Source
r/personalfinance•
CharlatanPrime

Rebalancing portfolio as retirement approaches ... best way to do this?

Investing

I'm approaching retirement (it's 3 years out) and after doing some reading on the topic, I've decided to rebalance my portfolio from 100% stocks to a 60%/40% stock/bond ratio. The majority of my portfolio is in a Traditional IRA at TD Ameritrade, and consists of individual stocks. My plan consists of selling stocks and rolling the money into BND (the ETF equivalent to VBTLX, since TD Ameritrade doesn't have access to the Vanguard mutual funds).

Initially I thought I'd move 13% of the portfolio from stocks to bonds once a year as a way to ease into the new ratio (so over three years the stock/bond ratio of my portfolio would be 87/13, 74/26, and then 60/40 at retirement). But recently I've been having second thoughts about doing it over an extended timeframe, and I wonder if it makes more sense to just "rip the bandaid off" and rebalance the entire thing now. Stringing out the process feels a little like trying to dollar cost average or time the market, both of which I am against.

So the question as I see it is: should I rebalance my portfolio a little at a time over 3 years, or should I change to my target asset allocation all at once, right now?

At 3 years out I'm starting to value protecting my current assets more than trying to squeeze out a couple percent of extra growth. Which makes me feel like I should do it all now. I would appreciate any thoughts or opinions from wiser folks. Thanks in advance!

Posted Feb 19, 2018, 2:42 PM UTC

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zhenya00•

Honestly, 3 years out from retirement, I don't think you have time to DCA.

Yes, interest rates may well continue to rise, causing you to lose a little bit of NAV in your bond funds, but if you choose these funds carefully, and stick with reputable funds with moderate duration (say average duration of 6 years or so) then your losses will be short-term and minimal.

Compare that with the risk you are currently exposed to. If the market lost 50% between now and your intended retirement date, how much longer would you have to continue working to get back on track? Compare that number with 60/40 (and any other asset allocation) and pick the one that you are most comfortable with. It may well be more conservative than even 60/40 in that context.

Asset allocation is mainly about controlling risk. In your case you likely have a lot to lose. In which case it makes sense to make the change now, not later.

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CharlatanPrimeOP•

Thanks for the input. I think you clarified the pertinent issue very well.

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MAJIC9•

I wonder what will happen to bond market in next 12-18 months as they keep talking about raising interest rates (not good for bond market).. maybe DCA wouldn't be such a bad idea? Wish I had a crystal ball, though :)

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CharlatanPrimeOP•

Yes, part of me thinks that interest rates have nowhere to go but up so maybe it doesn't make sense to be in a hurry to change so much of my portfolio to bonds.

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MAJIC9•

Agree -- plus "time in market" probably isn't as significant for bonds as it is for equities... If it was my money I'd DCA it.. and you can always accelerate if necessary...

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Redcrux•

the bad part though is that even though bonds are likely to fall in the short term, stocks have a much further to fall right now, and if they do bonds will be pumped somewhat as a safe haven. It's best to do 60/40 for now and then go back to 100% stocks over the first 10 years of your retirement:

https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

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CharlatanPrimeOP•

Thanks. I do think in the short-term, preservation of the stock gains makes sense, and I absolutely will move back into more stocks once I get past the initial glide path of retirement, for sure!

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1
AnotherPint•

What do you have against DCA? For me it's always been a good hedge against spikes and hiccups.

I'm about 7 years out, around 80/20 stocks/bonds, and because of recent volatility (and the growing view that the bull market may not last much beyond 2018) my investment firm just coughed up a recommended rebalance to 70/30, but to be accomplished gradually, over the next year or so. I'm inclined to take some of the advice, but in incremental doses. If I'd done a one-fell-swoop rebalance ten days ago I would have forfeited a fair sum.

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CharlatanPrimeOP•

Actually when I was thinking about DCA I was thinking from the standpoint of investing in stocks. I refer to articles like this...

https://www.actuaryonfire.com/lump-sum-dollar-cost-average-investing-part-1/ https://vanguardblog.com/2016/12/21/investing-fast-and-slow/

... which to grossly summarize, say "if you're going to DCA or invest a sum at once, investing at once beats DCA"

But maybe that doesn't strictly apply when you're talking about rebalancing (after all, the funds are already invested, so it's moving stuff around, and I don't have to worry about the opportunity cost of having a pile of cash sitting there).

I dunno, I guess a small part of me thinks DCA might be appropriate here, that's why I'm getting input!

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AnotherPint•

I agree with your thinking.

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midlakewinter•

Not to further worry you, but the bond tent approach would have you ramp up well beyond 60/40 as you enter and exit retirement.

This is a weird time to be moving to bonds, but risk management isn't called risk maximization for a reason.

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CharlatanPrimeOP•

Yes, I'm aware that strictly speaking it makes sense to go ever further into bonds, but I was thinking if worst came to worst and stocks cratered, I could absolutely live by liquidating the bond portion until it was gone - and that would be 8 to 10 years - and by then I assume stocks would have recovered. I guess if we have a > 10 year bear market then I'd be in uncharted territory.

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