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December 05, 2011

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Since you are adding funds continuously, why not rebalance simply by changing the mix of contributions? With the two IRAs and the 401-k, you are adding around $25,000 per year. Unless your portfolio is already quite large, that should be sufficient to bring it back into balance in a reasonable timeframe.

I read somewhere that frequent rebalancing reduces performance - not due to fees, but due to taking money out of the winners too early. It was suggested that rebalancing should occur every 4 years, and that statistically, the best time to do it was some specific year of the presidential election cycle. Unfortunately, I cannot find the source of this suggestion.

I, too, think rebalancing doesn't need to be done too often or only when a portfolio deviates a small percentage form your desired allocation.

3% is ok, but you could to 5% or more and still be OK, especially with the volatility in the markets lately. I prefer to do semi-annual rebalancing and set two dates (birthday and half-birthday?) just to take as much "emotion" out of the process. The key is consistent "non-emotional" investing.

More importantly, though, it sounds like you're saving a significant percent of your income. Continuing that will do much more to accumulate wealth than rebalancing quarterly v. annually.

So you're basically asking, should I be "a millionaire" or "a millionaire" when I retire early? No wrong answer. Keep it up!

You might be able to be more efficient with your index funds depending on your stock/bond ratio. The Vanguard Balanced Index has admiral shares (VBIAX) and is set at 60/40 stocks and bonds. If you like that ratio then all you have to add is your total international. Just a thought.

1. Rebalancing is 100% a judgement call. Keep in mind that rebalancing every four years, every year, or whenever the market moves your portfolio away from your target allocation... all of these decisions fall under market timing. If you rebalance too soon, you are more exposed if the markets conginues trending in the same direction and if you don't do it soon enough you miss out on a potential reversal. For your Vanguard IRA (and potentially your 401K depending on your employer/provider) rebalancing Vanguard funds will not incur transactions costs. If your method works for you, stick with it... if you want to back-test other methods and try to time your rebalancing, do that. I would just understand what you are signing up for.

2. The idea of holding two portfolios also appears to be market timing. Add in the complexity of measuring your balance across the two portfolios and it sounds like a waste of time at best. Your diversified portfolio should appropriately expose you to the aggressive and less agressive strategies that you are talking about splitting into two different portfolios, no?

I invest a small portfolio aggressively in indvidual securities outside of retirement accounts however I understand the greater risk of losing this money. I do not factor this money into my retirement allocation (although I might if it represented a larger piece of my portfolio, it is currently ~2%).

In short, just be aware of the risks of any decisions. I admire that you reached out to get others' opinions and wish you the best of luck.

Making small rebalancing changes can make you feel you're helping things but it achieves very little.
The outlook for 2012 is not much better, if at all, than it was for 2011. If you want to make a much more significant change to your overall performance I would suggest the following.

Move a substantial amount of the money out of your big Loser VGTSX and add it to your one Winner which was VBTSX. VTSSX did nothing for you except to create a huge amount of volatility. I would move a substantial amount of money out of it and split it up between VBSTX and possibly VMNFX which is Vanguard's "Market Neutral" fund that attempts to make money in both Up and Down markets. If Vanguard is anything like Fidelity where my son has his 401K which I manage for him, they don't like frequent trades, so keep your moves down to no more than 2 per fund per year.

SYMBOL ...... UI% ...... ANN% ...... UPI ........ MDD% and DATE ...... START ...... END
VBTSX ........ 0.66 ........ 7.40 ........ 3.05 ......... -1.72 ... 10/10/11 ..... 12/31/10 12/02/11
VTSSX ........ 8.19 ........ 0.05 ........ 0.00 ........ -20.36 ... 10/03/11 .... 12/31/10 12/02/11
VGTSX ........ 12.18 ... -13.53 ........ 0.00 ........ -26.64 ... 10/03/11 .... 12/31/10 12/02/11
VMNFX ........ 0.58 ........ 9.73 ........ 7.46 ........ -2.00 ..... 09/29/11 .... 12/31/10 12/02/11

In the table above,
UI% is a measure of downside volatility, the lower the better.
ANN% is the annual rate of return, the higher the better.
UPI is the Risk Adjusted rate of return, the higher the better.
MDD% is the maximum drawdown during the period, the lower the better.
START - END is the period being analyzed.

