Blocking and Tackling

In partnership with

Pay No Interest Until Nearly 2027 AND Earn 5% Cash Back

Use a 0% intro APR card to pay off debt.
Transfer your balance and avoid interest charges.
This top card offers 0% APR into 2027 + 5% cash back!

Learn How To Apply Now

Jason’s random words on rebalancing

One of the things that I have added to my investing framework and process over the past year is the idea of rebalancing. In short, rebalancing is the idea that your portfolio should have a certain percentage of certain asset types to improve the odds of reaching your desired outcome, and as markets do their thing and your contributions happen, your portfolio gets out of balance. It’s actually a feature, not a bug. But re-optimizing your portfolio by rebalancing can help you earn more optimal outcomes.

For many years, rebalancing didn’t make sense for me, as my portfolio was entirely stocks and cash, and the excess cash served as “dry powder” for opportunistic stock buying. Like many of you reading this, the bulk of my investing journey to date has been during a period of extremely good stock market returns, very low yield for fixed-income investments like bonds, and with my financial goals measured in decades from the time I would need to take money out of my portfolio.

But, to paraphrase Ferris Bueller, markets come at you pretty fast. If you don’t rebalance, you could miss some great opportunities.

But I need to set the stage for what I have done first.

Changing with the times

Back in September, I wrote about two things that younger me would be embarrassed about: golf and bonds.

Something Warren Buffett has said helped influence the decision to shift some of my portfolio from stocks to bonds. “When the facts change, I change my position.” For me, a few important facts have changed.

• I’m closer to retirement than being in college.

• Interest rates have returned to more normal historical levels versus the lows of the past 15 years.

• I have a far clearer idea of the rates of return I need to earn to reach my family’s financial goals.

Yes, retirement is probably still at least a decade into the future, and probably a little more. I’m pretty certain both my wife and I will continue earning some income from work into our 60’s, like most people.

But I’ve also come to realize that there’s a non-zero chance that we go through a protracted period of extremely low stock market returns, and if that were to happen, it would harm our financial future. So we have made some allocation changes to help guard against unexpected volatility that for the most part, is not a risk. Except when it is.

Floor versus ceiling

I have reached a point in my investing career where think about the “floor” for future returns more than the upside. Considering that the bulk of our future retirement savings will come from our existing contributions, and less and less will be a product of new contributions, the idea of protecting against losses due to volatility has become more important.

To be clear, this is still a very low-probability risk. The most extreme examples are the peak-to-peak-to-peak periods of the 2000’s. For those who don’t recall the specifics, here’s what happened over the next dozen years:

• The S&P 500 peaked on March 23, 2000

• It fell more than 40% by mid-2002

• It did not recover until November 2006, more than 6 ½ years later

• It peaked again on October 9, 2007

• It hit bottom on March 9, 2009 down 48% from the March 2000 peak

• It did not fully, permanently return to consistent highs until December of 2011.

The figures above are based on total returns, so even with dividends included, this was a brutal 11 years for people who entered 2000 with a lot of already-accumulated wealth held in stocks.

Can you imagine being in your 40s in 2000, with a million-dollar stock portfolio? You’d just spent the past decade earnings more than 19% a year in average returns! If you could get the same over the next decade, you’d be coasting into your 50’s with a $5.5 million portfolio!

Instead, the market did what the market does. That million-dollar stock portfolio in January 2000 would have been worth $1.06 million 11 years later. That’s less than 1% per year in average returns.

I don’t expect to see that sort of extreme volatility and weak returns over the next decade-plus. But it’s not a zero-probability likelihood, and since bonds and cash are now worth holding for some yield, I have increased my exposure to those asset classes. Resetting the floor a little higher, if at the expense of a lower ceiling for total returns.

How rebalancing works in this scenario

As explained above, most of my reasoning for shifting to more bonds is to help soften the impact of downward volatility on my existing portfolio. But as I described to Jeff on the podcast episode when we talked through my decision, there’s more to it.

In short, acting opportunistically during market downturns to rebalance bond exposure down, and increase stock exposure back to those ideal levels, is a way to boost returns.

And just as I have rules around cash and buying — I hold a lot of extra cash specifically to deploy during market selloffs — I have put in some guidelines around rebalancing bonds, too. And I did exactly that on April 8th, being lucky to “call the bottom” of the tariff selloff — at least to this point.

I was able to “avoid” the selloff with a portion of my portfolio, and “buy the dip” when stocks fell almost 20% in a matter of a few months. It was a nice little win that confirms my process is favorable for me, and just based on some basic fundamentals of investing success versus special insight or skill. I just used the playbook.

To be clear, these are still relatively small amounts of money, and I just rebalanced the percentage of my portfolio from bonds — which had increased as stock values fell — into stocks closer to my desired levels.

Now comes the hard part: rebalancing the other way later this year if we continue to see stocks move higher. But that’s content for a future post.

Jason

Seeking impartial news? Meet 1440.

Every day, 3.5 million readers turn to 1440 for their factual news. We sift through 100+ sources to bring you a complete summary of politics, global events, business, and culture, all in a brief 5-minute email. Enjoy an impartial news experience.

Join for free today!