How Frequently Should You Rebalance Your Portfolio?

August 15, 2023

In this highlight, we discuss what factors you should consider when rebalancing your portfolio and how to know when it is time to do so.

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Next up, we have Mark. His question says, “What are the Money Guys’ thoughts on rebalancing? I have my target allocation set, and every time I contribute, which is bi-weekly, I get my funds back to my target allocation. Is this too excessive?”

Alright, read it again. He says that he’s contributing, and every time he contributes, he goes towards his target allocation. He gets his funds back to his target allocation. So, every time, bi-weekly. So, okay, why do we rebalance? The idea of rebalancing, adjusting the mix of your portfolio assets, is because there’s a desired risk-reward trade-off you want inside your portfolio. Real simple math here: if you have a 60-40 allocation, you want your portfolio to exhibit the risk-reward trade-offs of a 60-40. Well, if you don’t rebalance and equities do really well and fixed income doesn’t do as well, your portfolio will naturally drift through time. So, that 60-40 becomes 65-35, 70-30, 75-25. As that’s happening through time and you’re getting older and your portfolio should be getting more conservative, it’s actually getting more aggressive, right? So, the way that we combat that, the way we fight against that, is we rebalance our portfolio. We say, “Okay, I went from 60-40 to 65-35. I need to rebalance back.”

So, there are two ways that you can do that, and I’m a little confused on Mark’s question, but I want to make sure I’m going to speak to both of them. One is, I can look at my portfolio and I can sell the overvalued stuff and buy the undervalued stuff. If it’s easy to see that inside the economy, what’s overvalued, what’s undervalued, not super difficult to do. And that’s what a lot of people who are in financial independence, living off their portfolios, that’s how they rebalance. What Mark is describing, I think Brian, is actually a lot easier if you’re someone who’s saving consistently and you’re adding dollars to your portfolio. And there will always be buying opportunities taking place. You’re naturally going to probably keep your portfolio pretty close to target. Whereas you don’t have to keep selling and readjusting and selling and readjusting and selling and readjusting. You can just buy back up through time to stay true. I like that strategy better because it creates a lot fewer transactions, a lot less tax impact, and it’s a little bit easier to manage. If you have money flowing in every single pay period or every single month or every single whatever, you’re likely going to stay close to target.

Because, Brian, you’ve done a bunch of tax returns in your day, and one of the things I think that used to drive you nuts is when you look at somebody’s tax return and they had 400 transactions where they were buying and selling, buying and selling, buying, selling. And you ask them, “Hey, what happened? I saw this trading. What happened?” “Oh, I made five percent last year.” You’re like, “Really? You tell me you had like 400 transactions.” “Well, I was rebalancing. I was getting back to target.” Like, man, that was a whole lot of movement for not a whole lot of bang.

Yeah, I mean, I definitely think if this isn’t a taxable account and it’s creating a bunch of transactions, that might be unnecessary. But if it’s—I’m not gonna pick on Mark—if this is like his retirement account, his 401(k) contributions every month because I think he’s focusing on the detail of rebalancing. That’s where the question is. But the superpower of actually what’s going on behavior-wise is that every month he’s buying. I love it, and that’s actually dollar-cost averaging. That’s where the actual success is, because it is back to the “always be buying” part. So, I’m not going to pick on Mark. Um, because he’s essentially rebalancing every month or every week or every two weeks, whenever he gets paid. Um, that doesn’t bother me. It might be a little excessive because we’ve done, and there’s—we’ve done content. If you go do a search on YouTube or podcasting, however you look, we’ve done rebalancing episodes where we do show that rebalancing does add value to your portfolio, especially when you’re in retirement or approaching retirement. Because it does let you recenter the risk component back into the portfolio.

Um, but there’s a lot of variation whether it could be quarterly, it could be every six months, it could be weekly like Mark is doing, however often. But um, I actually—I’m gonna—here’s a confession on my part because we eat our own cooking. I think that rebalancing is very important. But what I like to do with the dollar-cost averaging is I find myself, as I’ve realized I’m getting older, so I have a large base of portfolio assets that stay fully allocated into what I think reflects my current asset allocation. But I don’t have a problem, we even do this sometimes with clients, where maybe for simplicity’s sake, if the stock market’s down 20 percent or more in a full bear market, just with those monthly purchases and the smaller side, just straight up buy into the equity. So, you use the volatility as a tool, to financial mutant-wise, to buy things while they’re getting crushed.

Sure, but you realize when you—it’s more of a behavioral or a feel-good experience because if you compare those monthly purchases to the total portfolio, very different. I mean, we are totally splitting hairs here, but it is one of those things where I always try to say, if there’s an attaboy you can give yourself from an emotional standpoint, to where as a financial mutant, you feel firm that you bought and took advantage of when the market was down, then that behavior can be something that gives you a little extra juice or fuel to keep doing the hard stuff while everybody else around you is freaking out. So, that’s the only one thing because I know I do that myself. It’s like I said, doesn’t impact the overall allocation, but man, does it feel good when you’re buying into something that is, as Warren Buffett talks about, you know, “Be fearful when others are greedy and greedy when others are fearful.” In my own little way, it lets me play that game. But please, you’ll call me back. That’s market timing, yeah, I guess it is. And in some, like I said, in a minuscule way, to give me some feeling of an attaboy moment. Well, it’s not really market timing. It’s always be buying. You’re just buying something a little bit different than what you would normally. I’m at the stage that I create financial games for myself to kind of, and I think a lot of our audience does that stuff too. And there’s nothing wrong as long as it doesn’t blow up the core of your plan and the intent of what the purpose of every dollar that comes to your army of dollar bills. For more information, check out our free resources.



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