Irregular Payments

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Possibly by this afternoon, if it stays quiet here, I’ll have our new portfolio.

Well, of course, I shouldn’t have written that qualifying statement in there. Because it just tempted the universe to fill the rest of my day right after I posted it… C’est la vie. Even though I was thrown off task a bit, people came in with a handful of interesting problems so I wasn’t bothered by the interruption.

After everyone went to bed Friday night, I had more than enough time to do the research I wanted anyway. And the decisions are in for this round of rebalancing. By tomorrow everything should be where I want it:

1. Put in all sell orders today.
2. Wait until market close for them to execute (mutual funds, so no instant trading).
3. Put in buy orders today after the sells have cleared
4. Buys get executed Tuesday morning

It’s not like I’m in a huge hurry to do the trades, but that delay in #2 is one minor reason why this round I’ve decided to shift quite a bit out of mutual funds and into ETFs. Well, that, and the lowered fees in most ETFs compared to their mutual fund counterparts (if there is one). Oh, and the fact that no-load mutual fund transactions have went from free to $9.95 while stock trades remain $6.95 where our accounts are held.

So, enough blathering. How about the meat already? The breakdown, largest allocation to smallest:

Class	Security	%age
US Large Cap	DODGX	22%
US Micro Cap	PZI	18%
Int’l Small Cap	DLS	16%
Emerging Market	EEM	12%
US Small Cap	EES	9%
US Small Cap Value	DES	9%
Int’l Large Cap Value	DODFX	9%
US Real Estate	RWR	2.5%
Int’l Real Estate	RWX	2.5%

I will incur a bit more in transaction costs this time around versus the last time I did this. In fact, they will be infinitely more, since last time I don’t believe I had any transaction costs. Unfortunately, as I said before, Firstrade’s free mutual fund trades recently disappeared. The total was still less than $100, so not crushing or anything. But it would certainly eat into any gains if I had to do this often.

If you notice, I have quite a bit invested in one company’s ETFs: WisdomTree. I recently stumbled across the WisdomTree indexes. I was always slightly uncomfortable with cap weighted indexes, for the very reason these ETFs were created: in a ‘normal’ index overvalued companies tend to get overweighted, while undervalued ones get underweighted. Despite almost no history, I like the idea, and I’m going to give them a run.

As to the overall allocation, it probably looks a little risk-heavy to some. I have no need to invest these funds conservatively - I’m perfectly comfortable with the risk, and have many years before I intend to tap these accounts. Some day I may consider a bond fund like DODIX in there for diversification reasons, but I’ve never been all that attracted to bonds. I’m not that old yet…

Now that all your paychecks so far this year have gone to the government, it’s time to finally get earning for yourself.

Despite my desire to focus most of our attention on debt reduction, that doesn’t mean other aspects of our finances can be entirely pushed to the wayside. Certain areas just need a bit of consideration to keep things going along as smoothly as possible. Plus, now that I finally have a little time to contemplate anything other than numbers, what better time to think about a few more of them?

If you are tracking the performance of your investments, you’ll notice that the separate portions of your portfolio like, for instance, your US Large Cap and your Emerging Market Micro Cap sections aren’t necessarily moving in the same direction, in the same amount, all the time. (Hopefully so anyway, or you’ve got a bit of diversification to do.) Over time, these disparities can cause one or more areas of the portfolio to be overweighted while leaving other areas underweighted. Which is just another way of saying that you’re taking on more or less risk than you desired when you set up your portfolio. So a little reallocating of funds between the different classes becomes necessary.

There are three general styles of portfolio rebalancing that I’ve stumbled upon:

• Rebalance periodically - Whether annually, biannually, monthly(!) or whatever arbitrary time frame chosen, you pick some date and decide “that day is the day to rebalance.” And when that day arrives, do so. Then put a reminder in your date book for that next arbitrary date in the future to do it all over again.
• Rebalance when a your allocation is off by a particular percent - Pick an arbitrary percentage off your ideal portfolio, and decide “this is how far off perfect my allocation must be for me to rebalance“. And when some portion of your portfolio hits that percentage, rebalance.
• Rebalance when you feel a the market is heading in a particular direction - Give the separate areas of your portfolio a range of allocations - i.e. 20-40% Large Cap Value, 30-50% Small Cap, etc., etc. - and based on how you view the market, you allocate somewhere in that range when you feel that the market is about to change.

The first method is just too arbitrary for me. Too short a time between rebalancing and “if it ain’t broken, don’t fix it” would apply - and you’d needless be incurring transaction fees. Too long a time period and things get too far out of whack, and the portfolio would no longer reflect the level of risk one is comfortable taking. The problem is, there is no perfect time frame; the market just doesn’t move at a steady pace.

Method three, well, that’s just a market timing play. Which, to a me, is just shy of gambling without any of the fun (ala sharing a few good cigars and drinks with friends). I generally believe in the efficient market theory, though I probably lean more towards weak-form efficiency than strong-form. Either way, market timing doesn’t sit in either ends of that spectrum.

Which leaves method two, the route I take - it personally makes the most logical sense. The Large Cap Value portion of our overall portfolio has been creeping away from ideal for some time now, and is finally enough off that the time to take some of the gains in the winners and stock up on the beaten down has arrived.

And so now the fun begins: deciding if the investments we are in are the most appropriate, and, if not, with what to replace them. Changes at the broker I use - namely, no more free mutual fund trades - initiated some looking around before the rebalance trigger hit, and I actually stumbled across an interesting group of prospective investments that I may let run for a bit.

Possibly by this afternoon, if it stays quiet here, I’ll have our new portfolio. I’ll even throw it up here, just to see if anyone has an opinion or two on my choices….