Editing my 3 fund portfolio (VG, TSP, Fidelity)

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tomwood
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Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

We have retirement accounts at Vanguard (2 Roths), a 401K at fidelity and one TSP. We have been too conservative to date with our bond percentage, in our estimation. Job/income is stable and relatively safe. Many decades ahead to work even though age is very late 30s. And we plan to make a change to the percentage of bonds we hold, which was age in bonds.

1) can anyone help recommend a more risky/aggressive way to calculate bond percentage? Though I’m not implying 0% bonds...too risky for us.

As we imagined us total market would have the higher long term rate of return, both roths at VG have us total stock market index funds. Tsp has a life cycle fund and Fidelity holds a 3 fund portfolio with the three index funds listed on the VG wiki page.

2) with access to the G fund, should the tsp be the only location for bonds, until there’s more money in the TSP than bonds needed? Or do the bond funds at fidelity (or VG) offer other positives in addition to the G fund, such as possible bond diversification?

When the time comes for rebalancing, we are currently set at 20% of Equities in the international fund. Any suggestions or recommendations to change that?

3) the International funds at VG, TSP & Fidelity are all a bit different. Is one fund better to use based on fees or what it tracks? Or is is better to have international in traditional or Roth account? Or for better diversification, should all 3 be held?


To share a bit more about the plan to invest more heavily in equities, and please speak up if people think we’re wrong to make the change, this isn’t a change we would do today. We would make a new investment strategy/plan and when the time comes to rebalance this spring (as we use the same date every year) we will make the change and stick to that new plan.


4) which brings us to our last question. Who rebalances once (or more) per year on a specific date(s) and who rebalances when the allocations differ by a percentage? Would someone explain the reason behind why you’d chose one over the other? I’m sure there’s a lot of personal preference involved but any reasoning would be helpful as this might also be part of our investment plan’s updating.
Does anyone never rebalance? we’d like hearing the reasoning behind that perspective too.
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woolie
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by woolie »

1) can anyone help recommend a more risky/aggressive way to calculate bond percentage?
you can do age - 10 in bonds. It's a rule of thumb, as many people feel that age = bonds is too conservative. So if you're (almost) 40, your bond allocation would be 30%.

2) with access to the G fund, should the tsp be the only location for bonds, until there’s more money in the TSP than bonds needed? Or do the bond funds at fidelity (or VG) offer other positives in addition to the G fund, such as possible bond diversification?
Check out the wiki for info on tax-efficient placement of assets by account type. Generally Roth is the least-preferred type of tax-advantaged account to hold bonds. However another consideration is ease of rebalancing. If you can rebalance with sell-to-buy orders within one account, rebalancing is a piece of cake. But to do this, the account balance needs to be a large proportion of your total portfolio. So if one of your Roths happens to be really big, you may want to hold all of your funds in there for ease of rebalancing, despite not being the most optimal tax strategy.

3) the International funds at VG, TSP & Fidelity are all a bit different. Is one fund better to use based on fees or what it tracks? Or is is better to have international in traditional or Roth account? Or for better diversification, should all 3 be held?
I doubt there's any diversification benefit from holding three different international funds, they're all holding the same underlying stocks. If you read the fund summary and compare the fees they should be very close, as long as they are all international index funds. The lowest fees should therefore win, although you might choose one that sets you up for easy rebalancing within one account rather than the lowest fees.

4) which brings us to our last question. Who rebalances once (or more) per year on a specific date(s) and who rebalances when the allocations differ by a percentage? Would someone explain the reason behind why you’d chose one over the other? I’m sure there’s a lot of personal preference involved but any reasoning would be helpful as this might also be part of our investment plan’s updating.
Does anyone never rebalance? we’d like hearing the reasoning behind that perspective too.

I try to rebalance quarterly, although sometimes I forget and only do it two or three times a year. A lot of times my rebalancing consists of doing nothing, because I'm only one or two percentage points away from my target allocation. In my carefree youth I used to only rebalance by adjusting my contribution mix, not by buying/selling within the account. My thinking was simply "buy and hold, never sell". It worked OK for me, but I wouldn't recommend it, I don't think its rational. What makes the most sense to me now is to rebalance holdings when they're more than two points away from the target AA, and split contributions according to the AA. And I think quarterly is a good cadence for checking the actual AA against target. A lot can happen in a year.

Good luck!
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by Pandemic Bangs »

tomwood wrote: Thu Jan 21, 2021 7:33 pm Many decades ahead to work even though age is very late 30s. And we plan to make a change to the percentage of bonds we hold, which was age in bonds.
Just a caveat. There is a lot of FOMO among earlier-stage earners about this concept. Were you planning to make this change this past March? And: if not then, why now?
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by abracadabra11 »

Vanguard had a whitepaper on rebalancing that I consulted years ago when establishing my IPS rebalancing strategy and bands. I can't seem to find it, but here's another one that I can find that has some of the major takeaways and some relevant data (though it's limited).
https://advisors.vanguard.com/iwe/pdf/ISGGBOT.pdf
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by pkcrafter »

I will address some of your questions...

tomwood wrote: Thu Jan 21, 2021 7:33 pm We have retirement accounts at Vanguard (2 Roths), a 401K at fidelity and one TSP. We have been too conservative to date with our bond percentage, in our estimation. Job/income is stable and relatively safe. Many decades ahead to work even though age is very late 30s. And we plan to make a change to the percentage of bonds we hold, which was age in bonds.


You are now holding about 40% in bonds and you want less than that, right?

1) can anyone help recommend a more risky/aggressive way to calculate bond percentage? Though I’m not implying 0% bonds...too risky for us.

You can't calculate bond %, it is strictly a personal decision. It can be assessed on need, ability, and willingness to take risk.

As we imagined us total market would have the higher long term rate of return, both roths at VG have us total stock market index funds. Tsp has a life cycle fund and Fidelity holds a 3 fund portfolio with the three index funds listed on the VG wiki page.

Yes, and TSP has the C fund, which is S&P 500.

2) with access to the G fund, should the tsp be the only location for bonds, until there’s more money in the TSP than bonds needed? Or do the bond funds at fidelity (or VG) offer other positives in addition to the G fund, such as possible bond diversification?

The G fund is a very safe investment that provides a good return for the low risk. If you want a higher return you will have to go with a bond fund like total bond fund or something more aggressive, but of course, the risk is higher.

When the time comes for rebalancing, we are currently set at 20% of Equities in the international fund. Any suggestions or recommendations to change that?

3) the International funds at VG, TSP & Fidelity are all a bit different. Is one fund better to use based on fees or what it tracks? Or is is better to have international in traditional or Roth account? Or for better diversification, should all 3 be held?

20%-25% is a popular choice for international. The market allocation is twice that much. Count all accounts as one portfolio so you don't have to duplicate in every account.

To share a bit more about the plan to invest more heavily in equities, and please speak up if people think we’re wrong to make the change, this isn’t a change we would do today. We would make a new investment strategy/plan and when the time comes to rebalance this spring (as we use the same date every year) we will make the change and stick to that new plan.

Why are you going to wait? If you've made up your mind....

