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!


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.


Jeffrey Johnston

Jeff has over 30 years of experience in the investment industry. He currently holds his FINRA Serices 6, 63, 66, 7, 24 & 51 licenses with LPL Financial as well as his health and life insurance licenses.