The Benefits of Re-balancing (and having a friend with a great tractor)
Recently, Vanguard put out a great whitepaper (fancy term for “compliance-approved informative article”) on the benefits of rebalancing your portfolio on a regular basis. There was a lot of good information in the article, but I was particularly interested in the two charts that showed allocations to equities during and after the 2008 financial crisis and the difference in returns of a 60% stock and 40% bond portfolio. While it is a bit busy, it contains a lot of great information. See below from Vanguard:
It is tempting to always keep the investments that are going up and never sell them. But, that’s exactly what rebalancing is. It is periodically selling some of the stuff that’s gone up and using the proceeds to buy some of the stuff that’s gone down or stayed flat. The idea is to maintain your intended allocation and not let any one portion of your portfolio become so big that it can do too much damage during a downturn.
As you can (hopefully) tell from the Vanguard charts, monthly rebalancing from 60% Stock and 40% bond portfolio from 2005 – 2014 (leading up to and after the 2008 financial crisis) would have resulted in less volatility and a 5 percentage point better rate of return. As the article also points out, it is important to rebalance regularly to avoid emotion (AKA trying to time the market) getting in the way. Note that in taxable (non-retirement) accounts, you must be a little more careful due to the tax implications.
This past weekend, I needed some help rebalancing by recently installed basketball hoop. It was a multi-day project, mainly because I needed to wait for the concrete anchor to set. But, also because the backboard was EXTREMELY heavy and had to be mounted on the pole after the pole was installed. The instructions indicated “4 capable adults.” The first attempt used three capable adults in waning sunlight and was wholly unsuccessful. We came very close to dropping the whole thing. Enter my good friend Colin and his awesome tractor with front end bucket.
Hopefully, this particular item will not need monthly rebalancing!