Paul



4) which brings us to our last question. Who rebalances once (or more) per year on a specific date(s) and who rebalances when the allocations differ by a percentage? Would someone explain the reason behind why you’d chose one over the other? I’m sure there’s a lot of personal preference involved but any reasoning would be helpful as this might also be part of our investment plan’s updating.
Does anyone never rebalance? we’d like hearing the reasoning behind that perspective too.
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kelvan80
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by kelvan80 »

Do you utilize Roth TSP or Traditional? We do hold the G fund for our bond allocation. I've found it's pretty easy to reallocate using the TSP by just doing an intrafund transfer when our allocation is off by 5%. As far as how much bonds you should be holding you'll have to do some reading on what you are going to be most comfortable with especially if you experience a 50% drop in the market which is always possible. In 2008 my husband and I decided we didn't ever want to be more than 80/20 (we are 90/10 at the time) so now we fall somewhere between that and 70/30 depending on if you include what our amounts our in 529s for four kiddos and our cash allocation for our next down payment. But we are pretty conservative and don't feel a need to take greater risk than that. His pension will be enough for us to FIRE on so everything else is just bonus money. It's a bit of a moving target since we have so many pieces.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by oncorhynchus »

RE: Question #2

I still make contributions to the TSP + agency match; my entire TSP balance is part of my bond allocation, along with I and EE savings bonds and a municipal bond fund in my taxable account. I switched from 100% G fund to 100% F fund last summer, around when the G fund stopped meeting its performance objective of a rate of return greater than the rate of inflation. I'll probably switch back to the G fund in the future if I am still maintaining a TSP balance and when the G fund becomes useful i.e. the Fed allows interest rates to rise.

o
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tomwood
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

Pandemic Bangs wrote: Thu Jan 21, 2021 9:53 pm
tomwood wrote: Thu Jan 21, 2021 7:33 pm Many decades ahead to work even though age is very late 30s. And we plan to make a change to the percentage of bonds we hold, which was age in bonds.
Just a caveat. There is a lot of FOMO among earlier-stage earners about this concept. Were you planning to make this change this past March? And: if not then, why now?
As the market was falling in the spring of 2020, we directed all new investments entirely into the us total stock market. That’s the reason we are reconsidering our amount of percentage in bonds, because we didn’t have a panic moment as the us Stock prices fell. Additionally, we are the type that usually go an entire year without looking at our retirement accounts, and only look on the date we rebalance. It’s likely a helpful fact that the markers have been climbing for so long, I cannot know if we’d look if the markets were constantly declining day after day. But so far, we rarely ever peek.

So, we’ve been thinking about this over the past few months, since the spring/summer of 2020, and came here for help implementing the plan.
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tomwood
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

woolie wrote: Thu Jan 21, 2021 9:02 pm 1) can anyone help recommend a more risky/aggressive way to calculate bond percentage?
you can do age - 10 in bonds. It's a rule of thumb, as many people feel that age = bonds is too conservative. So if you're (almost) 40, your bond allocation would be 30%.
That’s a helpful guide, thank you.
Would this continue into retirement or eventually switch back to age in bonds?
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tomwood
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

abracadabra11 wrote: Thu Jan 21, 2021 10:13 pm Vanguard had a whitepaper on rebalancing that I consulted years ago when establishing my IPS rebalancing strategy and bands. I can't seem to find it, but here's another one that I can find that has some of the major takeaways and some relevant data (though it's limited).
https://advisors.vanguard.com/iwe/pdf/ISGGBOT.pdf
Thank you for sharing the link. That was a great read
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tomwood
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

kelvan80 wrote: Thu Jan 21, 2021 10:20 pm Do you utilize Roth TSP or Traditional?
Only traditional tsp at the moment

kelvan80 wrote: Thu Jan 21, 2021 10:20 pm His pension will be enough for us to FIRE on so everything else is just bonus money.
Congratulations on winning the game.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

pkcrafter wrote: Thu Jan 21, 2021 10:19 pm I will address some of your questions...
Thank you for answering all the questions
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woolie
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by woolie »

tomwood wrote: Fri Jan 22, 2021 11:24 am
woolie wrote: Thu Jan 21, 2021 9:02 pm 1) can anyone help recommend a more risky/aggressive way to calculate bond percentage?
you can do age - 10 in bonds. It's a rule of thumb, as many people feel that age = bonds is too conservative. So if you're (almost) 40, your bond allocation would be 30%.
That’s a helpful guide, thank you.
Would this continue into retirement or eventually switch back to age in bonds?
My plan for myself is to follow the age-10 rule until I’m 60, then make 50/50 my forever AA. I think that’s going to work out ok in terms of not outliving my money, keeping it simple, and my own risk tolerance. That’s just me, though, there’s not one right answer for everyone.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by sailaway »

I originally chose my own bond allocation just by the names Fidelity our on percentages. "Moderately aggressive" seemed appropriate to my 30 something self. When I convinced DH to add bonds, he ran some numbers and we agreed on 70/30 for our joint assets. We currently have no intention of changing that allocation in the foreseeable future, as we find it a comfortable balance.

Our method of being more aggressive than our asset allocation might indicate is to put all new monies into equities. Then we rebalance to bonds twice a year, when the biggest chunks go into taxable. This is kind of our compromise between 70/30 and 80/20.

So 401k and HSA contributions go to stock funds, all additions to taxable go to total market ETFs for him and international for me. If necessary, we then rebalance in a 401k after RSUs have vested and been converted to index funds. This happens twice a year. We have done it this way long enough, that we may well continue on the same schedule even when we no longer have RSUs vesting.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by Watty »

tomwood wrote: Thu Jan 21, 2021 7:33 pm 1) can anyone help recommend a more risky/aggressive way to calculate bond percentage? Though I’m not implying 0% bonds...too risky for us.
It looks like all your funds are in retirement accounts so one option would be to use target date funds and let them set your asset allocation for you. If you want to be more or less aggressive you can just use a target date fund with a different date fund.

There is a suggested format for asking portfolio questions and and if you post you post your information using that as a guideline you may get additional useful comments.

viewtopic.php?f=1&t=6212
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by grabiner »

tomwood wrote: Thu Jan 21, 2021 7:33 pm We have retirement accounts at Vanguard (2 Roths), a 401K at fidelity and one TSP. We have been too conservative to date with our bond percentage, in our estimation. Job/income is stable and relatively safe. Many decades ahead to work even though age is very late 30s. And we plan to make a change to the percentage of bonds we hold, which was age in bonds.

1) can anyone help recommend a more risky/aggressive way to calculate bond percentage? Though I’m not implying 0% bonds...too risky for us.
You could reasonably have very little in bonds, since you have secure jobs, and the government retirement will give you one pension and both of you health care in retirement. The new L funds in the TSP have a glidepath which will be 93% stock at your age. The L 2045, which is the TSP's allocation for your age, was not changed to be more aggressive for the new glidepath but will stay at its current 23% bonds until the glidepath catches up to it in 2030.

But this is also an emotional decision; how comfortable are you with market declines? I would suggest 80% stock for now.
As we imagined us total market would have the higher long term rate of return, both roths at VG have us total stock market index funds. Tsp has a life cycle fund and Fidelity holds a 3 fund portfolio with the three index funds listed on the VG wiki page.

2) with access to the G fund, should the tsp be the only location for bonds, until there’s more money in the TSP than bonds needed? Or do the bond funds at fidelity (or VG) offer other positives in addition to the G fund, such as possible bond diversification?
You don't need diversification to reduce risk when all your bonds are backed by the US government. I do like the G fund for your entire bond allocation, as it gives the best trade-off of return for risk.
When the time comes for rebalancing, we are currently set at 20% of Equities in the international fund. Any suggestions or recommendations to change that?
20% is within the reasonable range; most models suggest an optimal allocation somewhere between 20% and 40%.
3) the International funds at VG, TSP & Fidelity are all a bit different. Is one fund better to use based on fees or what it tracks? Or is is better to have international in traditional or Roth account? Or for better diversification, should all 3 be held?
Vanguard and Fidelity have total international indexes, which are more complete than the TSP I fund. The TSP I fund has no small-cap or emerging markets.
To share a bit more about the plan to invest more heavily in equities, and please speak up if people think we’re wrong to make the change, this isn’t a change we would do today. We would make a new investment strategy/plan and when the time comes to rebalance this spring (as we use the same date every year) we will make the change and stick to that new plan.
While this wasn't a question, I do agree with the decision to wait a few months. I have a similar statement in my Investment Policy Statement, which says that if there is no change in my financial situation, I will wait three months between changing the statement and changing the investments, so that I have time to evaluate the decision.

