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Resolve to Rebalance

William Ehart  |  January 2, 2020

I CAN TELL I’M a little squishy on my investment plan, because the thought of making a public New Year’s resolution fills me with all the dread of a reluctant groom.

As I linger outside my metaphorical church, I imagine my bride wants to shackle me to allocation targets and rebalancing rules that I announce to the whole congregation. My aversion to such commitments competes with my realization that—without them—I’ll be back to my free-wandering self.

But freedom’s just another word for… never getting to kiss the bride. It can mean wondering every darn day whether it’s time to take profits, buy the dip or indulge my latest get-rich-quicker scheme. Freedom allows us to respond to our emotions, which rarely leads to sound decisions.

I have asset allocation targets, such as 20% developed foreign stocks, 7% emerging markets, 5% real estate investment trusts, 3% inflation-indexed Treasury bonds—and 5% for a satellite position that allows me to make a small bet on any asset I think might outperform, which is currently foreign small-cap value stocks.

But I haven’t set hard and fast triggers for rebalancing. Do I bring the portfolio back to all targets every year-end? Every two years? Or adjust each asset class when it strays too much from my target percentage? What if it’s a long-suffering asset class? Wouldn’t I want to let it run above target for a bit before rebalancing? How about my satellite position—when do I take profits there, assuming I realize any? How long do I stick with the original bet before making a new one?

Meanwhile, what about my overall stock allocation target, which—at age 58—is currently 72% of my overall portfolio? Do I reduce that by a percentage point every year as I age, as I tentatively plan to do? Or do I have the freedom to increase that allocation and load up on stocks during a market rout when I think shares have gotten cheap enough? And if I manage to catch the recovery from the lows or close to it, how long do I let my stock funds run before bringing them back to my original target?

As it stands, in the absence of hard-and-fast rules, all of these things are judgment calls on my part. And judgment is the first thing to go out the window when greed, fear or passion rule.

You see my quandary. I have an investment plan, but it’s etched in the easy electrons of an Excel spreadsheet rather than in a gold band with a diamond setting. And I love fiddling with the spreadsheet. When will I be ready to tie the knot with a rebalancing regimen that’s forever?

William Ehart is a journalist in the Washington, D.C., area. Bill’s previous articles include Durn FurrinersOldies but Goodies and Mild Salsa. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart.

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R Quinn
R Quinn
1 year ago

I’m so adverse to paying taxes and increasing my Medicare premium, I never sell anything. I’ve had one stock for 55 years. Besides, my kids can enjoy the bump up on the cost basis. I guess I am worth more dead than alive. 🤑

BenRod
BenRod
1 year ago

Nice article, and funny as usual. Thanks. I love the imagery of being free, but without the bride. Makes you think about what freedom really is.

Peter Blanchette
Peter Blanchette
1 year ago

Your bio says that you are a journalist. My presumption is that a journalist, in the writing of an article about a topic, does investigation about the topic by looking for something that we call “facts” by doing something called research by reading books, articles and speaking with people in the field being studied. You are writing about something where there has been a lot of research done. There a lot of books, articles and people who do work in the field, that of retirement planning. Have you done any research on the topic beyond what your personal predilections are? You state that you are 58, you believe in certain defined allocations for different asset classes(foreign and emerging stocks etc). You appear to have a predilection for maintaining these asset allocations(or maybe not maintaining these allocations). You indicate that your current equity allocation is 72% which appears to be your advice for someone who is 58. Should it be lower or higher if your reader is younger than 58 and lower or higher if your reader is older than 58? If equities drop 25-30% this year what do your readers do? If I have $ 1 million in assets vs $10 K at age 58 does that change my allocation at age 58? What will you do?

Retirement planning is about having a plan. We all tend to be more successful if we have some sort of plan beforehand, before life happens. Past performance is no guarantee of future performance but it is still better than winging it as you would seem to agree.

Langston Holland
Langston Holland
1 year ago

I think you’re doing what we all should – setting rational investment boundaries around an approach that works with our human side. We all have to manage this duality to be successful in the long-run and your article is a great reminder of this.

Investing is fascinating because we have two worthy opponents; the markets and ourselves, neither of which we learn much about until later in life. Even then, much of our learning is in what we don’t know. HumbleDollar. 🙂

Just to be complete.. Your allocation isn’t a problem if you can handle a large market hit without having to sell equities for about 5 years. Also, if you are comfortably avoiding equity sales to meet your annual cash needs, you might be better off maintaining your allocation and marrying into a plan to transition into simplicity for the sake of your heirs. Maybe 3 or 4 index funds from Vanguard – while keeping that 5% satellite position on the table for fun. 🙂

Roboticus Aquarius
Roboticus Aquarius
1 year ago

Rebalancing is like flossing. You know you should floss 2x per day, but most of us are doing well if we manage half of that. We know we should rebalance, but few of us do so with any regularity. If you look once every 5 years you’re still probably going to be just fine…. one just has to be a little more vigilant once they hit 50 and higher, since we need to watch our volatility risk more closely.

John Bogle himself said something to the effect that he never really got
around to rebalancing. But then, I guess maybe he really didn’t need to.

Anyways, I think this a very minor sin in the church of personal finance. Recite your commitment to low cost index fund investing three times and increase your savings rate by 1%; your sins are absolved.

Jack McHugh
Jack McHugh
1 year ago

Dude, after reading the comments of Blanchette below, and since you (understandably) find the process of determining rebalance-thresholds too fraught, just set a time of year when you will perform an annual rebalance.
I can guarantee that it will not be optimal – just like every other rebalancing regime in existence! But over the long haul this will make little or no difference. And you are investing for the long haul, correct?
I am guilty of a wee bit of market timing myself on this, as my rebalance window is “mid-January.” I’m playing that game right now, seeing momentum and holding out for a little more… It may end in tears this year, but again, over the long-term will make very little difference.

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