Don’t Lose Your Balance

Don’t Lose Your Balance

Back in July I wrote an article for the Times Standard about the importance for investors to have a written investment policy statement.  Writing it down helps you understand yourself as an investor, helps define your goals and risk tolerance and leads to your optimal asset allocation.

But keeping your target asset allocation requires adjusting it from time to time.  Regardless of how well positioned you may think your portfolio is, prices oscillate, markets move and the economy is constantly shifting.  As a result, your asset allocation model changes as well.  Investors have to take how these fluctuations impact their allocation and effect their investment goals and risk tolerance into consideration.  Rebalancing helps you control some of the outside factors that can be detrimental to your investment success and keeps you on target to achieve your goals[1].

Investing is about risk and return.  How much are you willing to risk to get an optimal return on your assets.  The risk and return dynamics of your portfolio are based on asset allocation, or the mix of investments you choose to achieve your investment goals.  Typically, that means stocks, bonds and cash.  But adding real estate, precious metals and other commodities can add significantly to returns of your total portfolio.

What should your asset allocation be?  Historically a 60/40 mix between stocks and bonds has been the most common.  But with interest rates so low it’s hard too justify putting 40% in bonds.  A popular new rule of thumb for your stock portfolio is to subtract your age from 120[2].  Once you establish your asset mix, low cost Index funds and ETFs are an effective way to invest.

There are index funds and ETFs in any category you choose.  Let’s look at stocks, remembering we want to diversify.  Start with the 10 sectors of the S&P 500 which includes technology, utilities healthcare, consumer staples and durables, financials, energy, industrials, materials and telecommunications. 

Then you need to consider the size of these companies.  There are large capitalization, mid-cap and small-cap stocks. There are growth stocks, value stocks and blends of the two. Interestingly, if you had invested in small-cap value stocks 100 years ago you would have made more than in any other category[3].  You should consider foreign stocks along with domestic ones. Different parts of the world grow at different times so it can pay to add some foreign Indexes and ETFs.

Rebalancing is simply restoring your portfolio to its original asset allocation by buying or selling when things get out of line with your allocation goals.  And different people have different ideas about how to go about it, but whatever you decide is the right mix of risk and reward, stay with it by rebalancing. 

Most people’s portfolios are divided into several categories. A 401k or pension plan, IRAs, taxable accounts at brokerage firms or banks or gold in a safe deposit. And while these accounts have different structures and different purposes, they’re all yours and you need to treat them in totality. You should think about rebalancing whenever you make a deposit or withdrawal.

Most people rebalance at tax-time or year-end.  It makes sense as these are times we’re thinking about investing.  Either paying capital gains taxes or taking capital losses in April or either tax-loss harvesting or offsetting taxable gains at year end.

Rebalancing is about controlling risk; Warren Buffet’s first rule is don’t lose money. But how often should you do it?  Checking your monthly statement just takes a few minutes and if you don’t you don’t like your allocation, rebalance it.

Vanguard went back to 1926 and looked at a 60-40 portfolios to compare the results of monthly, quarterly, annual and never rebalancing. Oddly, there isn’t much difference between them. The never rebalance portfolio returned 9.1% while a yearly rebalance was 8.6% .[4]  But there is a huge difference in the amount of risk entailed so why take it for so little gain?

Rebalancing can be painful, but it shouldn’t be.  While no one wants to sell a stock that’s going up and it’s hard taking a loss as well, but intelligent investing requires you to do both from time to time.  Remember, we rebalance primarily for risk control.  No one deserves an unintended consequence, so rebalance.


Until the next time, we’ll watch your money.





Nicholas W. Bertell ChFC®, AIF®

Financial Advisor / Accredited Investment Fiduciary



Redwood Coast Financial Partners, an independent firm with securities offered through Summit Brokerage Services Inc., member FINRA/SIPC.  Advisory Services offered Through Summit Financial Group Inc., a Registered Investment Advisor.  Advisory services also offered separately through Redwood Coast Financial Partners, a Registered Investment Advisor.  Opinions expressed are those of Redwood Coast Financial Partners, and are not endorsed by Summit Brokerage Services, Inc. or its affiliates. All information herein has been prepared solely for information purposes, and is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.

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[1] Nerdwallet, 4 Ways to Rebalance Your Portfolio, Dayana Youcim, June 30, 2018

[2] Investopedia, Achieve optimal Asset Allocation, Shuana Carther, March 2, 2018

[3] Vanguard, Best practices for portfolio rebalancing, Vanguard Research, July 2010

[4] Vanguard, Best practices for portfolio rebalancing, Vanguard Research, July 2010

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