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Investment Rebalancing Based on Asset Allocation

 

The above screenshot is a little busy but it’s my private brokerage account balance and investment holdings which I’ll break down for you bit by bit in the next few paragraphs. In it I have $172,192 invested and in this post I’ll take your through the concept of asset allocation and how to rebalance your investment portfolio based on your desired asset allocation.

I don’t pay anything to have this private brokerage account through Vanguard but I pay a small fee for each fund that I hold which depends on the fund. I hold 4 individual index funds, 3 of which are stocks and the last one a bond.

There is also a money market account (labeled as MM) where I transfer money into before deciding what to invest in. The money market account is also called a ‘sweep account’ or ‘settlement fund’ where the dividend proceeds from the index funds are swept or settled into.

 

 

Private Brokerage Account

Physicians choose to have a private brokerage account when they have extra money that they want to invest after maxing out their retirement accounts. Ballers.

During my wealth accumulation phase I would max out my retirement accounts and try to contribute as much as possible to my private brokerage account. I was able to stash away about $160,000 in my private brokerage within 1.5 years before cashing it out to by my condo in cash.

As of this writing (2018) every physician should have the ability to max out their retirement accounts to the tune of $55,000 which is the IRS maximum defined contribution plan limit. This would be a combination of $18,5000 in a 401k, 403b, 457, or TSP and another $36,500 in other forms of retirement contributions.

At Kaiser Permanente in Oregon we got the following in order to help us achieve the maximum retirement continuation limits:

  • 401k
  • 401k match (2% of salary)
  • 401a, aka money purchase plan (9% of salary)

Click here to read about my post regarding Kaiser’s 401a plan.


Once a physician maxes these retirement accounts out then the only other way to invest in securities is to open a private brokerage account within which one can buy individual stocks, REITs, bonds, ETF’s, or index funds.

Opening a private brokerage account takes 3 seconds and can be done online. I can’t recommend Charles Schwab because they aren’t consumer friendly but I have had great experiences with Fidelity and Vanguard

 

Choosing Funds

Within your private brokerage account you can invest in any security that’s offered. Most of us are familiar with individual stocks but those haven’t been a lucrative option for me.

Another post about how to invest money in your private brokerage.

I invest in index funds because I’m conservative which is why you see the ticker symbols having 5 letters in my portfolio. Index funds are traded differently and have 5 letters designating them in the securities world.

In that screenshot above you will see the following 4 index funds:

  • VEMAX (international emerging market stocks)
  • VMLTX (short-term municipal bonds)
  • VTIAX (international large blend stocks)
  • VTSAX (US large blend stocks)

 

 

To come up with the ideal portfolio you will need to know your investment horizon, your risk tolerance, and your desire for simplicity.

The huge benefit of a private brokerage is that you have options to each and every security that’s traded. While in your work sponsored retirement accounts you are often given a limited selection of funds.

 

The Transaction

Whenever I get some money that I decide to not spend on blow I try to transfer it right away into my private brokerage money market account.

I’m not sure what the interest on that account is but it’s nothing worth bragging about. The money shows up in the Vanguard money market account usually within 2 business days from my checking account and I can start investing it.

My index funds from above also provide me with some dividend income which I let pile up in the money market account as well. Every few days/weeks I log into my Vanguard account and decide what to do with that stale money.

 

You can see that I had $987 in that account which was all from dividend income. I decided to buy more of my municipal bond fund (VMLTX) with it. The reason as to why I chose to buy more municipal bonds we’ll get into next section – Asset Allocation & Rebalancing.

In order to make the purchase I had to just click on the VMLTX fund, select buy, then identify the source from which I wanted to purchase the fund, and complete the transaction. I did this today, Saturday, so the transaction will likely complete by the end of the day on Monday at whatever price the fund ends up at the time.

 

Asset Allocation & Rebalancing

The asset allocation is what you need to come up with to decide how much of each fund to hold. If you want to be invested in 80% stocks and 20% bonds then your asset allocation is often referred to in short as 80/20.

In my case my desired asset allocation with all my funds is:

  • VEMAX – 20%
  • VMLTX – 20%
  • VTIAX – 20%
  • VTSAX – 40%

If you look at the percentage column then you’ll see what percent of my total account is actually held in each fund. Because the funds go up or down depending on the market’s moods, these numbers fluctuate constantly taking my desired percentages off track.

So the actual holdings are currently sitting at:

  • VEMAX – 23%
  • VMLTX – 16%
  • VTIAX – 32%
  • VTSAX – 28%

In the next column I’ve created some nerdy functions to automatically tell me whether I’m over or under my desired asset allocation.

 

The negative values in red indicate that I need to add 4% (or $6,265) to the municipal bond fund (VMLTX) in order to bring it up to the desired asset allocation. This is referred to as rebalancing your portfolio in order to maintain your asset allocation.

Rebalancing

I don’t want to get too technical but because the markets have recently favored the international funds, my foreign emerging markets (VEMAX) and my foreign large blend (VTIAX) have performed quite well and shot past my desired asset allocation.

I could sell some of these appreciated assets and buy more of the other 2 funds or I can just add more funds to the other 2 in order to bring them up to goal.

From the spreadsheet you can see that if I bought $6,265 worth of the municipal bonds (VMLTX) then I could bring my bonds to the level I want them to be at (20% of total portfolio). I don’t have $6,265 to invest so the $987 will have to do for now until I come by more money.

I would need to invest another $20,246 in the US large blend stocks (VTSAX) in order to bring it up to the level I need it to be. Wanna gift me $20k?

That’s the process of rebalancing. It used to be fun and exciting to do it – now it’s a bit tedious so I look forward to handing this over to my financial adviser soon so that he can have all the fun while I sit back and enjoy the profits.

 

The Big Picture

It’s good for me to provide a big picture section after every one of my technical posts so that you guys can see why it’s worth going through these nerdy steps.

Rebalancing to achieve your asset allocation goals won’t make your dick bigger and won’t make that bald spot less obvious but it will help you maximize your profits from your portfolio.

If you just let the entire portfolio drift then it will soon look like the forest of pubes some of us sport in Portland. Rebalancing it makes sure that you retain the desired percentages of each fund – after all, you chose that percentage because you knew that it would maximize your profits based on your risk tolerance and investment horizon.

As shitty as the bond market has been the past few years, if I just let my private brokerage funds drift then soon I would have very little in my bond fund while my stocks would take up the majority of my investments.

I need the bonds not only to allow me some rebalancing wiggle room but also because it will prevent my portfolio from crashing too hard should the market correct.

If you went with a single-fund portfolio, for example if you only held a US large blend fund (VTSAX), then you wouldn’t need to do any rebalancing or even come up with an asset allocation.

Once your private brokerage account gets large enough then the investments within it will start generating sizable dividend income. Soon you’ll have thousands of dollars sweeping into that money market account.

This private brokerage portfolio at Vanguard earns $3,400/year in dividend income or $283/month.

2 replies on “Investment Rebalancing Based on Asset Allocation”

Was it a hassle to get the dividends sent to your money market rather than automatically buying more shares of the same fund? Seems like the default for mutual funds is to reinvest so the allocation skews even more.

There is a checkbox you can click which allows you to either automatically reinvest or have the money sent to your settlement fund (money market). It’s not hard to figure it out but you have to do it with each fund and account.

My Accounts > Dividends & Capital Gains > Change Distribution Election > Change Elections > [Choose: 1. Reinvest, 2. Transfer to Settlement Fund, 3. Transfer To Bank, 4. Send me a Check]

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