A Different Take on Rebalancing

So much is made about this tool of asset management, but how much does the average investor actually know?

As a brief overview, rebalancing is getting your investment allocation to the appropriate target.  For example, if your portfolio is comprised of 60% in risk assets (i.e. stocks) and 40% in conservative assets (i.e. bonds) and one piece of that moves differently and throws the balance off, rebalancing helps to get you back to your original allocation.

In the simplest form, rebalancing buys the assets that have gone below the allocation threshold you would like to be at and sells the assets that have gone over. And you rebalance so that you can maintain the appropriate level of risk in your portfolio and to help stay on track to reach long-term financial goals.

But what does the research say about rebalancing? And what is the common sense approach when it comes to this tool? Tune in to this week’s episode to hear us dive into the nuts and bolts of rebalancing and how you can use it in your financial life.

Here’s What You’ll Find Out in this Episode:

• The side-effects of rebalancing that investors should be aware of
  • It can be expensive (cost and taxes)
  • The time and labor involved
• How much value is added to a portfolio from rebalancing according to Vanguard
• The industry standard for rebalancing (hint: there is no standard anymore!)
  • Our philosophy is that a proper allocation need to encompass all aspects of your financial plan: risk profile, goals, age, and unique situations or needs.
• A brief discussion about the term “catawampus”.
• Academically, the 3 benefits of rebalancing:
  • 1. Naturally creates a mechanism by which you buy low and sell high
  • 2. Generally speaking, rebalancing allows you to keep your risk in check
  • 3. Allows you to tax-manage your portfolio
• The primary goals/motivation for rebalancing:
  • 1. Not to be poor: Risk-averse and don’t want to run out of money
  • 2. I want to be rich: Wants to grow
• Explore the goals-based approach to rebalancing for the young investor vs the older investor and a discussion of what this looks like in real life.
• The nitty gritty of rebalancing: when we do it and how often
  • We look at client allocations every quarter and we look to rebalance 2x a year, but that doesn’t mean we rebalance every portfolio twice a year.
  • We make sure client allocations reflect goals and if the threshold isn’t large enough, we won’t make the trade.
  • To make sure your portfolio is structured appropriately for your circumstances and the broader economic environment, we look beyond your macro-level split level of stocks and bonds, and we look inside those asset classes and may rebalance inside these spectrums.
• The value of tax diversification of your portfolio
  • Not all investment vehicles behave the same.
  • Ideal scenario is that as you are building wealth that you build up assets in three separate tax buckets (tax-deferred, tax-free, and taxable) so that you can minimize taxes now or in the future, and to provide flexibility when taking withdrawals later.

Resources Mentioned in this Episode

• A Better Way to Think About Rebalancing by Meir Statman, The Wall Street Journal
• The Next Millionaire Next Door by Sarah Stanley Fallaw, Ph.D.

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