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Rebalancing: Better safe than sorry

puzzle

By Joel Dresang

Call it inertia (a force of nature) or laziness (a flaw of character), but I often let things ride. I wear shoes long after I’ve walked holes through the soles. I’ve used the same bowl for my oatmeal for 30 years, though it’s chipped and cracked, and I expect it to break apart each time I place it in the microwave.

So, it is refreshingly radical for me to rebalance my retirement account. I noticed from my last statement that the run-up in stock prices in the last few years had inflated the equities side of my 401(k) plan. Stocks filled more than two-thirds of the pie chart showing my investment mix.

On the counsel of my advisor, I reduced my holdings in growth stock funds and moved that money into bond funds. I understand the reasoning behind it. It’s consistent with lessons I’ve been learning from podcasts, videos and seminars:

  • Efficient frontier calculations show that the proportionate reward I receive for the investment risks I take lessen as I get above about 60% in stocks.
  • Especially as I approach retirement age, I’ll want to protect my holdings from unpredictable drops in stock prices by having about 40% of my mix in bond funds. That way, I’ll have enough in bonds to finance up to 10 years of safe retirement withdrawals, giving stocks plenty of time to recover.
  • I do not want to be loaded with growth stocks when the stock market reverses direction. Growth tends to be the first to flee downstairs when the party’s over. The market is overdue for a correction, and the longer between sell-offs suggests the steeper the setback will be. Although most signs point toward continued expansion, I’m better safe than sorry.
  • Even with an eventual sell-off, stocks in the long run will sustain and grow my portfolio, which is why my advisor recommended that I keep buying more stock funds every two weeks through my 401(k) contributions.

So, I get it. Rebalancing was wise. Still, the process was a little unnerving for me. It seemed counterintuitive to reduce my stake in successful investments. And it didn’t help that I did the math.

In just the time between New Year’s and Martin Luther King Jr. Day, my entire 401(k) had grown by more than $10,000. Of that increase, more than $6,000 was from the growth fund – the same fund that I was going to reduce. In other words, 60% of my gains in the first two weeks of 2018 came from one fund, and I was showing my gratitude by diminishing my stake in it.

My dad often said, “Don’t change horses in the middle of the stream.” But that was when the family was playing rummy or Yahtzee. To use a sports analogy, my rebalancing act felt like having a manager cutting the contract of an All-Star. But I am not a professional manager. My advisor is.

Not only does he know investments, he knows me – in some ways, better than I know myself. I have been his client for more than 14 years. I didn’t realize that – until he told me. He knows me and my wife and our daughters and probably – based on experiences with hundreds of other families over the years – he knows the trajectories we’re on.

So, as much as it felt against my nature to rebalance, to curtail a winner instead of letting it ride, I trusted my advisor and the consistent lessons I’m learning, and I exchanged some growth funds for bond funds.

My wife reassured me after the transaction. Growth stocks could well continue to ascend, and we’ll have a smaller wagon hitched to that star. But we can breathe easier not worrying as much about when that ride is over.

Joel Dresang is vice president-communications at Landaas & Company.

(initially posted January 22, 2018)

Learn more:
When Should I …rebalance my portfolio, from Art Rothschild
Risk, return and the Efficient Frontier, a Money Talk Video with Steve Giles
Safe investment withdrawals for retirees, a Money Talk Video with Art Rothschild
Growth, value and the business cycle, a Money Talk Video with Dave Sandstrom
Stocks: Long-term, consistent returns, a Money Talk Video with Dave Sandstrom
Corrections: A normal part of investing, a Money Talk Video with Marc Amateis

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