4) which brings us to our last question. Who rebalances once (or more) per year on a specific date(s) and who rebalances when the allocations differ by a percentage? Would someone explain the reason behind why you’d chose one over the other? I’m sure there’s a lot of personal preference involved but any reasoning would be helpful as this might also be part of our investment plan’s updating.
Does anyone never rebalance? we’d like hearing the reasoning behind that perspective too.
It doesn't matter that much when you rebalance, as long as you do it enough to avoid creating a portfolio which has too much or too little risk. I do my own rebalance every January, both because this is when I make my IRA contribution (so I need to evaluate my allocation to decide where to make the contribution) and because I increase my bond allocation by 2% every year.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by Triple digit golfer »

1. We are 35 and have been 80/20 since I started investing and plan on staying there until around 15-20x annual expenses are saved, then maybe 70/30. It makes sense to me to do it based on portfolio size than age or other factors. More money means more to lose, closer to financial independence, and justifies going more conservative. I think that adding a little in bonds each year is fine, but I don't bother. I'm comfortable at 80/20 for a while.

I caution you against over estimating your risk tolerance near market highs. How did you feel back in March? How would you feel if you made a switch to a more aggressive AA and we immediately went into a multi year bear? If you wouldn't sweat it or have regret that you bought at the "wrong time" then you're probably okay. Only you can determine how much extra risk to take. Why not start with increasing equities 10%? Age minus 10 in bonds, essentially. As good a place as any to start.

2. TSP only is fine, but why not the F fund, which I believe is the "total bond" equivalent? G is short term government only, I believe. That's certainly fine, too. If you want your bonds as safe as possible, G fund is good. I'd use F, personally. Hardly a big deal. Either will do the job of being a ballast for stock declines. I wouldn't use more than one bond fund unless I had to. Keep it simple.

3. The TSP international fund does not include emerging markets, which make up about 25% of international equity. It's not a huge deal, but if possible I'd use a fund outside the TSP for international that includes emerging markets. If you were only contributing to the TSP then the I fund would be just fine, though. If using Vanguard, use VTIAX.

4. Rebalancing is to keep risk at a steady level. I prefer to direct contributions to the lagging asset class if possible. In my 401k it's a pain, so I just contribute 80/20, but in other accounts I manually direct contributions to the lagging asset. It doesn't really matter. I used to put all contributions at 80/20 and rebalance when needed. The important thing is that your overall portfolio is always close to your desired AA. Contribute in whatever way is convenient and rebalance when an asset class is 5% off. I personally don't like calendar rebalancing. It's too arbitrary, but ultimately this stuff just doesn't matter much. Rebalance using 5% threshold, or do it quarterly or annually regardless of current AA, or some people even check it annually and even then only rebalance it thresholds are met, such as 5% off. Do whatever is easy and reasonable for you.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by retiredjg »

tomwood wrote: Thu Jan 21, 2021 7:33 pm 1) can anyone help recommend a more risky/aggressive way to calculate bond percentage? Though I’m not implying 0% bonds...too risky for us.
My reference points are "age in bonds" on the conservative side and "age minus 20 in bonds" on the aggressive side...with the caveat that a portfolio should have at least 20% and not more than 80% in bonds. So for the average 40 year old, I'd suggest something between 20% in bonds and 40% in bonds. For a person who self-identifies as very risk averse, more bonds could be reasonable.

2) with access to the G fund, should the tsp be the only location for bonds, until there’s more money in the TSP than bonds needed? Or do the bond funds at fidelity (or VG) offer other positives in addition to the G fund, such as possible bond diversification?
I think this is a matter of personal preference, cost, and convenience. And I don't think it matters much as long as you are using good quality mostly intermediate term investments (G Fund included here even though it is not intermediate term).

I think holding your entire bond allocation in the G Fund is fine, but if you do that, you give up some flexibility in the portfolio because there is only one place to rebalance (the TSP). Some people would choose not to do that and if there is a low cost bond fund in the Fidelity 401k, there is no real reason not to use it.

Or, some people might choose to fill all of their accounts with a target/lifecycle fund - for extremely convenient investing. If that can be done low cost, there is no reason not to do it if it suits you. Obviously if you did that your bond allocation would be in several different kinds/places.

When the time comes for rebalancing, we are currently set at 20% of Equities in the international fund. Any suggestions or recommendations to change that?
20% of your stock allocation in international is one of the reasonable answers to this question. No reason to change it unless you want to.

3) the International funds at VG, TSP & Fidelity are all a bit different. Is one fund better to use based on fees or what it tracks? Or is is better to have international in traditional or Roth account? Or for better diversification, should all 3 be held?
To the extent that it matters, this depends on which funds you are talking about. Both VG and Fido have several and we don't know which you are considering. It also depends on whether you want to hold the entire market or just the "developed markets". Cost could be a consideration. And convenience. And I'm not sure what the I Fund covers - it was supposed to transition over to a total market approach, but I'm not sure if that has happened yet.


4) which brings us to our last question. Who rebalances once (or more) per year on a specific date(s) and who rebalances when the allocations differ by a percentage? Would someone explain the reason behind why you’d chose one over the other? I’m sure there’s a lot of personal preference involved but any reasoning would be helpful as this might also be part of our investment plan’s updating.
Does anyone never rebalance? we’d like hearing the reasoning behind that perspective too.
There are lots of good ways to rebalance and the way you pick is not terribly important. Since you don't want to bother with your portfolio more than about once a year, then once a year rebalancing seems like it would suit you.

Just from reading your post, it seems to me that putting a target fund (at the chosen stock to bond ratio) in each of your accounts would suit you unless you actually wish to keep your international allocation on the low end. I think most of the target funds have more international.

The interesting thing about most of your questions is that few of them will matter a great deal. That does not mean your questions are not valid. It means that there are no bad choices among the ones you are considering. Your portfolio is not going to do significantly better if you rebalance one way or the other or if you pick this international fund over that one or if you use only G Fund vs G Fund and some other funds. You should see more long term growth (and larger losses in the down times) if you move to a more aggressive portfolio though.

Apparently not on your radar - the question of whether to use traditional TSP or Roth TSP (or 401k). With a pension, you will need less in tax-deferred accounts than a person without a pension. Depending on what your balances are at this point, how much you contribute to each account each year, and your current tax bracket...you might give some consideration to putting more in Roth than you currently are.
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tomwood
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

retiredjg wrote: Sat Jan 23, 2021 7:48 am My reference points are "age in bonds" on the conservative side and "age minus 20 in bonds" on the aggressive side...with the caveat that a portfolio should have at least 20% and not more than 80% in bonds. So for the average 40 year old, I'd suggest something between 20% in bonds and 40% in bonds. For a person who self-identifies as very risk averse, more bonds could be reasonable.
All the information you provided was helpful. Thanks.

Is the reason for minimum of 20% bonds so that I can rebalance? As opposed to 100% stocks.


And, when you mentioned my pension as a possible reason to focus more on the ROTH, would you explain why that’s the case more for someone with a partial pension?

