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I'm opening my Roth IRA Account.

My question is: How often should I adjust my portfolio? I know this depends on a variety of factors: I'm 23, plan to retire when I'm in my 60s (or at least withdraw from this fund at that time). So my "target" retirement date is ~2057.

Right now, because of my age, I'm investing solely in ETFs (VTI, VOO, VT).

I know the old rule-of-thumb: subtract your age from 100 and that's how much you should be investing in stocks.

With the longevity of human life, and I can only imagine that this is going to increase substantially in my lifetime, I'm considering the 'new' rule-of-thumb: subtract your age from ~120 and that's how much you should be investing in stocks.

According to this logic I should have ~97% of my money in stocks, but I think it's safe to just do all 100% for ease.

How often should I adjust this? I'm not planning on readjusting my portfolio by 1% annually. Should I be doing this every 5 years? 10? This question may be ambiguous and varies by investor, but I'm looking to try to maximize my portfolio, and at what time may be best to adjust.

  • I wouldn't bother actively adjusting it more often than you actively rebalance, which for many ofus is once a year or less., if that. You might want to let the moving target allocation guide which investments you pick when you buy or sell, to sorta drift in the right direction – keshlam Mar 2 '16 at 16:49
  • adjusting/re-balancing - same thing right? What is the context of these two - also, where do I find information on this moving target allocation? – DukeLuke Mar 2 '16 at 16:58
  • If I am adjusting my portfolio I would assume that I'm re-balancing my investments. – DukeLuke Mar 2 '16 at 16:58
  • Right, but you might be rebalancing without changing the allocation too, just to stay on your planned ratios. Changing those allocations is a second reason. – keshlam Mar 2 '16 at 17:01
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I think that there are two different questions here: 1) What is a good asset allocation, and how should it change over time 2) How to rebalance a portfolio to match the desired asset allocation

There are entire books written on asset allocation. A split between stocks and bonds is the simplest allocation, but you can also splits stocks up into, for example, US and International, large and small companies (large cap and small cap), add in Real Estate through REITs, and other components.

My opinion is that everyone should have a small (5%-10%) allocation of bonds. (There have been studies that show that this, when combined with periodic rebalancing, reduces volatility (fluctuations in the value of your portfolio) while having a minimal impact on returns (the increase or decrease in value of your portfolio)). This percentage probably doesn't need to change until you are much closer to retirement (10-15 years out).

Rebalancing is a way to sell high and buy low. The basic idea is that over a period of time some of your investments will do better than others. [As an aside, if they don't you might as well pick just one since you don't gain anything by having multiple investments that always go up and down together.] By selling some of the out-performing assets and buying the under-performing ones you are setting yourself up to benefit when they switch places.

There are two ways to do this rebalance. First, you can sell some assets and buy others. If you are investing in a tax-advantaged account (IRA, 401k, or similar) this won't trigger any gains that you have to pay tax on, and may not incur transactions fees from the broker. If you are investing in a non tax-advantages account this can be a significant expense.

The second way is just to adjust future purchases. So if you have more invested in stocks than your target allocation, buy more bonds on your next purchase to bring things back into balance. This avoids any of the costs outlines above.

  • "Rebalancing is a way to sell high and buy low." More like sell your winners to replace them with losers. If a stock has gone up say 50% in a year how do you know it won't go up another 50% in the next 6 months? Then you would replace this with a stock that has declined by say 50%. Who is to say this one won't decline another 50% in the near future. A better method is to let the market take you out when the stock stops going up and then look at other stocks that are just starting to uptrend to replace it. – Victor Mar 3 '16 at 2:25

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