Wealth Management & Financial Planning

Wealth Management & Financial Planning


It’s a Balancing Act

There is a Parable in the Bible where Jesus tells the story of a landowner turning the operation over to three of his servants while he was gone. Two of the slaves “invested the money” and one did not. Though there are Bible scholars who would remind us that we tend to apply our western view to the story, the point taught in some Sunday school classes is that you reward those who do the best and take from those who do the least. That is the opposite of rebalancing.

Most retirement plans have an option that allows for an automatic quarterly rebalancing of the investments. For instance, let’s assume you have four investment options you are using. The large-cap growth fund might have gone up 10% in value this quarter while the fixed income fund only went up 3% (both numbers imaginary of course.) The other two funds were flat and one lost 5%. The beauty of diversification!

Rebalancing would automatically take from the fund that did the best and buy more of the holdings in the fund that lost! Exactly the opposite of how we learned in Sunday school. The question then is, is rebalancing a good idea or a bad one? It most likely depends on what you are trying to accomplish and what stage of life you are in.

We have seen plans where there was no rebalancing and the employee never looked at his plan for more than 15 years. After starting with an allocation of 70% in equities, 20% in fixed income and 10% in cash, his allocation had moved with the markets over the years to be vastly different than his starting percentages. Over 90% of his money was in equities and a very small percentage was in cash. Paying no attention at all is dangerous!

People who rebalanced as the Great Recession took hold were clearly helped as they were forced via the process into buying more stocks as the prices fell. During the rebound they were truly helped.

The downside occurs when a trend is obviously going either up or down or when all asset classes are in decline at the same time. The situation is so challenging that Target Dated funds came on the scene in 1994 as a way to help investors rebalance and to change their overall allocation mix as they moved toward retirement.

Finding the right allocation for your long term needs and short term emotions requires a serious set of skills.  Often referred to as risk tolerance, short quizzes help guide you to that allocation mix which can make you or break you over time.

As professional money managers, we don’t rebalance our 401k plans via the calendar but we do hold certain things in check. For instance, we don’t let individual stock holdings get above 5% of your total account value without serious examination and usually taking a little profit off the table. Adjusting your 401k over time is necessary and rebalancing is one solution.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

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