In recent years, the focus has been more on traditional over ROTH, as it keeps the gross income down for student loan repayments. Though based on current tax rates and annual income, I’m sure the charts suggest more Roth contributing. Is there a goal to have about half retirement income in a Roth and half in traditional, when retirement arrives?
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by MichDad »

I agree with retiredjg regarding consideration of investing in the Roth TSP. When the Roth TSP was first offered in 2012, I changed all my new TSP contributions to the Roth TSP. I did this because I already had a very large amount in the traditional TSP and my wife had a lot of her retirement savings in traditional 401(k) plans. Even with this move to the Roth TSP, we're now (in retirement) making substantial Roth conversions each year and this will continue for the next seven or more years.

Our only bond holding now is the G Fund. It's also my only remaining TSP holding, albeit a large one.

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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by MichDad »

tomwood wrote: Sat Jan 23, 2021 9:41 am
retiredjg wrote: Sat Jan 23, 2021 7:48 am My reference points are "age in bonds" on the conservative side and "age minus 20 in bonds" on the aggressive side...with the caveat that a portfolio should have at least 20% and not more than 80% in bonds. So for the average 40 year old, I'd suggest something between 20% in bonds and 40% in bonds. For a person who self-identifies as very risk averse, more bonds could be reasonable.
All the information you provided was helpful. Thanks.

Is the reason for minimum of 20% bonds so that I can rebalance? As opposed to 100% stocks.


And, when you mentioned my pension as a possible reason to focus more on the ROTH, would you explain why that’s the case more for someone with a partial pension?

In recent years, the focus has been more on traditional over ROTH, as it keeps the gross income down for student loan repayments. Though based on current tax rates and annual income, I’m sure the charts suggest more Roth contributing. Is there a goal to have about half retirement income in a Roth and half in traditional, when retirement arrives?
These links may assist your decision:

https://www.bogleheads.org/wiki/Traditional_versus_Roth

https://www.bogleheads.org/wiki/Traditi ... h_examples

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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by grabiner »

tomwood wrote: Sat Jan 23, 2021 9:41 am Is the reason for minimum of 20% bonds so that I can rebalance? As opposed to 100% stocks.
The reason for a bond holding is to control your risk level. If you have 20% bonds, you need to rebalance to keep the risk level the same; if you have 0% bonds, rebalancing is not necessary (although you will still rebalance between US and foreign stocks).
And, when you mentioned my pension as a possible reason to focus more on the ROTH, would you explain why that’s the case more for someone with a partial pension?
Traditional accounts are better than Roth accounts if you will retire at a lower marginal tax rate. For example, if you are in a 22% tax bracket now and will retire in a 12% tax bracket, and have $7800 to invest, you can contribute $10,000 to a traditional account. If it doubles in value, you will have $20,000, which becomes $17,600 after tax. In contrast, if you contribute $7800 to a Roth account, you will have $15,600 tax-free. If you retire in the 22% tax bracket, then it is break-even, as you have $15,600 either way, and using a Roth protects you from the risk of changing tax rates (either in the tax law, or because your traditional account RMDs put you in a higher tax bracket).

Most investors will retire at a lower marginal tax rate, but one common reason this may not happen is a pension. Your FERS pension will be almost fully taxable (the amount you contributed will not be taxed). But with only one pension, it may not be that much of your retirement savings. You will also have Social Security, which will probably be 85% taxable.
In recent years, the focus has been more on traditional over ROTH, as it keeps the gross income down for student loan repayments. Though based on current tax rates and annual income, I’m sure the charts suggest more Roth contributing. Is there a goal to have about half retirement income in a Roth and half in traditional, when retirement arrives?
It is useful to have both Roth and traditional accounts, so that you can withdraw from whichever one is appropriate given your tax situation. You might withdraw from traditional up to the top of a tax bracket, then from Roth for the rest.

However, 50/50 is not really the goal. A better goal is to use Roth accounts only in those years when your marginal tax rate is relatlively low. With student loan repayments, if you are going to use Public Service Loan Forgiveness, this is effectively an increase in your tax rate; if you pay an extra $1000 on your student loan, you get no benefit when the loan is forgiven. If you are not eligible for PSLF, you don't actually gain from reduced repayments (except in cash flow); if you pay an extra $1000 this year on your 5% loan, you will have a balance $1050 lower next year and thus have less to pay in future years.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by UpperNwGuy »

retiredjg wrote: Sat Jan 23, 2021 7:48 am The interesting thing about most of your questions is that few of them will matter a great deal. That does not mean your questions are not valid. It means that there are no bad choices among the ones you are considering. Your portfolio is not going to do significantly better if you rebalance one way or the other or if you pick this international fund over that one or if you use only G Fund vs G Fund and some other funds. You should see more long term growth (and larger losses in the down times) if you move to a more aggressive portfolio though.
I agree with this summary.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by retiredjg »

tomwood wrote: Sat Jan 23, 2021 9:41 am Is the reason for minimum of 20% bonds so that I can rebalance? As opposed to 100% stocks.
No. I just think it is a good idea to have some diversification and the primary level of diversification is between stocks (the risky stuff) and fixed income assets like bonds (the stabilizers of your portfolio).

And, when you mentioned my pension as a possible reason to focus more on the ROTH, would you explain why that’s the case more for someone with a partial pension?
I agree with what grabiner said above - the decision for traditional vs Roth should mostly depend on your tax rate now vs later. But I would go one step further. It is possible to save too much in tax-deferred accounts and this can be a problem if you don't have a way to spend some of it or convert a good portion of it to Roth IRA before RMDs start.

Imagine this scenario...you arrive at age 72 (time to start RMDs) with $5 million in tax-deferred accounts because your pension and 2 SS incomes pay most or all of your bills. All of a sudden, you have a forced taxable withdrawal from your tax-deferred accounts of $180,000 (the first year - it goes up each year). As you can see, that will push you up a tax bracket pretty easily. And when one dies, the survivor is likely to go up even another tax bracket.

For that reason, people with a pension might find it useful to go ahead and pay a little extra tax now by using more Roth so that this "problem" may be less later.

I'm not saying this tax-bomb will happen to you. I'm saying it does happen to some people and having a pension is often one of the contributing factors. So, just put it on your list of things to learn more about.
In recent years, the focus has been more on traditional over ROTH, as it keeps the gross income down for student loan repayments. Though based on current tax rates and annual income, I’m sure the charts suggest more Roth contributing. Is there a goal to have about half retirement income in a Roth and half in traditional, when retirement arrives?
Every situation is different and you may decide that you get an important current benefit from using more traditional. Just keep an open mind that that may not be the best decision every year for the rest of your career.

There really is no "goal". It's more a "balance". I would not encourage more Roth than 50/50 in most scenarios. Nor would I encourage arriving at retirement with all tax-deferred if there are other choices.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by pkcrafter »

Tomwood wrote:
Is the reason for minimum of 20% bonds so that I can rebalance? As opposed to 100% stocks.
No. Take a look at this page and decide of the additional return of 100% stock is worth the potential drawdown. I don't advocate 100% stock because of the higher risk and the lack of a major asset class.

https://investor.vanguard.com/investing ... allocation

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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by grabiner »

retiredjg wrote: Sat Jan 23, 2021 11:08 am I agree with what grabiner said above - the decision for traditional vs Roth should mostly depend on your tax rate now vs later. But I would go one step further. It is possible to save too much in tax-deferred accounts and this can be a problem if you don't have a way to spend some of it or convert a good portion of it to Roth IRA before RMDs start.

