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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!”
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.
