Personal Investments • Was too conservative at 50/50. How to transition back to 80/20?

Market timing is changing your asset allocation in response to beliefs about future asset returns.

Rebalancing is resetting a portfolio back to asset allocation weights after past market action led to a drift from established allocation weights.

Most of us tend to suffer from a type of sunk cost fallacy wherein if we make a mistake, we want to wait for the market to bail us out by performing in a way that gives us another chance to accomplish what we could have accomplished without the error. More often than not, this compounds the error rather than correcting it.

That makes great sense. You are right. I do suffer from the sunk cost fallacy. I guess I need to establish the allocation weights, do it and believe in it, and forget about it.

It is not unreasonable to spread the timing risk across a few points in time. The most important thing is first to establish your new asset allocation, second, decide what funds you will hold and their placement to implement the allocation, and lastly, decide on the strategy to move from where you are now to the new allocation.

The asset allocation is more than the ratio of stocks and bonds. It also should the types of stock and bond asset classes to hold.

Target Date 2050 funds I'm familiar with range from 75% stocks (American Century One Choice 2050) to 90% stock (Vanguard Target Retirement 2050 or Fidelity Freedom Index 2050). So I do think 75% or 80% stock is reasonable.

One exercise is to try to imagine the maximum portfolio loss you can tolerate before you will want to pull the plug on your asset allocation. Take that percentage and double it. The resulting number should be your maximum allocation to stocks. If you want to be 80/20, it means you can stay the course if your portfolio drops by 40%. If that is uncomfortable to fathom, you would want to consider a lower allocation to stocks.

Historically, the market has recovered from bear markets, and in the absence of job loss, contributions made at that time will be at lower prices. What is important is to stay the course with your allocation. On the other hand, there may not be, and often is not a mechanism to recover from a missed rally.

If you nail down your asset allocation and select funds and account locations, you could post it for feedback.

Statistics: Posted by Northern Flicker — Thu Jun 27, 2024 12:16 am — Replies 86 — Views 5572

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