fbpx
U

Shocking Stats: The Impact of Never Rebalancing Your Portfolio

March 8, 2023

Rebalancing sounds great in theory, but what if it could hurt your portfolio? Fortunately, we have some data to share with you. In this highlight, Brian and Bo discuss what could happen if you never rebalance your portfolio.

For more of a deep dive into rebalancing, watch the full episode called, “Watch This Before Rebalancing Your Investment Portfolio!”

Transcript

I’m not sure if we were lucky or if we actually planned it, but that’s a perfect segue into a common investing concept: “Buy low, sell high.” It sounds easy, but as we know from emotions, market cycles, and economics, it’s not that simple. Unless you have a system that forces you to rebalance your portfolio, it can be challenging to manage your winners and losers effectively.

You might wonder, “Okay, rebalancing sounds great in theory, but wouldn’t it hurt my performance? If I sell the things that are doing well and buy the things that haven’t done as well, wouldn’t I be better off doing nothing?” Fortunately, we have some data and analytics to share with you.

In our show, we like to show you the numbers and dive into the details. Recently, Daniel put together an illustration that compares two 60-40 portfolios over the past 22 years of investing, starting in 2000, which included the dot-com bubble burst, the Great Recession, COVID, and several positive bull markets. The dark line represents the rebalanced portfolio, while the lighter green line represents the non-rebalanced portfolio.

As you can see from the chart, the overall difference in total return performance isn’t that huge, with 264 percent for the rebalanced portfolio and 268 percent for the non-rebalanced portfolio. However, if you look closely, you’ll notice that in most economic cycles, the rebalanced portfolio outperformed the non-rebalanced portfolio. Only recently, due to the significant run-up of the S&P 500 post-Great Recession, the difference narrowed to four percent.

At first glance, you might think that the four percent difference isn’t worth the effort of rebalancing, but let’s consider two retirees named Trina and Tina who retired in 2000 with a million-dollar portfolio, targeting a 60-40 allocation over their retirement life cycle. Both of them listened to the Money Guy content and decided to withdraw 4% per year, or $40,000, for living expenses. However, Trina rebalanced her portfolio annually, while Tina never rebalanced hers.

If you run the simulations, you’ll find that over 22 years, Trina’s portfolio would grow to $2.34 million, even after accounting for taxes and inflation. On the other hand, Tina’s portfolio would only grow to $1.94 million. That’s a difference of $400,000, which is not trivial, especially in retirement. Moreover, the rebalanced portfolio would also have less risk and volatility than the non-rebalanced portfolio.

Therefore, even though rebalancing may seem like a small or tedious task, it can add up to significant benefits over time, especially when compounded by other smart investing strategies. That’s why we encourage you to automate your rebalancing or set a calendar reminder, so you don’t miss out on this opportunity to enhance your portfolio’s performance and stability.

For more information on how much you should be saving for retirement, check out our Know Your Number course.

Connect

Subscribe

Most Recent Episodes

Financial Advisors React to Money Advice from ChatGPT

Will ChatGPT be your new financial advisor? In this react episode, we’ll break down some money advice from ChatGPT and compare it to our own thoughts and opinions. Enjoy the Show? Sign up for the Financial Order of Operation (FOO) Online Course! Sign up for our Know...

Financial Planning 101 (By Age) 2023 Edition

Throughout every decade, there are different areas of your financial life that come in and out of focus. In this episode, we'll discuss what you need to focus on by age, pitfalls to watch out for, and how to know you're doing it right. In this episode, you'll learn:...

Is the 2023 Housing Crash Around the Corner?

Housing prices skyrocketed after the pandemic to all-time highs, and mortgage rates have more than doubled since 2020. Homes are harder to purchase for more Americans, which means it’s more important than ever to make sure you are ready to buy before purchasing. In...

Watch This Before Rebalancing Your Investment Portfolio!

85% of Americans don’t rebalance their 401(k). Are they making a huge mistake? In this episode, we’ll discuss the “why” behind rebalancing, how to do it, and the data on whether or not rebalancing can increase your return. In this episode, you’ll learn: What...

Don’t Make This HUGE 401(k) Mistake!

Americans are making a HUGE mistake in their 401(k) that could cost them thousands by retirement. We’ll talk about why this is happening and how you can avoid making the same mistake in this Q&A episode! For more information on how to make the most out of every...

Alex Hormozi’s Top Money Advice! (Financial Advisors React)

In this episode, we react to Alex Hormozi's financial advice. Enjoy the Show? Sign up for the Financial Order of Operation (FOO) Online Course! Sign up for our Know Your Number Course! Check out our Net Worth Tool! Get FREE downloads full of financial advice from...

Everything You Need to Know About Finances in Your 20s

In this episode, we discuss everything you need to know about finances in your twenties. In this episode, you’ll learn: The top financial advice for your twenties How to start building wealth and the steps you should take Enjoy the Show? Sign up for the Financial...

The Most Valuable Asset in Building Wealth!

This episode will show you how to maximize the most valuable resource you have - starting right at this moment. What is it, you may ask? It’s TIME. If you give your money time to grow, you’ll be amazed at how much your dollars can become - it’s incredible! How wild is...