The takeaway: Research shows that keeping your portfolio in proper balance accounts for nearly 90% of your investment results. Here’s a step-by-step guide to rebalancing your nest-egg once a year. Making money is hard. Managing it shouldn’t be.
Happy New Year, Boomer! I caught up with my cousin Vinny during the holiday. (Ok. Not his real name…) He said he’d read my series on Asset Allocation. He said he understood how asset allocation is key to investment results. He got the bit about rules of thumb. He understood buying low and selling high. But what, he said, did rebalancing have to do with any of it?
My reaction: stage left.
Boomer, let’s cut to the chase.
Research shows that close to 90% of your portfolio results are based on how you allocate your assets. You maintain your asset allocation by periodically rebalancing your portfolio. Rebalancing means selling some of your assets and buying others.
Periodic rebalancing moderates the natural roller coaster of financial markets–stocks in particular.
And the best part? Rebalancing forces you to buy low and sell high–whether you like it or not!
This post is a step-by-step guide on how to rebalance. It tells you what to say when you call a financial institution to rebalance your portfolio. Although you can rebalance online, sometimes only talking to a live person will do. Sometimes you need specific answers to the situations you find yourself in.
This post provides three phone scripts covering various situations potentially facing you. They’re designed for talking directly to financial institutions, but if you’re working with a financial planner you can address these scripts to him or her as well.
Recap: how do I know when it’s time to rebalance?
Suppose you want a portfolio that contains 50% stocks and 50% bonds. However, during the course of a year, the price of stocks escalates and before you know it, stocks comprise 70% of the value of your portfolio.
As a result, your bonds only comprise 30% of your portfolio. (100% – 70% = 30%.)
To restore your desired asset allocation back to 50% stocks and 50% bonds, you’d rebalance by selling the excess in your stock portfolio—i.e., selling a portion of those high-priced stocks. You’d take the money you received from the stocks and buy more bonds, so that your 50-50 stock-bond split was restored.
Do you see what you did there, Boomer?!! You sold high (the stocks) and you bought low (the bonds). You did it all through asset allocation and rebalancing. You’re a genius!”
BTW, sometimes we don’t want to sell high. We want to ride that horse until it drops. We want to ride those stocks until they drop.
Boomer, avoid the drop. Leave a little money on the table. Sell high. (That’s what let me move to Italy for a year.)
What steps do I take to rebalance? (Hint: The phone’s your friend.)
When you want to talk to a live person, there are three different types of rebalancing phone calls you can make, depending on your situation.
Sometimes, answers to these questions will lead to additional questions you can ask yourself. All will help maximize your rebalancing effort–and your investing success. They are:
- The “tell-me-what-these-funds-in-my-account-are” call,
- The “help-me-set-my-asset-allocation-(or-rebalance-my-portfolio)” call, and
- The “keep-me-from-killing-myself-because-I-have-to-make-these-calls” call.
Oops. The third call is:
- The “consolidate-all-my-orphan-accounts” call.
When you’re making these calls, don’t be intimidated! Think of my dearly departed aunt. (Ok. Not my aunt, but a relative…)
In our city’s most exclusive restaurant, she once made a waiter translate an entire menu written in French before she’d order. 😯 😡
Afterwards, she informed the rest of us that her money was as good as anyone else’s.
So is yours, Boomer. Expect answers.
Financial services companies have gotten rich on your dime. Make them work for those mega-millions by answering your questions.”
Your three calls…
Script #1: the “tell-me-what-these-funds-in-my-account-are” call. Boomer, it’s not always easy to know what the funds in your account are. Are they stocks, bonds, real estate, what? Companies close out one fund and replace it with another all the time. Before you know it, you have tons of funds. It’s hard to keep track of what the old fund was and what the new one is. And whether it even resembles what you wanted in the first place. If you’re not crystal clear on what a particular fund is, call the financial services company and ask. If you don’t know if it’s a stock or a bond or both, ask.
