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I Don’t Rebalance
By JLP | December 3, 2008
Rebalancing an investment portfolio - much like diversifying and spending less than you make - is classic, sensible, research-proven, oft repeated personal finance advice. It’s important for many reasons:
- It keeps your asset allocation on target (a key component of total return).
- It forces you to buy assets when they’re down and sell them when they’re up.
- It improves performance over the long term by lessening portfolio volatility.
- It prevents you from getting too conservative or too aggressive when the market swings, thereby leaving you in a better position for downturns and rebounds.
In short, rebalancing is an “easy and effective way of maintaining the right balance between risk and reward in your portfolio,” as Money Magazine’s Walter Updegrave says in this rebalancing article.
But I’ve never done it. I have been investing for 10 years, but I’ve never rebalanced. I have never sold a single asset I’ve bought and used the proceeds to purchase an alternate asset (unless you count day trading, which of course I don’t).
I want to do it; I feel I need to do it. But there are a few things stopping me.
In the first place I haven’t really decided exactly what my asset allocation should be. I’m in my mid 20’s, and I am comfortable with risk for a variety of reasons, so one could argue I should be 100% in stocks. But I plan to “retire” from the corporate world and potentially start dipping into some of my assets by the time I’m 40, so maybe I should be more conservative. But I could get married, have kids, or change priorities by then so maybe that won’t happen after all and I should allocate based on my age and risk tolerance and be more aggressive.
And there are further complications. I am heavily invested in real estate (I own 3 properties), so one could argue I need a hefty dose of bonds - or gold or silver - to act as a real estate hedge. Also I am blessed with wealthy relatives who have gifted me a sizeable fund which sits 100% in stock index funds which I can’t/don’t currently control. Given that, should my personal funds be 100% in bonds and cash in order to counter-balance that — or should I pretend that those index funds don’t exist and allocate my retirement and other accounts as I otherwise normally would?
Which brings me to another point. Which assets am I supposed to be looking at here? My total portfolio is hugely skewed by my 3 real estate properties which have a lot of equity in them. Even leaving that out, it’s hugely skewed by the “leftover college fund” that I don’t yet control. Leaving that out it’s still skewed by my real estate reserve fund (6 months of expenses for each property is my goal) and by my emergency fund - which ideally would be a year’s worth of cash. But if I leave all that out and only look at my (relatively small) personal funds, that isn’t really accurate or helpful.
So what I’ve been doing is this: I buy and hold. My 401k is all in one 2040 retirement fund, and my Roth IRA is mostly in the Vanguard 2045 retirement fund. Each year when I make my Roth contribution I have been buying whatever I think might balance out my retirement funds somewhat - one year it was the Vanguard International Index for a little more exposure there, last year it was the Vanguard REIT index and the Vanguard Extended Market Index. Technically it’s all still “stocks” but of course it changes things to weight those sectors…
Another thing I do is invest “play” money - I have a Prosper account and a brokerage account which are both pretty small, relatively speaking. I also have a non-retirement Vanguard fund (balanced, but mostly stocks) which I throw money into when the market really dips.
I don’t think I could ever be satisfied with or stick to one asset allocation strategy. What if I wanted to pick up a foreclosure or invest in a start up or give a loan to somebody or start a business - where does that sort of activity fall into the mix? And even if it was all simple and I had one fund and I got the stocks vs real estate vs bonds vs cash thing figured out, what oh what to do about international vs domestic, large cap vs small, growth vs value?? Maybe if I had $50 million or so I could construct the perfect portfolio…
More from Meg at The World of Wealth
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