Hey everyone, it’s Finance Fridays again. Today is just a short post to talk about “Rebalancing”.

Rebalancing

I’ve talked about rebalancing before. It’s not too difficult of a concept. I general, you make your investment plan and try to stick with it. However, because your investments can go up and down over the course of the year, you need to find time to rebalance your investments to the asset allocation you are comfortable with.

For example, let’s say you’re slightly aggressive (me), so you want to do the -15 age in bonds idea. If you’re 30 years old, that means you want 30-15 in bonds, 15% bonds, with the rest, 85% in stocks.

You look at your portfolio which was 85%/15% at the beginning of this year. However, you’ve also put more money into your 401k, Backdoor Roth IRA, and your taxable account. To be honest, I haven’t really been paying attention, but there is a lot of talk about the stock market taking a hit this year. Additionally, there are concerns that we’re headed for an extended bear market.

As such, I am hearing from my friends and colleagues about moving some of their assets into bonds and waiting out this “probable bear market”.

This is my response:

We don’t do that here

Let’s remember, we’re Bogleheads, meaning that we’re passive investors. We invest in index funds and stay the course.

Move our money around to try to time the market?

We don’t do that here.

While it may seem insignificant. It’s kind of a slippery slope. Of course everyone wants to try to optimize their investments. It’s especially difficult when it seems the whole world is telling you that “now is the time” to pull out of the market. I’ll even grant you that we may see a bear market in the stock market in the near future. However, let me ask you this question:

When do you plan to go back into stocks?

Just remember, no one can predict the stock market. This possible “bear market” may last a year or it may last 5 years. The “recovery” may take 5 years or it may take 5 days. The likelihood of you being able to pull your money out now right before the bear market and put it back in right before the recovery is pretty low.

Perfect is the enemy of good.

It may seem harmless to take this time now to rebalance your portfolio and drop your asset allocation to 70/30 or 50/50 or something. Just remember that it’s a slippery slope and you’re deviating from your investment and retirement plan, the one you wrote at the beginning. While it may seem like you’re not timing the market because it’s just “rebalancing” — trust me, you are still attempting to time the market.

You’re deviating from your plan based on what could happen.

Rebalancing is something you do to stay in your lane. Whether your lane is the fast lane, the middle lane, the slow lane, or the carpool lane, or whatever, it’s the one you’ve already chosen.

Let’s say your investment/retirement plan is a slightly aggressive and was to keep 80/20 until 40 years old, and then switch to 75/25 at 40. For those wondering, that’s what my wife and I are doing. Our plan hasn’t changed, so our plans for rebalancing also haven’t changed regardless of what the stock market is doing.

When do you choose to rebalance?

I don’t choose, I’ve already chosen.

I rebalance our portfolio at the beginning of every calendar year after doing the Backdoor Roth IRA. It’s usually sometime in January, whatever the first day I have that I’m off from work. I get some coffee, sit down, and rebalance all our investments on my computer.

I don’t pay attention to what the stock market was doing that day and to be honest I don’t pay attention to the stock market in general.

The best option for most people on when to rebalance is probably after they do their Backdoor Roth IRA. Once the money is in your Backdoor Roth IRA, then you have a good overview of where your money. is and how much on % basis is stocks/bonds. Additionally, this is probably the only time of the year you need to do anything related to finance.

Backdoor Roth IRA, rebalance, review contributions — see ya next year.

For my wife and I, the vast majority of our investments and retirement is in our Thrift Savings Plans (TSP). As such, I mainly rebalance around those. The other smaller retirement accounts and Backdoor Roth IRA I don’t worry too much about and just try to keep them “in line” with the larger TSP accounts.

Once I have everything in order again, I let my wife know what’s been done just so she is aware and then she asks me “Can I retire yet?”. The answer so far has been no, but someday it may be yes.

Maybe I’ll make another portfolio update post this January with some before and after rebalancing info and pie charts.

TL;DR

Don’t go down the slippery slope.

Don’t use rebalancing as an excuse to time the market.

We don’t do that here.

Stick to your investment plan and rebalance based on that, not the market.

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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