Imagine this scenario...you arrive at age 72 (time to start RMDs) with $5 million in tax-deferred accounts because your pension and 2 SS incomes pay most or all of your bills. All of a sudden, you have a forced taxable withdrawal from your tax-deferred accounts of $180,000 (the first year - it goes up each year). As you can see, that will push you up a tax bracket pretty easily. And when one dies, the survivor is likely to go up even another tax bracket.

For that reason, people with a pension might find it useful to go ahead and pay a little extra tax now by using more Roth so that this "problem" may be less later.
This is not a problem if you intend to contribute a lot of your portfolio to charity. When you have the RMD of $180K, and only need to spend $100K, you can donate $80K to charity and not have it affect your taxes at all.

But if you intend to leave the money to your heirs, it is better to use a Roth account, because the Roth does not have RMDs during your lifetime. (The Roth TSP does, but you can roll your Roth TSP into a Roth IRA.) If the money is in a traditional account, you will have to move much of it into a taxable account during your lifetime, and then you and your heirs will both start paying dividend tax.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

grabiner wrote: Sat Jan 23, 2021 3:46 pm
retiredjg wrote: Sat Jan 23, 2021 11:08 am I agree with what grabiner said above - the decision for traditional vs Roth should mostly depend on your tax rate now vs later. But I would go one step further. It is possible to save too much in tax-deferred accounts and this can be a problem if you don't have a way to spend some of it or convert a good portion of it to Roth IRA before RMDs start.

Imagine this scenario...you arrive at age 72 (time to start RMDs) with $5 million in tax-deferred accounts because your pension and 2 SS incomes pay most or all of your bills. All of a sudden, you have a forced taxable withdrawal from your tax-deferred accounts of $180,000 (the first year - it goes up each year). As you can see, that will push you up a tax bracket pretty easily. And when one dies, the survivor is likely to go up even another tax bracket.

For that reason, people with a pension might find it useful to go ahead and pay a little extra tax now by using more Roth so that this "problem" may be less later.
This is not a problem if you intend to contribute a lot of your portfolio to charity. When you have the RMD of $180K, and only need to spend $100K, you can donate $80K to charity and not have it affect your taxes at all.

But if you intend to leave the money to your heirs, it is better to use a Roth account, because the Roth does not have RMDs during your lifetime. (The Roth TSP does, but you can roll your Roth TSP into a Roth IRA.) If the money is in a traditional account, you will have to move much of it into a taxable account during your lifetime, and then you and your heirs will both start paying dividend tax.
If this situation does happen with my accounts, and a half dozen years before I retire, the vast majority of my tax advantage account worth is in traditional accounts, is there a strategic way to get things into Roths before retirement, even if it means a bit of a tax Bill? Or would that not be likely or be not worth it due to the taxes being paid later that I need to plan now, and not get caught with my hand in the cookie jar later in life?
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by grabiner »

tomwood wrote: Sat Jan 23, 2021 4:14 pm
grabiner wrote: Sat Jan 23, 2021 3:46 pm
retiredjg wrote: Sat Jan 23, 2021 11:08 am I agree with what grabiner said above - the decision for traditional vs Roth should mostly depend on your tax rate now vs later. But I would go one step further. It is possible to save too much in tax-deferred accounts and this can be a problem if you don't have a way to spend some of it or convert a good portion of it to Roth IRA before RMDs start.

Imagine this scenario...you arrive at age 72 (time to start RMDs) with $5 million in tax-deferred accounts because your pension and 2 SS incomes pay most or all of your bills. All of a sudden, you have a forced taxable withdrawal from your tax-deferred accounts of $180,000 (the first year - it goes up each year). As you can see, that will push you up a tax bracket pretty easily. And when one dies, the survivor is likely to go up even another tax bracket.

For that reason, people with a pension might find it useful to go ahead and pay a little extra tax now by using more Roth so that this "problem" may be less later.
This is not a problem if you intend to contribute a lot of your portfolio to charity. When you have the RMD of $180K, and only need to spend $100K, you can donate $80K to charity and not have it affect your taxes at all.

But if you intend to leave the money to your heirs, it is better to use a Roth account, because the Roth does not have RMDs during your lifetime. (The Roth TSP does, but you can roll your Roth TSP into a Roth IRA.) If the money is in a traditional account, you will have to move much of it into a taxable account during your lifetime, and then you and your heirs will both start paying dividend tax.
If this situation does happen with my accounts, and a half dozen years before I retire, the vast majority of my tax advantage account worth is in traditional accounts, is there a strategic way to get things into Roths before retirement, even if it means a bit of a tax Bill? Or would that not be likely or be not worth it due to the taxes being paid later that I need to plan now, and not get caught with my hand in the cookie jar later in life?
You may decide to convert traditional accounts to Roth accounts. This is most likely to be worth doing after at least one of you has retired and before RMDs start, as you will likely have a lot of room in moderate tax brackets. The 22% tax bracket for a married couple extends to $172,750 taxable income, and the 24% tax bracket to $329,850. If you have $100K of room in the 24% tax bracket, you can convert $76K from traditional to Roth and withdraw another $24K to pay the tax on the conversion.

But this is only worthwhile if there isn't much difference in marginal tax rates. It is worth converting at 22% to avoid paying later tax at 22% and get rid of RMDs. It might be worth converted at 25% to avoid paying later tax at 22%. But it is not worth converting at 22% federal plus 6% state tax to avoid paying later tax at 22% because you intend to retire in a state with no income tax.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by brad.clarkston »

tomwood wrote: Thu Jan 21, 2021 7:33 pm
2) with access to the G fund, should the tsp be the only location for bonds, until there’s more money in the TSP than bonds needed? Or do the bond funds at fidelity (or VG) offer other positives in addition to the G fund, such as possible bond diversification?

Yes the G fund would be the best place for your total bond allocation. There's nothing saying you have to spread bonds across every account.
VG or Fed have great funds but there runners up to the G fund.

3) the International funds at VG, TSP & Fidelity are all a bit different. Is one fund better to use based on fees or what it tracks? Or is is better to have international in traditional or Roth account? Or for better diversification, should all 3 be held?

There close enough to not matter. I'm slowly moving to FTIHX only but that's because my Fidelity account is now bigger than my VG due to my last three employee's use it and I've been maxing out my IRA and Roth at Fed. Within the next year'ish I plan to roll VG over to Fidelity but that's not a knock on the company it's just how my circumstances played out.


4) which brings us to our last question. Who rebalances once (or more) per year on a specific date(s) and who rebalances when the allocations differ by a percentage? Would someone explain the reason behind why you’d chose one over the other? I’m sure there’s a lot of personal preference involved but any reasoning would be helpful as this might also be part of our investment plan’s updating.
Does anyone never rebalance? we’d like hearing the reasoning behind that perspective too.


I re-balance on my birthday every year - you'll notice I'm more active on BG from Dec-March because that's when I'm actively looking at everything.
I use the banding method at 5%. Any one fund that's over 5% of my IPS gets re-balanced which means everything more than likely gets shaken up a bit.
This year is taking more work than most across all of my investments (cash/ef/cd ladders/401k/ira/roth/hsa/life insurance/espp).

I never re-balance my 401k account because I'm almost always in a Target/Freedom fund that's actively balanced. I treat 401k and IRA/Roth as separate beasts.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by MichDad »

grabiner wrote: Sat Jan 23, 2021 4:20 pm
tomwood wrote: Sat Jan 23, 2021 4:14 pm
grabiner wrote: Sat Jan 23, 2021 3:46 pm
retiredjg wrote: Sat Jan 23, 2021 11:08 am I agree with what grabiner said above - the decision for traditional vs Roth should mostly depend on your tax rate now vs later. But I would go one step further. It is possible to save too much in tax-deferred accounts and this can be a problem if you don't have a way to spend some of it or convert a good portion of it to Roth IRA before RMDs start.

