Investment balance: Find and keep
Joel Dresang: Art, we talk about the importance of balance, having the right mix of stocks and bonds in an investor’s portfolio. Why is that important?
Art Rothschild: Studies have shown consistently that the single biggest determinant of long-term investment success is your asset allocation, having the right stuff over a long period of time. Typically, stocks do better, significantly better than bonds, but they go up and down more. And so we use balance, mixing stocks with bonds, to smooth out the ride, to help the investor better achieve their long-term goals and objectives.
Joel: So when you’re talking about smoothing out the ride, you’re talking about adjusting for risk and volatility?
Art: One of the single biggest problems that investors face is indeed volatility. The ups and downs of the market, either caused by economic events, caused by news events, caused by media attention to news events, often times will cause investors to lose focus, be tempted to sell when they should be staying in the game. By having a discipline, by balancing a portfolio, having the right mix between stocks and bonds and focusing on that mix instead of what’s going on around you, it’s more likely that you’re going to be successful as a long-term investor.
Joel: But balance is a moving target, so we talk about re-balancing. Can you explain what that is?
Art: Yeah, re-balancing is simply making adjustments to your portfolio over time to help bring you back to that predetermined course that you set for yourself when you determined that perhaps 60-40 was the right split. So, for example, if the stock market goes up 10%, what was 60% stocks might become 65% or 66%. You’d want to reduce the amount you have in stocks to bring you back into that 60-40 mix.
Joel: How regularly, ideally, should investors be re-balancing?
Art: Investors should at least once or twice a year take a look at their mix. If something catastrophic happens in the market or something good happens in the market that causes, again, the balance to be skewed, it’s a good time to come back to the balance that you originally set out for.
Joel: Are there tax consequences you should keep in mind?
Art: You always should. That’s a great question. If you’re re-balancing in an IRA or a 401(k) account, you don’t have to worry about tax consequences. But if you’re selling a stock fund that has appreciated in a taxable account, there could be capital gains taxes, so you have to be cognizant of your tax rate and, again, the impact of any changes you make in your portfolio.
Joel: So I understand that investors don’t ask a lot about the balance in their portfolio.
Art: It’s just not an exciting topic, but it’s an important topic. Balance is something that investors should be focused on because it helps you stay on course. So, it, it’s still an important discipline. It’s something that should be practiced methodically on a regular basis and will help most investors be much more successful over the long haul.
Art Rothschild is vice president and investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Peter May
(initially posted May 27, 2015)