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Old 01-15-2016, 12:19 PM
Location: Central Massachusetts
4,800 posts, read 4,861,663 times
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Originally Posted by ABQ2015 View Post
So if I could interject a quick question about rebalancing and/or taking advantage of market drops. I have my 401k contributions going into equity index funds and am getting ready to fund my Roth IRA and HSA for 2016 while the market is down. My 401k was at 60/40 asset allocation equities/stable value (2 years from retirement) until the recent market drop but is probably down some in equities (I try not to look because I also have problems sleeping at night if I see the actual drop). At this point do you rebalance to 60/40 while the market is down, perhaps move 5-10% of the stable value into equities at a time, or move most of the stable value into equities (I probably would not do this because I'm risk adverse)? Or do you just buy additional shares with new contributions and funding of Roth and HSA and rebalance at some later predefined time? The dividing line between "staying the course" and "playing the market" has always been a little fuzzy to me.

My 401K will fund about 25% of my retirement, all discretionary funding. It's important but not the bulk of my retirement.

Here is what I am saying. If you are not already maxing out your contributions to your IRA you could add to it when the market is down. If you are talking 401k you could attempt to add more by increasing contribution amount but you might be subject to open season for changes.

This has nothing to do with timing. It all is based on today's value. If you see today it cost you $10 per share and tomorrow that same fund will cost you $8 per share you are increasing your share holdings and when the shares price goes back to 10 your 8 dollar share has increased by 2. I hope that simplifies it.
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Old 01-15-2016, 12:32 PM
Location: Central Massachusetts
4,800 posts, read 4,861,663 times
Reputation: 6379
Originally Posted by ohio_peasant View Post
Yes, there are caveats. But other than dividends, my index-funds' annual return tracks that of the "official" indices remarkably accurately. Daily fluctuations can differ.

Yes but it is not just there. You are correct in that if you just bought and held those share and did not add to it. But index funds are being added to every pay period or systematically depending on the situation.

Part of the confusion, I think, is that we're assuming that most people neatly fall into one of two categories:

1. Retirees or near-retirees, who have a large ratio of portfolio-to-income, and don't have enough future-earnings to cover sharp losses in their portfolio. They can buy on the dips, but it's not going to make a large impact on their overall portfolio. But that's OK, because being older, they are less exposed to the stock market.

Only when the adjust to be less exposed. If they move too conservative then they are set to fall behind inflation.

2. Younger people who have decades of future earnings from which to recoup any portfolio losses, because their ratio of portfolio-to-earnings is not so large, and their biggest asset is their own future earning-potential.

People in this category should ask for help from people they can trust to find the proper investments for them. It all depends on their own risk tolerance. Young folks also need to remember avoid tapping any retirement savings for any reason other emergency and in that it really has to be a real emergency.

Well, there is a third category: an amalgamation of the above two. This would be middle-aged people who don't retire for several more decades, and yet, who have such a large ratio of portfolio to annual salary, that they can't possibly recoup losses – even over the course of fanatical savings and deft buying on the dip. These folks are stuck. They can't go all-cash, because they have maybe another 50 years to live, and consequently need the compounding that only equities can provide. But neither can they save their way to recouping of losses.

Who are these people? Maybe 1990s dot-com millionaires who sold their stock-options just in time, and have spent the past 15 years working as say community-college adjunct professors.
When I said that the funds have cash reserves. Well they do. The funds need that to stay somewhat liquid. I was not talking about individuals having all cash. When I mention increasing deposits those will have to be in IRA's and Roth IRA's and not employer plans. Those employer plans are more restictive to changes in periodic deposits. If there are poorer performing IRA's for example those could be a candidate to roll into a better performing one provided you are prepare to lock in those losses from that rolled over account. But an action like that could increase holdings if the fund that was deposited to is performing well.
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