Simple Rules: Portfolio Rebalancing

by | Aug 3, 2020 | Financial Planning, Investments

People aren’t dumb. The world is hard. – Richard Thaler

We took the kids mini-golfing for the first-time last week.  The weather forecast called for no rain. It rained. Thankfully, the rain kept people away allowing the kids to take the time to 100-putt each par three hole. Their heroic cheers when the ball finally fell into the hole was marvelous.

The whole premise of golf is fairly straightforward, especially mini-golf. You use your club to try to putt a ball in the hole in the least number of strokes possible. Our three-year-old figured out the rules in no time.


Yet, simple does not mean easy. Even those that pursue golf over a lifetime still find it incredibly difficult and challenging.  Being a master is almost always just out of reach. Despite years of practice, seasoned professionals will still see that little white ball go in confounding directions.

It reminds me of investing.

Buy low, sell high

When asked about what to do in the market, most advisers will provide general guidelines.  Personally, we like to suggest investors buy low and sell high. A golf pro might tell you to plant your feet, square your hips, and keep your eye on the ball. These might be simple rules but they are no guarantee the ball will go where you want, and, with investing, simple rules always seem to be hardest to follow right when they are the most useful.

Market stress happens. It’s a basic fact of investing. Sticking to simple rules becomes necessary when markets go wild. Having a personal financial plan based on your goals and objectives can help be the anchor in stressful times, since it’s during tough market conditions that we forget the simple rules we need to follow to be successful.  The plan reminds us how to act and what to do when the world is chaotic.

For instance, market drops are when we get our chance to buy low and sell high. These drops coincide with negativity and have proven to be good times to buy, but sailing your portfolio into a hurricane is harrowing. Notice the chart below, the most volatile times in the past 20 years have proven to be exceptional buying opportunities.

Buy low, sell high is a simple rule and the data supports it. Yet, good opportunity coincides with tough times.  So, how can we make sure we take the right actions when we should?

Portfolio Rebalancing

For purely illustrative purposes, let’s say your investment plan calls for 60% stocks and 40% bonds. Stocks are for growth and bonds are for stability. The plan further states that portfolio rebalancing will occur when either stocks or bonds move more than 5% from strategic weights.

We do portfolio rebalancing because, over time, the market fluctuates and it’s important to keep the portfolio aligned to your goals. Having a rebalancing process makes choices easier. This is especially true during stressful markets.

During the COVID panic in March 2020, stocks fell 35% from their highs. Bonds protected the downside so that at the stock market bottom on March 23, a portfolio starting on January 1 with 60% stocks and 40% bonds would have been invested in 50% stocks and 50%.

At 50% stocks and 50% bonds the portfolio was out of balance.  Our plan calls for 60% stocks and 40% bonds.  It was time to do some portfolio rebalancing. Or, in other words, use our stable bonds to buy stocks low.

Portfolio rebalancing rules force us to do the hard thing and buy low.  It also helps us avoid asking if now is the right time to buy.  When a portfolio is out of balance, we follow our rules. We rebalance. Crucially, if you go into a downturn with 60% stocks, you want to come out of the downturn with 60% stocks. Portfolio rebalancing helps portfolios recover faster. The rules we use help us do the hard thing when its hard.

Portfolio Rebalancing

Buying and holding works too. Simply holding the hypothetical 60% stock and 40% bond portfolio was also a good choice. Holding and doing nothing also follows a simple rule: when in doubt do nothing. However, comparing the dollar performance of a rebalance or a buy and hold strategy, the rules-based, rebalanced, portfolio comes out ahead.

Following simple portfolio rules

Following basics rules helps investors make the right choices in hard times.  A rule like portfolio rebalancing is not perfect, by any means, and our illustration demonstrates the best case, which is rarely achieved in the real world. Following a process with uncertain outcomes is not about being perfect, it’s about being good enough. As long as good enough is achieved, investors can feel good about the actions they take to try to achieve satisfactory outcomes during tough markets. Like a mini-golfer, outcomes are better when you adhere to basic putting rules while managing expectations. In other words, shoot for the hole in one but expect par.

Here’s to the follow through… and portfolio rebalancing when things go out of whack.

If you’d like to discuss rebalancing or have any questions about your portfolio, schedule a call with one of our fiduciary advisers.


We acknowledge that we pursue knowledge.

Schedule time to see if it would help your portfolio!

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