Conventional investing wisdom commands two things: Invest in a diversified portfolio of investments in line with your age and risk tolerance level, and regularly rebalance those investments back to their recommended percentages. But is conventional wisdom all it’s cracked up to be? Maybe not. I’m going against these tenets and not rebalancing my investment portfolio this year — and here’s why.
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What the Heck Is Rebalancing?
Let’s say you start the year with 60 percent of your money invested in stock funds and 40 percent in bond funds. During the year, stocks exploded and, at year end, you have 70 percent of your money in stocks and only 30 percent in bonds.
Conventional wisdom recommends that you sell 10 percent of your stocks and buy bonds with the proceeds in order to return to the 60-40 percent mix. That’s rebalancing.
Here’s Why Rebalancing a Portfolio Is a Big Deal
Vanguard, the well-known brokerage company, explains that the goal of rebalancing is to minimize risk or the volatility of your investments. Your returns won’t necessarily increase with regular rebalancing, but the risk will be moderate.
In fact, research shows that your asset allocation — not the stocks and bonds that you pick — is the major factor in your ultimate investment returns. But, rebalancing will smooth out the peaks and troughs in your investment returns.
Ultimately, whether you rebalance or not, your returns will likely correspond to those of your investment categories or asset classes.
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Sh*t Happens: My Investment Management Issues
Until this year, I’ve always rebalanced. I followed the consensus opinion that rebalancing is sound investment practice. But this year is different. A major life event changed everything.
After years of great health and an awesome family vacation in June 2017, my mom had a major stroke on July 2, 2017. The stroke left one side of her body completely paralyzed. Mom went from living independently, traveling and having a robust social life, to confinement in a care facility. It was horrible.
So, since I live across the country, I committed to visiting monthly. I fulfilled that commitment, going from the Bay Area to Ohio every month or so. We were lucky — Mom could still speak and had some decent cognitive functioning.
But my priorities completely changed. Being with my mom took on enormous importance.
I let much of our family’s investment financial management go. Work took a back seat to my mom. I didn’t worry about updating investment values and barely managed to pay the bills.
From Bad to Worse: Rebalancing Doesn’t Matter
As if 2017 wasn’t bad enough, on Jan. 2, 2018, my mom suddenly passed away. I was overwhelmed with agony and grief. And then, there were the matters of settling her estate. My sister and I were deluged with administrative responsibilities. My own investments continued to take a back seat to grief and the necessary details of my mom’s affairs.
Then, I wrote an article for US News and World report about rebalancing, which brought the topic to the front of my mind. While researching investment rebalancing, I read profusely and consulted the experts. What I learned was enlightening. Rebalancing has its detractors.
Learning that I might not be a horrible investment manager by not rebalancing provided comfort. This was good news, as I was way behind in handling portfolio management tasks. I decided to forget about rebalancing entirely this year.
Why I’m Not Rebalancing
Turns out, there’s ample research to raise questions about the necessity of rebalancing. Vanguard’s “Best Practices for Rebalancing” was an eye-opener, in particular. The investment management house examined historical investment returns between two 60 percent stock / 40 percent bond portfolios over an 83-year period, 1926 through 2009. One group of investments was rebalanced monthly and the other identical group was never rebalanced.
At the end of 83 years, the initial weighing of the never-rebalanced portfolio was: 98 percent stocks and 2 percent bonds. The annualized return of this never-rebalanced portfolio was 9.1 percent, with a 14.4 percent standard deviation or risk level.
In contrast, the monthly rebalanced portfolio ended the 83 years with 61 percent in stocks and 39 percent in bond investments, approximate to the initial 60/40 percent asset allocation. The annualized return for this portfolio was 8.5 percent, with a lower risk level of 12.1 percent
So, this research shows that not rebalancing won’t hurt your investment returns. But, you need a strong stomach, so that when your investment values tumble during a market correction, you won’t sell in a panic. In fact, not rebalancing suggests that likely you’ll end up with a less diversified portfolio with higher returns.
This was enough support to let me off the rebalancing hook for the year, but what about forever?
Rebalancing Still Makes Sense in the Long Run
Sacrificing a bit of return for more peace of mind and slightly lower returns makes sense in the long run. Most investors, myself included, will have a hard time with a 90+ percent stock investment portfolio, the ultimate result of never rebalancing.
Yet, rebalancing frequently incurs transaction costs and tax implications. It’s also a lot of work –unless you use a free robo-advisor like M1 Finance, that does the rebalancing for you. So, while rebalancing keeps your risk level in check, if you miss the deadline one year or so like I did, there aren’t dire consequences.
Life issues were much more important this year than worrying about whether or not to rebalance my investment portfolio.
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