Episode 24: The Rebalancing Act!

Here are just a handful of the things that you’ll learn:

“Gambling: The sure way of getting nothing from something.” Wilson Mizner


You may say that’s a strange way to start a podcast about rebalancing your portfolio with the famous Kenny Rogers Song “The Gambler”!


After all what does gambling have to do with rebalancing? Surprisingly, it has a lot to do with rebalancing and, in my opinion, rebalancing is the antithesis of gambling with your investments.


In this series of episodes (maybe 2 or 3) we are going to dive in and explain why it is crucial for you to rebalance your portfolio,

  • what is rebalancing,
  • how often you should rebalance,
  • and give you concrete examples of what a prudent investment strategy really looks like.


So, the question is, do you really want to gamble with your retirement savings? You know, the money you saved over most of your adult life, the money that is meant to fulfill your personal values and personal goals in your retirement years?


Our opinion is that it’s way too important to gamble with!! So having an investment strategy that is #1 Prudent and #2 rebalancing that investment strategy is absolutely critical , in our opinion, to your success as an investor and (by the way) is the exact opposite of gambling by stock picking, forecasting or trying to predict the future, and trying to time the market!


(2:30) I’m sure there are some folks out there that get a dopamine rush from gambling with their portfolios. I mean we run into them all the time.  They place trades so often it’s like placing chips on the craps table at their local casino.


What’s even worse is that some of them use brokerage firms and let the brokers stock pick and gamble on their behalf and this is extremely harmful behavior to your long-term success as an investor.


Numerous studies show that the vast majority of investors buy high and sell low. One recent study shows the discrepancy of investors’ returns vs. the S&P 500 index. The DalBar Corporation publishes a yearly study on investor behavior measuring the effects of investor decisions to buy, sell, and switch into and out of mutual funds.  The results of this study are truly mind blowing and can be seen below.


(5:00) Some highlights from the study:


CATEGORY1985-2018 Annualized Return
S&P 500 Index10.86%
Dalbar Average Investor – Equity Fund3.67%
CPI (representing Inflation)2.59%


Over a period of 30 years, from 1985 to 2018, the S&P 500 index has an annualized return of 10.86%. However, during that same time frame the average equity fund investor experienced returns significantly lower, coming in at a paltry annualized 3.67%.


There are many factors that explain why the average investor performs so badly compared to the index, but in my opinion their behavior is a significant factor that explains this dismal performance.


More precisely, the risk the average investor assumes when creating their portfolios is directly related to their behavior when it comes to hitting the panic button and stopping the pain of their latest stock picking maneuvers when markets crash!


(8:00) I think it would be helpful to explain what is called the Uniform Prudent Investor ACT UPIA.

It is based on the original “Prudent Man Rule” in Massachusetts common law written in 1830 and revised in 1959 and its been updated since

The key takeaways are this:

  • The Uniform Prudent Investor Act (UPIA) is a statute that sets out guidelines for trustees to follow when investing trust assets, an update to the Prudent Man Rule.
  • The Prudent Man Rule stated that a trust fiduciary was required to invest trust assets as a “prudent man” would invest his own assets.
  • The UPIA requires trustees to consider a diversified portfolio approach that follows modern portfolio theory and a total return approach.

So, it all starts with a well-diversified portfolio of asset class funds.


No stock picking and No market timing. Let me explain. An asset class fund is a fund (similar to an Index find) but not quite. That tracks an entire asset class. For example, a fund that own all the stocks that represent Large US Growth or a fund that owns all the stocks that represent small US stock,


There are a lot of other asset classes out there. Funds that mirror small value and large value us stocks, international stocks both large, small, growth and value-oriented asset categories………and Fixed income asset class funds as well.


(11:50) So, under the UPIA……. a Fiduciary trustee would consider a well-diversified portfolio owning all the asset class funds and that well diversified portfolio will be based on the client’s personal risk tolerance (controlled by the percentage of $$$ allocated to each asset class) and personal return preference.


