’m holding things somewhat in place with ongoing contributions. I’d smooth it further with ongoing cashflow, but I’m too lazy to go in and change all the settings. :)

  7. 7
    Danielle Says:

    My allocation is holding up fine… I assume..

    Years ago when I started contributing to my 401K at my first “real” job I had read enough to know that I needed to invest aggressively and then leave it alone till I was MUCH closer to retirement. This is the only stock investments I have for now.

    I invested 100% of my contributions to “MFS AGGRESSIVE GROWTH ALLOC FD-A”.

    Expense Ratio: 1.3%

    Funds included:
    MFS® Core Growth Fund (20.2%)
    MFS® Mid Cap Growth Fund (15.1%)
    MFS® Value Fund (14.9%)
    MFS® Mid Cap Value Fund (14.9%)
    MFS® Research Fund (10.0%)
    MFS® New Discovery Fund (5.0%)
    MFS® Research International Fund (10.0%)
    MFS® International New Discovery Fund (9.9%)

    My personalized rate of return over 3 years is 1.82%, the funds performance over 3 years has been 7.19%.

    1) Is that a good expense ratio?
    2) I like that I never have to worry about re balancing, but someone managing the fund obviously has to. How strict do fund managers keep to the published allocations for their fund?
    3) What on earth good does the “personalized rate of return” do me? To generalize I assume I got 7.19% on the $ I invested 3 years ago, -8.66% on contributions over the last year, and .97% on anything in the last 3 months (6/30/2008 statement). But from what I understand this % just calculates based on total I started with 3 years ago compared to what I have right now. Stock fluctuations, my contributions, employer contributions ALL are factored in. What is the point of this number?

  8. 8
    Das Bear Says:

    1.3% would be a touch on the high side (to me, over 1% is high), but International funds will always be more expensive (you are invested about 20% there). However, is this fee in additional to the mutual fund fees? Tha 1.3% could be on top of the .5%-1.5% fees that each mutual fund charges. In essences, you could be paying 1.3% to have the 401k re-balance itself. Now if you are not going to re-balance it yourself, that is a valuable service. But if you are able to put the money into those funds, without an allocation fund, and you commit to re-balancing every year, or when things get too far out of whack, that may help you a lot. Call you 401k customer service line and find out (don’t ask HR, they probably don’t know, and suffer no punishment if they are wrong).

    The personalized rate of return is calculated by comparing what you have contributed compared to what is in there now. With a personal RoR of 1.87%, that means you have gotten a 1.87% annual return on your investments (including fees). That is 5.72% over 3 years. If you add 1.3% (your expense ratio) to the 5.72%, you get 7.02%, which is what your mutual funds returned over the past 3 years. The personalized rate of return refers to how much money you have made. The expense ratio is how much you are paying. If you are taking a invest and forget it strategy, then those two numbers are the only two numbers you should worry about.

  9. 9
    Danielle Says:

    @Das Bear – As far as I know the 1.3% fees include everything. Thanks for the explanation! I didn’t realize the personalized rate of return was annual, so you add it together to get the 3 years. Of course almost all those numbers are now negative on my current statement but oh well!

    -Danielle

  10. 10
    Dave Says:

    A simple rule is to take your age and subtract 50 to
    give you a stock – bond ratio. This seems to work well. I have read this.

    If you are 40, the stock – bond ratio would be 60/40.

    After some gains in your stock portfolio, you rebalance
    to bring your ratio back down.

    Don’t look at past results of funds because they are lagging indicators.

    Pick high quality funds with the lowest expense ratios. Index funds are usually the lowest.

    Don’t try to outperform the market. If the market goes up, chances are your funds will go up to.

    There won’t be much difference in your return, if your ratio is 70/30 instead of 60/40.

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