The Rebalancing Challenge

The Rebalancing Challenge
11 Nov 2015

A Hypothetical Conversation That Could Be True.

The concept of rebalancing is very simple. Let’s say an investor starts off with a model allocation of 50% stocks and 50% bonds.  The stock markets do well and after a year the portfolio sits at 70% stocks and 30% bonds. Investors pat themselves on the back and say something like, “I did great and now I want to do better. I wish I had not been so conservative in the first place and should have gone 100% stocks!” As a financial professional, I come along and say, “Let’s not be so greedy. In the context of your Financial Plan, you actually should consider selling some winners and go back to your original allocation of 50/50. We want to be investors, not gamblers.”  The investor tells me, “That’s the dumbest thing I have ever heard. And you call yourself a financial professional, HA!”

Rebalancing Blog

With an overabundance of financial “knowledge”, they kick me out of their office. The market drops 30% over the next 12 months. Instead of a loss exposure of 50% on your stocks, you are now at 70%.  Rebalancing, like many financial concepts, does not guarantee financial success. It does, however, just make good common sense.

Yes, I am being a bit overdramatic, but then again, maybe I am not. You see, the pure emotion of greed makes the concept of rebalancing very difficult to do manually.  My experience has been that most people would actually want to sell the investments that did bad and actually buy MORE of the winners. This may make you feel good, but think about it in this context; one of the first things many people learn about investing is buy low, sell high, and by selling investments that went down and purchasing the investments that went up, you are in fact doing the exact opposite.

This is a toxic investment strategy and should be avoided, in my opinion. It’s my belief that rebalancing should be set on autopilot and remove the investor and financial professional from the equation.  Ask your investment companies if they have automatic rebalancing. Many do these days. Trying to remove the emotions of greed and fear from our financial decisions is virtually impossible, but utilizing some simple financial concepts in your everyday investment life may make the road less bumpy.
Good Luck!

Jeff

This is a hypothetical scenario, not a recommendation. Every investor’s situation is unique and may vary. The concept of rebalancing does not assure profit or protect against loss.

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Jeffrey Johnston

Jeffrey is originally from Solon, Iowa. He currently resides in Swisher, Iowa with his wife, Prudence, and his three children, Seth, Ian, and Roman. He graduated from the University of Northern Iowa in 1989, where he majored in Finance and Investments. He has 24 years of experience in the investment and estate planning business. He is currently the President of “Premier Investments of Iowa, Inc.” Jeffrey’s main focus is Estate and Investment Planning for Senior Citizens and Pre Retirees. Jeffrey became a Chartered Financial Consultant (ChFC) in 2001. He is the author of many articles on industry related topics and he is a frequent seminar presenter. He is a Board Member TRIAD Linn County Seniors Against Crime, and he is also a past Board Member of the Heritage Area Agency on Aging Task Force. He is a member of CEO Roundtable in Cedar Rapids, a Daybreak Rotary Member, and a member of the Cedar Rapids Estate Planning Council. In March of 2009, Jeffrey became the host of the Premier Investments of Iowa Financial Hour which airs every Tuesday Evening from 6PM -7PM, on WMT 600 AM Radio. In his free time he enjoys golf, fishing, scuba diving, traveling, and coaching son’s basketball teams.