We are nation in pursuit of balance.  We aim for a work life balance.  We try to balance our diet.  We balance our checkbooks. The tires on our cars must be balanced for a smooth ride.   It’s impossible to ride a bike without balance.  Scales must be balanced to get a true measure.

Investors should practice balance as well.  Unfortunately, investors rarely pursue a balanced portfolio.  Portfolios get too aggressive when markets rise and too conservative when markets fall.   Investors who do practice the art of rebalancing will keep their risk level in check.

Let’s look at a few brief moments in time to highlight this point.

1930

An investor who started the year of 1930 with a portfolio of 50% stocks and 50% bonds saw her equity drop to 25% by 1932.   The portfolio in 1932 consisted of 25% stocks and 75% bonds a mix too conservative for her long-term goals.   In fact, it wasn’t until 1949 before she regained a portfolio of 50% stocks and 50% bonds.  She had to wait nineteen years before her target allocation returned to normal.

2000

An investor who started the year 2000 with a 50% stock and 50% bond portfolio saw his stock allocation drop to 29% by 2002.   By the end of 2015 his portfolio was 35% stock and 65% in bonds well below his original allocation of 50/50.

2009

In this example, our investor started 2009 with a portfolio of 50% stock and 50% bonds.  A year later her portfolio was 60% stock and 40% bonds.  By the end of 2015 the stock allocation had risen to 65% and the bond portion had dropped to 35%, too aggressive for her long-term goals.

As you can see, balance is seldom maintained.  The investor must constantly battle the markets to keep their portfolio in line with their investment goals.  If you do nothing your portfolio will oscillate between too conservative and too aggressive.

Here are few tips to help you stay focused on rebalancing your portfolio.

1. An annual rebalance is enough. Monthly or quarterly is too much.
2. I would recommend rebalancing your accounts in January. A January rebalance will allow you take advantage of the prior year’s movement.  In addition, your dividends and capital gains have been credited to your funds.
3. Your 401(k) plan may have an automatic rebalancing tab or button allowing you to set it and forget it. The tab should have a few options like monthly, quarterly or annually.  An annual rebalance will work best.
4. It’s easier to rebalance a portfolio of mutual funds or ETF’s, than it is a basket of individual stocks and bonds. It’s not possible to sell a half share of stock or a third of a bond.   If you plan to incorporate a rebalancing program in your portfolio, stick with funds.
5. It helps to automate the process so you can stick with your plan. It’s emotionally hard to sell stocks when they are rising and buy bonds when they are falling.  It’s even harder to buy stocks when they’re falling and sell bonds when they’re rising.  It will be beneficial to remove your emotions when you rebalance.
6. If you’re a micro manager of your portfolio, you can rebalance when your allocation moves 5% up or down. This strategy takes some work but it can be done.

The key to long term success is to match your financial goals to your investment portfolio. Once your hopes, dreams and fears are identified, put your plan to work and rebalance often!

Life is like riding a bicycle. To keep your balance, you must keep moving. ~ Albert Einstein

Honest scales and balances belong to the Lord; all the weights in the bag are of his making. ~ Proverbs 16:11

Bill Parrott is the President and CEO of Parrott Wealth Management.  For more information on financial planning and investment management, please visit www.parrottwealth.com.

March 8, 2017