Imagine this scenario...you arrive at age 72 (time to start RMDs) with $5 million in tax-deferred accounts because your pension and 2 SS incomes pay most or all of your bills. All of a sudden, you have a forced taxable withdrawal from your tax-deferred accounts of $180,000 (the first year - it goes up each year). As you can see, that will push you up a tax bracket pretty easily. And when one dies, the survivor is likely to go up even another tax bracket.

For that reason, people with a pension might find it useful to go ahead and pay a little extra tax now by using more Roth so that this "problem" may be less later.
This is not a problem if you intend to contribute a lot of your portfolio to charity. When you have the RMD of $180K, and only need to spend $100K, you can donate $80K to charity and not have it affect your taxes at all.

But if you intend to leave the money to your heirs, it is better to use a Roth account, because the Roth does not have RMDs during your lifetime. (The Roth TSP does, but you can roll your Roth TSP into a Roth IRA.) If the money is in a traditional account, you will have to move much of it into a taxable account during your lifetime, and then you and your heirs will both start paying dividend tax.
If this situation does happen with my accounts, and a half dozen years before I retire, the vast majority of my tax advantage account worth is in traditional accounts, is there a strategic way to get things into Roths before retirement, even if it means a bit of a tax Bill? Or would that not be likely or be not worth it due to the taxes being paid later that I need to plan now, and not get caught with my hand in the cookie jar later in life?
You may decide to convert traditional accounts to Roth accounts. This is most likely to be worth doing after at least one of you has retired and before RMDs start, as you will likely have a lot of room in moderate tax brackets. The 22% tax bracket for a married couple extends to $172,750 taxable income, and the 24% tax bracket to $329,850. If you have $100K of room in the 24% tax bracket, you can convert $76K from traditional to Roth and withdraw another $24K to pay the tax on the conversion.

But this is only worthwhile if there isn't much difference in marginal tax rates. It is worth converting at 22% to avoid paying later tax at 22% and get rid of RMDs. It might be worth converted at 25% to avoid paying later tax at 22%. But it is not worth converting at 22% federal plus 6% state tax to avoid paying later tax at 22% because you intend to retire in a state with no income tax.
I use my FERS pension to pay for most or all of our Roth conversions rather than reducing our tax deferred assets as in grabiner's example highlighted above. If you'll be making substantial Roth conversions from age 63 and later, be aware of the Medicare Part B premium surcharges; the Medicare Income-Related Monthly Adjustment Amount (IRMAA).

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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by LeeMKE »

4) which brings us to our last question. Who rebalances once (or more) per year on a specific date(s) and who rebalances when the allocations differ by a percentage? Would someone explain the reason behind why you’d chose one over the other? I’m sure there’s a lot of personal preference involved but any reasoning would be helpful as this might also be part of our investment plan’s updating.
Does anyone never rebalance? we’d like hearing the reasoning behind that perspective too.
My ISP says to check my portfolio once a year (I actually check it twice a year when I take draws) and rebalance if I'm 2% or more out of line. And when the market makes a sudden move, I rebalance if I can still sleep at night.

As a result, I rebalanced when the Brexit vote shocked the market (widely expected to fail, but it passed). And I rebalanced this last March when the market dropped 30% when the pandemic shocked the market (Sure, the US was going to be magically immune?).

I became fond of having bonds in my portfolio because it gives me some dry powder to deploy in these shocking market moves. When I was at 90/10, there wasn't nearly so much to gain by rebalancing.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by WoodSpinner »

OP,

Since you are in the accumulation stage, I don’t think a yearly rebalance is warranted. I am retired and do rebalance yearly but am also funding the years expenses as part of the process. I would suggest a simple Band Rebalancing approach (I use 5/20). Here is the rules from my IPS.
Re-balance periodically as needed if a 5% Actual or 20% Relative threshold is exceeded. The
goal is to keep the Asset Allocation you are comfortable with while still allowing the market to move and change. Short-term and/or small deviations are simply not worth the effort and can be counter-productive.

Example 1 (20% Relative Re-balancing):
If fund XYZ has an allocation of 10% (20% of 10 is 2%) than you would re-balance, if:
a. If it went down to 8% (10% - 2%), you would buy more by selling other Assets
b. If it went up to 12% (10% + 2%), you would sell and by other assets.

Example 2 (5% Actual Re-balancing)
if fund XYZ has an allocation of 30% than you would re-balance, if:
a. If it went down to 25% (30% - 5%), you would buy more by selling other Assets
b. If it went up to 35% (30% + 5%), you would sell and by other assets.

Realize that it can be terrifying to re-balance as the market is dropping but it is necessary and over time will be proven to be the best decision.
Lots of other good comments up-thread. Personally I would be in the range of 70/30 to 100/0 at your age and job stability.

Best of luck

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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

brad.clarkston wrote: Sat Jan 23, 2021 4:48 pm I use the banding method at 5%. Any one fund that's over 5% of my IPS gets re-balanced which means everything more than likely gets shaken up a bit.
How does this 5% plan work?
If my target is: 20% bonds, 20% Intl and 60% usa, and on your birthday usa is 66% while bonds are 17% and intl is 17%, only one of the 3 funds fall outside the 5%, do you adjust all 3 funds to equal the original plan of 20-20-60?

And another example, with 20-20-60 target still, what if, on your birthday bonds are 19% while intl is 13% and usa is 66%. In this case two fall outside the 5% amount, so will you only balance between those two and leave bonds alone, or, so they all go back to 20-20-60?
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

WoodSpinner wrote: Sun Jan 24, 2021 12:14 pm OP,

Since you are in the accumulation stage, I don’t think a yearly rebalance is warranted. I am retired and do rebalance yearly but am also funding the years expenses as part of the process. I would suggest a simple Band Rebalancing approach (I use 5/20). Here is the rules from my IPS.
Re-balance periodically as needed if a 5% Actual or 20% Relative threshold is exceeded. The
goal is to keep the Asset Allocation you are comfortable with while still allowing the market to move and change. Short-term and/or small deviations are simply not worth the effort and can be counter-productive.

Example 1 (20% Relative Re-balancing):
If fund XYZ has an allocation of 10% (20% of 10 is 2%) than you would re-balance, if:
a. If it went down to 8% (10% - 2%), you would buy more by selling other Assets
b. If it went up to 12% (10% + 2%), you would sell and by other assets.

Example 2 (5% Actual Re-balancing)
if fund XYZ has an allocation of 30% than you would re-balance, if:
a. If it went down to 25% (30% - 5%), you would buy more by selling other Assets
b. If it went up to 35% (30% + 5%), you would sell and by other assets.

Realize that it can be terrifying to re-balance as the market is dropping but it is necessary and over time will be proven to be the best decision.
Lots of other good comments up-thread. Personally I would be in the range of 70/30 to 100/0 at your age and job stability.

Best of luck

WoodSpinner
This was very helpful. I was confused about this topic in earlier comments and this post spells it out well. Thanks
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by brad.clarkston »

tomwood wrote: Sun Jan 24, 2021 5:50 pm
brad.clarkston wrote: Sat Jan 23, 2021 4:48 pm I use the banding method at 5%. Any one fund that's over 5% of my IPS gets re-balanced which means everything more than likely gets shaken up a bit.
How does this 5% plan work?
If my target is: 20% bonds, 20% Intl and 60% usa, and on your birthday usa is 66% while bonds are 17% and intl is 17%, only one of the 3 funds fall outside the 5%, do you adjust all 3 funds to equal the original plan of 20-20-60?

