Have you re-balanced yet?

You can’t go a day without seeing articles on the pending crash/adjustment/correction to the stock market. Folks are talking about when this giant run-up of the last year will correct back. They point to high P/E ratios, way “out of whack” with traditional measurements. At the same time, others say that reduced regulations & taxes are going to push the market even further. For most of us, it is much too difficult to figure out, so what are we to do?

African elephant female and her baby elephant balancing on a blue balls.

The obvious answer – re-balance! Each of us who invests should have an asset allocation that determines how much we want in stocks, bonds, real estate, precious metals, etc. This should be based on our “risk tolerance,” where we identify how much risk (and stock market craziness) we want to participate in. For me, my risk tolerance is “moderately high” (it used to be “high”) so I’m into a 70/30 split with stocks/bonds. Mrs. 39 Months likes a lot of cash, so we end up really with a 60/40 split. Note that about ¼ of that “60” is in REITs, which is my way of investing in real estate.

The problem comes when one asset class or another really “takes off” and leaves the asset allocation off track. It is here where smart investors use re-balancing to reduce the risk and prepare for the correction that is due to occur. Re-balancing involves selling a portion of your “winners” (in this case the stocks that have just run up) and buying some more of your “losers” (bonds, REITs) in order to re-balance your portfolio. Re-balancing forces you to sell high and buy low – the quintessential investor plan.

For me, I tend to re-balance twice a year (January & July). Some folks do it more often, but I think you can drive yourself crazy if you do it more often. I also don’t re-balance if something is over a 2% variance (i.e. if I am supposed to have 30% and I only have 28.5%, I let it ride).

Some investment companies make it easy to re-balance. The Vanguard website has a specific section for selling out of one fund and purchasing shares with that amount from another. TRowePrice’s is a little more cumbersome, but not bad. Other brokerage houses, like USAA, make you have to do it all yourself, with your own spreadsheets and calculations. Still, its math, which I enjoy doing.

As an example, I looked at my Vanguard IRA account at the end of the year, and found this:

Name Symbol Current Price Current Shares  Current Value % of Portfolio Amount “off”
Vanguard 500 Index Fund VFIAX  $             246.82 237.6  $     58,655.54 19.6% $6,374.7
Vanguard REIT Index Fund VGSLX  $             117.55 392.6  $     46,146.13 15.4% ($6,134.7)
Vanguard Small-Cap Index Fund VSMAX  $                70.78 805.5  $     57,011.95 19.1% $4,731.1
Vanguard Bond Index Fund VBTLX  $                10.75 7397.1  $     79,518.65 26.6% ($10,105.7)
Vanguard Int’l Index Fund VGTSX  $                30.52 1881.2  $     57,415.51 19.2% $5,134.6

Looking at this, I chose to sell of $6,134.70 of S&P500, and put it into REITs (to get back to around 17.5% for each) and sell off the Small Cap ($4,731) and International ($5,134) and buy into the Bond Fund (+$9,865). This gets me close to my original allocation.

Now, if the S&P500 corrects 10%, I still have taken a significant chunk of money off the top and put it into a different investment. I also bond the bonds and REITs when they were down, allowing me to get bargain.

Have you re-balanced yet? How often do you do it?


Mr. 39 Months

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