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Author: friendlygirl Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5084  
Subject: X-Post: Asset Allocation & Fees Date: 2/3/2004 4:27 PM
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(Cross posted to REHP)

Well, life has settled down and a bit and I thought it was about time that I looked at my asset allocation again. The numbers have actually gone up a little bit, despite the fact that I have not been able to add anything in the last year. (Going back to school will do that to you....)

Anyway, I was noticing that because my balances are still somewhat low, I am torn by the impulses to maintain an asset allocation and limit fees. That is, if I impose the 75 stocks/15 bonds/10 REITs asset allocation that I chosen onto my investments, then I incur additional fees than if I let them ride at about 62/23/14. This is somewhat complicated by the fact that my money is separated into a Rollover IRA and a Roth.

Now, the fees aren't huge, and the percentages aren't so far off. But I'm just curious how other people have chosen to deal with this issue. How did you analyze the problem, or choose to respond? In particular, since value changes daily and you don't want to fall below the minimum amounts, how much padding do you maintain on your accounts?

One thing to consider is that it is important to set up the proper investment attitude and habits. So that forcing myself to rebalance every 6 months could be a good thing for the long run, even if it costs me an extra $40.

I'm sure most of you have large enough investments that this is no longer an issue, but I'm early enough into the accumulation phase that this is a concern especially in my Roth.

I'm interested in any suggestion that you might have.

friendlygirl
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Author: galagan Big gold star, 5000 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1912 of 5084
Subject: Re: X-Post: Asset Allocation & Fees Date: 2/3/2004 4:48 PM
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I'm sure most of you have large enough investments that this is no longer an issue, but I'm early enough into the accumulation phase that this is a concern especially in my Roth.

Early in the accumulation phase, you can address this by directing your new investment to a particular fund. For instance, if you are underweight on stocks, direct 100% of your new investments to stocks until you get back to the target. Then go back to allocating according to your targets.

To take an example, say my target is 50/50 stocks and bonds but my bonds are now 60% and stocks are 40%. Rather than making my monthly investment a 50/50 split, I change it so that all of my new investment goes to stocks. The first month, that may change the 60/40 into 58/42. Over the course of a few months, I'll eventually get to 50/50. Then I can change my new investments allocation back to 50/50 as well.

It may take some time, especially once your nest egg gets a little bigger. But if you're paying fees to rebalance, it may be easier to do it this way.

good luck,
dan

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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1913 of 5084
Subject: Re: X-Post: Asset Allocation & Fees Date: 2/3/2004 5:54 PM
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In particular, since value changes daily and you don't want to fall below the minimum amounts, how much padding do you maintain on your accounts?

The two easy ways to reduce volatility are to look at more things at once, and to look less often.

Certainly, as long as the dollar amount by which you are out of balance is less than the new money you can add to your investment pool during the next year, there is no obvious reason to trade SOLELY for the purpose of rebalancing. You can fix it soon enough just by choosing how the NEW money is to be applied.

(If you have income from the bonds/REITs, or are selling some of them for OTHER reasons, there's no reason not to move some or all of that money into stocks to help the balance.)

And once you're in the withdrawal phase you can similarly rebalance somewhat by choosing which part of your portfolio to sell a piece of in order to pay your living expenses.

I think you'll find a general rule of thumb, as well, that being less than 5% out of balance isn't worth any rebalancing trades. Some would say 10%.


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Author: texandesi Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1914 of 5084
Subject: Re: X-Post: Asset Allocation & Fees Date: 2/7/2004 3:31 PM
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One thing to consider is that it is important to set up the proper investment attitude and habits. So that forcing myself to rebalance every 6 months could be a good thing for the long run, even if it costs me an extra $40.



Instead of selling to rebalance, you could direct new funds to the parts that are under the benchmark you set. That way, you achieve a balance without selling any of your existing portfolio.

Since Stocks, Bonds and REITs have different rate of change, you will find them frequently out of whack with the perfect alignment you choose. If they are out of balance due to one component having performed significantly, why would you sell that part to put money in the other underperforming assets?

If you do want to rebalance, consider doing it once every two years or so. Is there a compelling reason to reblance more frequently other than investment discipline?

- TD


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Author: TheBreeze Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2048 of 5084
Subject: Re: X-Post: Asset Allocation & Fees Date: 3/3/2004 6:59 AM
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One thing to consider is that it is important to set up the proper investment attitude and habits. So that forcing myself to rebalance every 6 months could be a good thing for the long run, even if it costs me an extra $40.

I believe that keeping down costs is CRITICAL for your returns. Consider this: Is the extra $40 in fees more or less than your account earns (or is expected to earn) each month? If you have, say, $8000 in your IRA/401k/whatever, and you expect that it should earn 6% per year (i.e., 0.5% per month), then $40 is the amount your investment(s) will grow each month...in effect, the fee will eat up ALL the return. [OK, that should be EXPECTED return, sinceit will fluctuate.]

If your numbers are different, the fee could still be a significant part of the return. In the beginning of saving, your return will be less a function of the asset allocation and more a function of how much you save...and how much you save is strongly related to how little you "throw away" on fees.

How to compensate:
1. Put all the month's contributions in the asset class that needs to be increased to get to your target mix. Don't be in a rush to get that mix to your target in too short a time where the fees will swamp the gains.
2. Save each month's contributions in a passbook account and invest quarterly.
3. Begin a third IRA where there's no fee for investing $XX per month, and put all those contributions in the asset class that needs to be increased.

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