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Reallocation Time

I typically redo my asset allocation (aka rebalance or reallocate) once a year, around the first of the year. In a taxable account (which is not where I do this), this puts off any capital gains until the following year (although it would also put any losses there too, so if you are trying to take a tax loss to offset some gains, this may not be the best thing to do).

Reallocating is something like pruning a tree; you are selling certain assets and buying others in an effort to maximize the health of your overall portfolio. With reallocation, you must consider possible tax ramifications [which is why I do this in my 403(b), so I don't have to worry about this issue] and what you wish your new allocation to be.

In my case, for 2009 my target allocation is to have 30% of my portfolio in bonds, 50% in domestic stocks, and 20% in international stocks. Currently, it’s 39.71% in bonds, 42.26% domestic stocks, and 18.03% in international stocks. It started 2008 roughly at the target levels mentioned previously. What happened? The decline in the stock market and a steady performance by the Vanguard Total Bond Market Index Fund (VBMFX) resulted in this imbalance.

In previous years I’ve ended up with portfolios that were somewhat out of kilter with my 30/50/20 target, although not quite to this extent. When things have been off by a percentage point or two, sometimes I’ve just decided to live with it (even though I can make changes–within limits–to my portfolio without charge, others might not, which is a consideration), sometimes I’ve decided to make changes just by altering the allocation of my new contributions, and sometimes I’ve actually moved assets fund to fund–which is what I’ll do this year because the discrepancies are so large.

What I’m hoping to gain from this exercise is a portfolio that does better in the long run that maintains enough fixed income holdings to maintain some stability; my belief is this is it. We’ll revisit this periodically as well as rebalance again next year!

One Response to “Reallocation Time”

  1. [...] Suenaga presents Reallocation Time posted at Uncommon Cents [...]

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