The phone call might go something like this.
Boomer Money and More, here.
I see I’ve got money in a fund called “Get Rich Quick”, ticker symbol, RICH. What does this fund invest in?
Ok. Now, I need you to walk me through the rest of my funds. Tell me their balance and whether they’re a stock, bond, cash, or whatever.
Ok. Thanks for the help. I’ll be in touch. Don’t call me. I’ll call you. Bye.
[Ask yourself these four questions:
- What percentage of these funds are stocks, bonds, cash, etc.?
- Do these percentages follow standard rules of thumb for asset allocation?
- Do any of my funds seem to duplicate each other? That is, could I consolidate any of these funds to avoid paying extra fees?
- Am I more or less comfortable with these funds.]
[Proceed to the next call.]
Script #2: the “help-me-establish-an-asset-allocation-OR-rebalance-my-portfolio” call. From your previous call, you may subsequently decide your asset allocation is out of whack. Or you’ve noticed you have funds that duplicate each other and you can consolidate them. Or something else about these funds makes you uncomfortable (like their fees.)
Call the company and say something like this.
I want an asset allocation of __% stocks and __% bonds. I see that I don’t have that.
What adjustments to my existing portfolio will achieve my desired asset allocation? I don’t want to add funds if I don’t have to. I don’t want to pay the extra fees.
[Insert your percentages above. Listen to proposed adjustments.]
Ok, based on what you’ve told me, let’s make the adjustments you’ve proposed so that I have a __%-__% stock-bond split.
[Insert your percentages.. Repeat back proposed adjustments to confirm you got it right.]
Is there a confirmation number for this call? [Write it down.]
When will this change take place? [Write it down.]
Ok. Thanks, talk to you next year. Don’t call me. I’ll call you. Bye.
[Proceed to the next call if you have stray accounts scattered across multiple institutions or employers.]
Script #3: The “consolidate-all-my-orphan-accounts” call. Although past employers would love for you to leave your funds in their 401(k)s, consider transferring these funds to a low-cost financial services company, like Vanguard, Fidelity, T. Rowe Price, or Schwab. These companies typically offer a superior product. Specifically, they have a much larger selection of funds and have lower fees than the typical 401(k). As we’ve already discussed the lower your fees, the typically higher your return.
When you transfer your 401(k) or similar account, it is called a “rollover.” Here’s some additional info.
Your call should go something like this.
I have 401(k)s [or similar inactive funds] with past employers. Exactly what action do I take to get this money rolled over into a similarly taxed fund at your institution?
[Listen to response, follow instructions.]
I’ve reviewed your fund offerings and want low-fee funds that comprise an asset allocation of __% stocks and __% bonds.
[Insert your percentages above. This allocation should conform to the allocation established in phone call #2.]
Can I pick these funds with you now and then have the rollover go directly into these funds?
[Listen to instructions and follow same.]
Ok. Thanks for the help. I’ll follow your instructions. Bye.
Boomer, a word to the wise about rollovers (i.e., transfers):
Avoid any chance of getting taxed on the funds you’re rolling over. Do not take take physical possession of the money directly. Let the financial services company you’re leaving transfer the money directly into your account at the new financial services company you’ve selected. This is called “a direct transfer.”
Once you’ve made these three calls, you generally only need to rebalance once a year.
Well done, Boomer. Seriously, how hard was that? (Ok. Maybe a little hard–initially.) But you’re a pro now! You’re done until next year. Next year will be a snap.
Every January 1, Mr. Boomer Money and More, and yours truly, spend a romantic hour rebalancing our portfolio.
You really only need to rebalance once a year. Rebalancing any more often and you’re paying added commissions and writing more checks for capital gains tax.
Forget about it until next year, and then prepare to buy low and sell high again.
You’ve earned it, Boomer!
Happy New Year!
P.S. Follow that dream in 2019.