Resolve to Rebalance

William Ehart

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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