A Balancing Act

The Wall Street Journal recently published a good article about rebalancing your investment portfolio. (Portfolio Rebalancing Is A Good Retirement Habit, June 4, 2021).  Rebalancing is a simple yet powerful strategy for managing your accounts, whether you’re retired or not. Additionally, it’s a risk reduction strategy that may improve your returns.

We rebalance our portfolios largely driven by the market’s action. TD Ameritrade’s iRebal platform is the means we use to manage several investment models, and we automate the process to facilitate our trades. In other words, we try to eliminate emotions and human error from our system. We let the models dictate our trades, and we don’t override them because of market conditions. Each Tuesday, iRebal looks for accounts that deviate from their set allocation, and when it finds one, it rebalances the portfolio back to its original allocation. It’s like mowing the lawn or getting a haircut.

Why should you rebalance your account? The primary reason is to keep your risk tolerance intact. For example, if your allocation was 50% stocks and 50% bonds on January 1, 2020, it’s now 56% stocks and 44% bonds – too much risk. Conversely, during the COVID correction in March 2020, your equity positions fell to 40%, while your bond holdings rose to 60% –  too conservative. Rebalancing allows you to be in the right place at the right time. If you don’t rebalance, you may be too aggressive during a correction or too conservative during a recovery.

Speaking of the COVID correction, our rebalancing models worked overtime as the market crashed. Our rebalancing software sold bonds to buy stocks counter to what most investors were doing at the time. We were buying growth stocks, small-cap stocks, and real estate holdings as the market fell. Investors like to buy low and sell high, but few do it, but our models did. When we sold bonds to buy small-cap stocks and real estate holdings, they were down more than 40%! I was hyperventilating as the models made the trades. However, it worked well as growth stocks, small-cap companies, and real estate funds recovered from the COVID lows. If we did not rebalance our accounts, we would have missed impressive returns.

As the market rebounded and recovered, the models sold stocks to buy bonds to maintain our asset allocation and risk tolerance for our clients. Rebalancing works both ways – buying and selling stocks and bonds based on market conditions.

Below is a chart for a few of our models: ninety-nine, seventy-five, sixty, and fifty. The number corresponds to the equity allocation. For example, the seventy-five model is 75% stocks, 25% bonds. The most aggressive model fell further and recovered faster than our conservative ones, as expected. Our rebalancing models adjusted accordingly, so the risk level for each portfolio remained constant.

If you want to improve your investment results, consider rebalancing and automating your process so you don’t become financially paralyzed when the market falls 40% or 50%. Automating your trading will allow you to rebalance your accounts when you can’t.

How often should you rebalance? If you don’t automate the process, then rebalancing your accounts once per year is recommended. January is an excellent time to reset your accounts after all the dividends, and capital gains have been paid. If you hold assets in your company retirement plan, you probably have a rebalancing tab that you can select. The link should give a few options like monthly or annually.

If you want an investment edge, rebalance!

Happy Rebalancing!

The beauty of periodic rebalancing is that it forces you to base your investing decisions on a simple, objective standard ~ Benjamin Graham

June 8, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

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