And another example, with 20-20-60 target still, what if, on your birthday bonds are 19% while intl is 13% and usa is 66%. In this case two fall outside the 5% amount, so will you only balance between those two and leave bonds alone, or, so they all go back to 20-20-60?
There's several ways to do it but I always bring then back to my 60/20/20 (us eg/int eq/us bond) otherwise your probably going to have cash setting in your sweep fund doing nothing.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

LeeMKE wrote: Sat Jan 23, 2021 10:43 pm
4) which brings us to our last question. Who rebalances once (or more) per year on a specific date(s) and who rebalances when the allocations differ by a percentage? Would someone explain the reason behind why you’d chose one over the other? I’m sure there’s a lot of personal preference involved but any reasoning would be helpful as this might also be part of our investment plan’s updating.
Does anyone never rebalance? we’d like hearing the reasoning behind that perspective too.
My ISP says to check my portfolio once a year (I actually check it twice a year when I take draws) and rebalance if I'm 2% or more out of line. And when the market makes a sudden move, I rebalance if I can still sleep at night.

As a result, I rebalanced when the Brexit vote shocked the market (widely expected to fail, but it passed). And I rebalanced this last March when the market dropped 30% when the pandemic shocked the market (Sure, the US was going to be magically immune?).

I became fond of having bonds in my portfolio because it gives me some dry powder to deploy in these shocking market moves. When I was at 90/10, there wasn't nearly so much to gain by rebalancing.
That’s a very interesting take, so when unique events result in the us stock market dropping significantly, you use your bonds as a way to buy low? Do you use some, half, most, all of your bonds to buy more stocks? And and what point do you rebalance to a preset AA, if ever?
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by LeeMKE »

That’s a very interesting take, so when unique events result in the us stock market dropping significantly, you use your bonds as a way to buy low? Do you use some, half, most, all of your bonds to buy more stocks? And and what point do you rebalance to a preset AA, if ever?
When there is a sudden shock in the markets, I just rebalance to my asset allocation. Nothing fancy. I'm currently at 60/40, so I deployed a lot of bonds to buy stocks last March. Then, when the market corrected faster than expected, I rebalanced again, back to 60/40. It was an unexpected boost to my portfolio, as you can imagine.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

WoodSpinner wrote: Sun Jan 24, 2021 12:14 pm OP,

Since you are in the accumulation stage, I don’t think a yearly rebalance is warranted. I am retired and do rebalance yearly but am also funding the years expenses as part of the process. I would suggest a simple Band Rebalancing approach (I use 5/20). Here is the rules from my IPS.
Re-balance periodically as needed if a 5% Actual or 20% Relative threshold is exceeded. The
goal is to keep the Asset Allocation you are comfortable with while still allowing the market to move and change. Short-term and/or small deviations are simply not worth the effort and can be counter-productive.

Example 1 (20% Relative Re-balancing):
If fund XYZ has an allocation of 10% (20% of 10 is 2%) than you would re-balance, if:
a. If it went down to 8% (10% - 2%), you would buy more by selling other Assets
b. If it went up to 12% (10% + 2%), you would sell and by other assets.

Example 2 (5% Actual Re-balancing)
if fund XYZ has an allocation of 30% than you would re-balance, if:
a. If it went down to 25% (30% - 5%), you would buy more by selling other Assets
b. If it went up to 35% (30% + 5%), you would sell and by other assets.

Realize that it can be terrifying to re-balance as the market is dropping but it is necessary and over time will be proven to be the best decision.
Lots of other good comments up-thread. Personally I would be in the range of 70/30 to 100/0 at your age and job stability.

Best of luck

WoodSpinner

WoodSpinner,
I should I be checking my accounts more frequently than once per year, to learn if they are off by 5% or off by 20%, if that’s the way I choose to rebalance? For someone who currently only checks the retirement account once per year to rebalance, like me, and who would switch to this 5%/20% approach, how will I know it’s time to rebalance if I’m not checking the accounts quite regularly? Any advice?
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tomwood
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

LeeMKE wrote: Tue Jan 26, 2021 4:41 pm
That’s a very interesting take, so when unique events result in the us stock market dropping significantly, you use your bonds as a way to buy low? Do you use some, half, most, all of your bonds to buy more stocks? And and what point do you rebalance to a preset AA, if ever?
When there is a sudden shock in the markets, I just rebalance to my asset allocation. Nothing fancy. I'm currently at 60/40, so I deployed a lot of bonds to buy stocks last March. Then, when the market corrected faster than expected, I rebalanced again, back to 60/40. It was an unexpected boost to my portfolio, as you can imagine.
Thank you for clearing that up
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by FrugalInvestor »

Pandemic Bangs wrote: Thu Jan 21, 2021 9:53 pm
tomwood wrote: Thu Jan 21, 2021 7:33 pm Many decades ahead to work even though age is very late 30s. And we plan to make a change to the percentage of bonds we hold, which was age in bonds.
Just a caveat. There is a lot of FOMO among earlier-stage earners about this concept. Were you planning to make this change this past March? And: if not then, why now?
I second this caveat. What's most important is how you feel about your bond percentage when the market is crashing, not when it's soaring.
Have a plan, stay the course and simplify. Then ignore the noise!
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by retiredjg »

tomwood wrote: Tue Jan 26, 2021 8:28 pm I should I be checking my accounts more frequently than once per year, to learn if they are off by 5% or off by 20%, if that’s the way I choose to rebalance? For someone who currently only checks the retirement account once per year to rebalance, like me, and who would switch to this 5%/20% approach, how will I know it’s time to rebalance if I’m not checking the accounts quite regularly? Any advice?
If you decide to use the band method, the what you see/hear on the news will let you know if you need to check your balances. When the market is just plodding along, there is no reason to check frequently.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by WoodSpinner »

tomwood wrote: Tue Jan 26, 2021 8:28 pm
WoodSpinner wrote: Sun Jan 24, 2021 12:14 pm OP,

Since you are in the accumulation stage, I don’t think a yearly rebalance is warranted. I am retired and do rebalance yearly but am also funding the years expenses as part of the process. I would suggest a simple Band Rebalancing approach (I use 5/20). Here is the rules from my IPS.
Re-balance periodically as needed if a 5% Actual or 20% Relative threshold is exceeded. The
goal is to keep the Asset Allocation you are comfortable with while still allowing the market to move and change. Short-term and/or small deviations are simply not worth the effort and can be counter-productive.

Example 1 (20% Relative Re-balancing):
If fund XYZ has an allocation of 10% (20% of 10 is 2%) than you would re-balance, if:
a. If it went down to 8% (10% - 2%), you would buy more by selling other Assets
b. If it went up to 12% (10% + 2%), you would sell and by other assets.

Example 2 (5% Actual Re-balancing)
if fund XYZ has an allocation of 30% than you would re-balance, if:
a. If it went down to 25% (30% - 5%), you would buy more by selling other Assets
b. If it went up to 35% (30% + 5%), you would sell and by other assets.

Realize that it can be terrifying to re-balance as the market is dropping but it is necessary and over time will be proven to be the best decision.
Lots of other good comments up-thread. Personally I would be in the range of 70/30 to 100/0 at your age and job stability.

Best of luck

WoodSpinner

WoodSpinner,
I should I be checking my accounts more frequently than once per year, to learn if they are off by 5% or off by 20%, if that’s the way I choose to rebalance? For someone who currently only checks the retirement account once per year to rebalance, like me, and who would switch to this 5%/20% approach, how will I know it’s time to rebalance if I’m not checking the accounts quite regularly? Any advice?
Well, you could check yearly and rebalance only if outside of the 5/20 bands ......