The key here is to design a portfolio mix that is appropriate for the clients risk/return preference using an engineered approach of a variety of these asset funds to maximize return with as little risk as possible and that is what Nobel Prize winning economist, DR Harry Markowitz deemed “Modern Portfolio Theory”


So, the language of the uniform prudent investor act states that a portfolio should follow Dr. Markowitz’s Nobel prize winning research dubbed Modern Portfolio Theory.


Yes…. that’s stunning isn’t it.  That shows you the weight of how important his work was back in the 1950’s for today’s Prudent Investor! The problem is most investors are not Prudent! They don’t follow MPT! They go to the wall Street casino or let their brokers go to the walls street casino on gamble and speculate with their money rather than prudently investing it.


There’s a big difference in speculating and gambling vs investing… And I think a lot of folks get them confused and think they are one in the same!


(14:20) How does rebalancing help the average investor fight the need to speculate and gamble with their portfolios? 


Well let’s start with the definition of rebalancing! The technical definition is “realigning the weightings of your portfolio through periodic review and simultaneous buying and selling of assets to maintain your target asset allocation.”  In simple terms it’s the process of restoring your portfolio to its original target allocations. Now, if you’ve never had an original target allocation to begin with then we have a problem.


So, it makes sense to start there. Start with a portfolio of asset classes based on your own unique risk/return preference as mentioned earlier.


(15:40) What if someone listening has never thought about their personal risk/return preference?


Seek out some help. Work with a fiduciary that will help you identify your own risk tolerance based on your personal values around money and your goals. In essence a good investment coach.


Such as our firm……. hahaha shameless plug!


Did you notice how many times we have said RISK during this episode?


That’s not by accident, and that’s the precise reason WHY WE REBALANCE! Let me say that again……. it’s is too important for you not to hear.


The main reason why you should rebalance your portfolio is to control the risk inside your portfolio.


By rebalancing to control the risk in your portfolio you are eliminating the gambling from your strategy and essentially buying low and selling high.


(18:00) Isn’t this the most basic and logical tenet of investing; buy low and sell high?


EXACTLY!…………But unfortunately, as the Dalbar study shows, very few people do it correctly.


So, I think this is a good stopping point for this episode and what we will do next week is discuss what a prudent portfolio really looks like and then get into some concrete hypothetical examples of rebalancing.


(19:30) Coaching Segment: On this episode we really concentrated on the definition of RISK and why it so important to start with a portfolio mix that fits your personal risk/return preference!


But what we find, very often, when we meet with new folks that come into our office is that they don’t really know how much risk they are assuming in their portfolios because they have never measured the risk number and compared to their actual tolerance.


I personally feel that this is the most important decision in investing.


It’s not enough to tell your advisor and use terms like “Moderate Investor” or Conservative Investor”, etc… those terms are way too general and may mean different things to different people. For example, you may tell your advisor that you are a conservative investor and that a loss of 5 to 10% in a year is acceptable…. not fun!!!, but acceptable.


However, your advisor’s idea of conservative could be completely different like 10 to 20% loss. So, you are not really speaking the same language.


So, this is where the term “Risk Number” comes from. We need to actually “measure” the risk inside your portfolio so we can get a baseline and then look at that risk number and translate that into dollars of gain or loss in different market conditions!


That number goes from a scale of 1 to 100 with 1 being very little risk and 100 being maximum risk.


So, if you have a risk number of a 75, what exactly does that mean in terms of potential dollar lost in a bad market and potential dollars gained in a good market.


With this level of clarity many people can structure a more acceptable asset-class based portfolio and what we find is that they are more likely to follow the rules of investing




Go to the top left corner of our website: “WHATS YOUR RISK NUMBER?” to get you personal risk number!


“We appreciate you joining us today for this episode of The Fiscal Blueprint.

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Remember it’s not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!