Bob O'Brien
Head Instructor
bobrien@mywealth.com
It’s been my experience as a Financial Planner that there are a lot of people that understand rebalancing, but fail to do it. This strategy is more than a strategy, it is an absolute must for investors that do not have the time, and energy to dedicate to watching the markets consistently.
It’s very simple, but many people fail to see the incredible value over time.
Let’s say you decide that to have a portfolio made of 50% stocks and 50% bonds. Stocks over time will outperform bonds and the portfolio will become 75% stocks and 25% bonds. This is a much riskier portfolio than 50% stock and 50% bonds, and you will have more volatility which reduces your return over time. You are out of balance, now you simply restore to the 50% stock and 50% bonds an you are back in balance.
Even for experts that watch the markets all the time are challenged and can sometimes make big mistakes, never mind if you don’t have the time to monitor all the factors that affect our money.
Rebalancing will give you a fool proof way to buy low and sell high, without having to constantly monitor the markets, legislation and central banks.
Let’s again say you had a portfolio where you are 50% in stock and 50% bonds over the last year since the start of the bear market. First of all, you would only be down about 20% - 25% since bonds have held their own quite well. Many people have gotten crushed much worse than this! Your portfolio would now be about 67% in bonds and 33% in stocks and it’s time to rebalance. What an incredible opportunity! Most of the damage in the stock market is probably behind us and now we are going to buy into the market in what will probably be great stock prices.
As a compliment, people have referred to this as, the Lazy Man’s Portfolio. This is because it works well and you don’t have to do a lot studying and research. As strongly as I feel about rebalancing, I would never encourage anyone to be lazy. Just like a doctor would never encourage a patient to be lazy about their health. I feel people should constantly be educating themselves in regards to their finances, just as they do in their own field of work, health and their hobbies.
Savings for retirement and children’s education should be treated as sacred and this strategy should be used by the far majority of people. When you have your retirement and children’s savings funded appropriately then you can start to maybe be more aggressive and attempt to outperform the market with a side portfolio.
Bob O’Brien
Sr. Instructor