Old Limey,

Wow, I have never heard of VMNFX until you brought it up. Took a gander at it on Vanguard's website and found out why. The fund has a huge minimum investment ($250,000 vs $3,000 for typical Vanguard funds) and a pretty high expense ratio. I think that caters to a specific group of investors.

Are there other Vanguard funds that you like which are more accessible? Like other index investors, I have only heard of the big ones such as VTSAX, VTIAX, and VBMFX which many suggest as good cornerstones for a portfolio. What are your thoughts on this?

Eric:
I added VIPSX to the list, it's also done very well and has a low volatility. I will describe my investing techniques prior to the end of 2007 when I decided to own only individual municipal bonds and taxable bonds to be held until maturity.

I subscribed (and still do) to a database and software that allow me to analyze fund performance. I never held any fund that was in a downtrend. I bought funds that were in nice uptrends and got out of then once they were clearly downtrending. I then searched for a replacement. It worked extremely well for 15 years (ANN=21.26%) during the "Good Old Days" from 1993 after I retired right up to the end of 2007 when my market strength indicators indicated it was time to get out. Those days are over for a while and with all of the financial problems the world is facing it could be a long time before the good times start rolling again. The country was NOT spending way beyond it income during those days and the government was functional - today it's obscene with no end in sight. Now we are paying people not to work because we exported their jobs to countries with ultra low labor rates. Just look at all the expensive government programs that are bleeding us dry.

SYMBOL ...... UI% ...... ANN% ...... UPI .......... MDD% and DATE ...... START ...... END
VIPSX ......... 1.38 ....... 14.46 ........ 6.58 ........ -3.59 ..... 10/14/11 ..... 12/31/10 12/05/11
VMNFX ........ 0.58 ........ 9.73 ........ 7.46 ........ -2.00 ..... 09/29/11 ..... 12/31/10 12/02/11
VBTSX ........ 0.66 ........ 7.40 ........ 3.05 ......... -1.72 .... 10/10/11 ...... 12/31/10 12/02/11
VTSSX ........ 8.19 ........ 0.05 ........ 0.00 ........ -20.36 ... 10/03/11 ...... 12/31/10 12/02/11
VGTSX ...... 12.18 ..... -13.53 ........ 0.00 ........ -26.64 ... 10/03/11 ...... 12/31/10 12/02/11

In the table above,
UI% is a measure of downside volatility, the lower the better.
ANN% is the annual rate of return, the higher the better.
UPI is the Risk Adjusted rate of return, the higher the better.
MDD% is the maximum drawdown during the period, the lower the better.
START - END is the period being analyzed.

Old Limey,

Thank you so much for your reply. I always learn new things reading your comments!

@Old Limey

I don't understand how selling a looser (VGTSX)and buying a winner (VBTSX) is a good strategy? Can you elaborate. To me that is just "buy high and sell low". The whole purpose of rebalancing is selling the winners and adding positions to your low performers, assuming we are talking about index funds and not individual stocks.

Tony:
The way I worked from 1993, when I was retired until the end of 2007 is patterned after the editor of Investor's Business Daily's recommendations. He calls it "Buy High, Sell Higher". This way I have never bought something on the way down, or while it is floundering along the bottom after a big loss. I wait until a convincing uptrend has developed and we are also in a Bull market, then I buy a fund that is in the strongest low volatility uptrend that I can find. I also liked to jump from even an uptrending fund into one I liked better when the opportunity presented itself. I have an intense aversion to losing money so I have never ridden anything down a long way. Once I am in a fund I let my profits run but cut my losses quickly. Obviously it's not foolproof, occasionally you get whipsawed, but I much prefer it to Buy & Hold and suffering gut wrenching drawdowns. My method absolutely required the use of a large database of funds and market indexes (currently almost 11,000 entries), updated daily and sorted into sector families, and good software for ranking funds by many different technical indicators. I also never paid any attention to fund expenses, they are trivial compared with the gains and it was not very common for me to stay in any fund longer than 6 months at the most. In 1999, my best ever year my gains were greater than my gross income over the sum of my 32 year career as an senior aerospace engineer.

Nick:

My situation is similar to this reader. Although I may not be able to invest as much at the moment. I reallocate twice a year on a fixed frequency.

I'm often unsure if my portfolio allocation is the best fit for me. Advice varies depending on the book I read, the blog I follow, or financial advisor I talk with.

What types of portfolio allocations do you recommend (specifically based on Vaguard index funds)? How do these evolve over time as investors age and get closer to retirement?

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