Or quarterly.....

OR when there is a large market movement......

WoodSpinner
WoodSpinner
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

FrugalInvestor wrote: Tue Jan 26, 2021 8:32 pm
Pandemic Bangs wrote: Thu Jan 21, 2021 9:53 pm
tomwood wrote: Thu Jan 21, 2021 7:33 pm Many decades ahead to work even though age is very late 30s. And we plan to make a change to the percentage of bonds we hold, which was age in bonds.
Just a caveat. There is a lot of FOMO among earlier-stage earners about this concept. Were you planning to make this change this past March? And: if not then, why now?
I second this caveat. What's most important is how you feel about your bond percentage when the market is crashing, not when it's soaring.
Obviously this is a quite reasonable view. And one I personally do question. As mentioned above, I invested more money into US equities while the market was declining in the spring of 2020. And since that time have considered a more heavy position with equities, do you think enough reasonable information could have been learned from the spring of 2020, or is that not enough of a data point?
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by retiredjg »

I don't think there is anything wrong with starting slow and going more aggressive with experience. Everybody should probably do it that way. However, nobody listens to that advice. :(
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by FrugalInvestor »

tomwood wrote: Wed Jan 27, 2021 9:12 am
FrugalInvestor wrote: Tue Jan 26, 2021 8:32 pm
Pandemic Bangs wrote: Thu Jan 21, 2021 9:53 pm
tomwood wrote: Thu Jan 21, 2021 7:33 pm Many decades ahead to work even though age is very late 30s. And we plan to make a change to the percentage of bonds we hold, which was age in bonds.
Just a caveat. There is a lot of FOMO among earlier-stage earners about this concept. Were you planning to make this change this past March? And: if not then, why now?
I second this caveat. What's most important is how you feel about your bond percentage when the market is crashing, not when it's soaring.
Obviously this is a quite reasonable view. And one I personally do question. As mentioned above, I invested more money into US equities while the market was declining in the spring of 2020. And since that time have considered a more heavy position with equities, do you think enough reasonable information could have been learned from the spring of 2020, or is that not enough of a data point?
The fact that you were able to add to your equities during the downturn last year is a sign that you're comfortable with your current allocation. My only concern would be that in the good times you decide to become more aggressive with your equity allocation and then be overtaken by emotions when times get really tough.

I learned my most memorable lesson during the '08-'09 financial crisis and the resulting market crash. I thought I was perfectly comfortable with my 60/40 asset allocation at the time (I was early retired) but as I dumped more and more money into equities I became very uncomfortable with the thought of the possible consequences should the bottom fall out for an extended period of time. I continued to add to equities but as hard as I tried I was unable to get all the way back to 60/40 as equities continued downward. I ended up at 50/50 and so accepted that as my true "sleep well at night" AA. I've been at that number and sleeping well ever since.

Especially given your age I'm not saying that you shouldn't change your AA, I'm just saying that you should make certain to think it through - which it appears you're doing. You know better than anyone the extent to which your emotions may become a factor during difficult economic times. If there's any chance that you'll allow them to take over when the future looks bleak then stay where you are with the knowledge that controlling your emotions is paramount to successful investing. If you're confident that you can keep your emotions in check no matter what, then especially given your age I think that age minus ten is a perfectly reasonable target for your bond allocation.

Just keep in mind that being able to stay the course is likely to make a much larger difference in your financial future than the exact percentage of bonds that you choose to hold. Having a reasonable plan and sticking to it is what counts the most.
Have a plan, stay the course and simplify. Then ignore the noise!
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tomwood
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

retiredjg wrote: Wed Jan 27, 2021 9:59 am I don't think there is anything wrong with starting slow and going more aggressive with experience. Everybody should probably do it that way. However, nobody listens to that advice. :(
If you have any wisdom you’d like to share, I’d enjoy listening to it. Feel free to just PM me and share. I value your advice.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

FrugalInvestor wrote: Wed Jan 27, 2021 11:53 am
tomwood wrote: Wed Jan 27, 2021 9:12 am
FrugalInvestor wrote: Tue Jan 26, 2021 8:32 pm
Pandemic Bangs wrote: Thu Jan 21, 2021 9:53 pm
tomwood wrote: Thu Jan 21, 2021 7:33 pm Many decades ahead to work even though age is very late 30s. And we plan to make a change to the percentage of bonds we hold, which was age in bonds.
Just a caveat. There is a lot of FOMO among earlier-stage earners about this concept. Were you planning to make this change this past March? And: if not then, why now?
I second this caveat. What's most important is how you feel about your bond percentage when the market is crashing, not when it's soaring.
Obviously this is a quite reasonable view. And one I personally do question. As mentioned above, I invested more money into US equities while the market was declining in the spring of 2020. And since that time have considered a more heavy position with equities, do you think enough reasonable information could have been learned from the spring of 2020, or is that not enough of a data point?
The fact that you were able to add to your equities during the downturn last year is a sign that you're comfortable with your current allocation. My only concern would be that in the good times you decide to become more aggressive with your equity allocation and then be overtaken by emotions when times get really tough.

I learned my most memorable lesson during the '08-'09 financial crisis and the resulting market crash. I thought I was perfectly comfortable with my 60/40 asset allocation at the time (I was early retired) but as I dumped more and more money into equities I became very uncomfortable with the thought of the possible consequences should the bottom fall out for an extended period of time. I continued to add to equities but as hard as I tried I was unable to get all the way back to 60/40 as equities continued downward. I ended up at 50/50 and so accepted that as my true "sleep well at night" AA. I've been at that number and sleeping well ever since.

Especially given your age I'm not saying that you shouldn't change your AA, I'm just saying that you should make certain to think it through - which it appears you're doing. You know better than anyone the extent to which your emotions may become a factor during difficult economic times. If there's any chance that you'll allow them to take over when the future looks bleak then stay where you are with the knowledge that controlling your emotions is paramount to successful investing. If you're confident that you can keep your emotions in check no matter what, then especially given your age I think that age minus ten is a perfectly reasonable target for your bond allocation.

Just keep in mind that being able to stay the course is likely to make a much larger difference in your financial future than the exact percentage of bonds that you choose to hold. Having a reasonable plan and sticking to it is what counts the most.
I’m glad you posted the question. The reason I make the OP was to receive lots of feedback and questions from different perspectives. And I’m sure even when people don’t think they are market timing, they really are, and it’s most helpful when other who see it can point it out to that person. While I don’t consider myself in the market timing group, I also want to transition to a more aggressive portfolio in a strategic way. Maybe it’s best to do it quickly and all at once or maybe it should be done over time. I’m here to learn from others and then put a plan into action, which I hope keeps me away from those who market time.
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by pkcrafter »

rebalancing information...

https://www.bogleheads.org/wiki/Rebalancing


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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tomwood
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

pkcrafter wrote: Fri Jan 29, 2021 12:02 pm rebalancing information...

https://www.bogleheads.org/wiki/Rebalancing


Paul
A great link.
Thank you
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Re: Editing my 3 fund portfolio (VG, TSP, Fidelity)

Post by tomwood »

grabiner wrote: Sat Jan 23, 2021 10:21 am
tomwood wrote: Sat Jan 23, 2021 9:41 am Is the reason for minimum of 20% bonds so that I can rebalance? As opposed to 100% stocks.
The reason for a bond holding is to control your risk level. If you have 20% bonds, you need to rebalance to keep the risk level the same; if you have 0% bonds, rebalancing is not necessary (although you will still rebalance between US and foreign stocks).
Would any BHs personally hold 100% equites for a portion of their life, knowing of assuming they could handle the risk?
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