Watch This Before Rebalancing Your Investment Portfolio!

today we're gonna cover a different take on rebalancing your portfolio it's brian preston the bloody guy bow this is one of those things where i got to tell you about the financial planning industry or investment industry is that people try to figure out how they can differentiate themselves from everybody else sometimes a lot of it is fancy talk that doesn't really do anything right and i mean you can really nerd out on this stuff and then there's other people that are trying to sell things office supposedly they're they're systems so we want to kind of talk about that because you do have the Robo advisors that are out there some of them are saying i think i've even heard people talking about it minimum people are talking about their rebalance once a month yeah its quarterly annually does that add any benefit i've actually even heard more often yeah that's what daily rebalancing you you like this that is that better if rebalancing is definitely something that's needed in the portfolio is daily better than never rebounds and so i mean there's a lot of questions on that and then of course there's always the black box managers who supposedly have a smarter system to help you understand how to offing your rebalance or they have some type of trigger based upon value and other things that will do it is that what they should be doing yeah there's two thoughts right so there there is like this systematic rebalancing someone who has these smart triggers and then there's automatic rebalancing where there's no trigger it's just period certain times certain or dollar certain that it just happens which one is right and then and then if you're not a computer how should i managing my portfolio think about that what should i be doing and i wanted to kind of find the common ground we do this a lot on the money guys show remember we are simple and smart in the fact that i want to find that common ground between the nerdiness of actually looking at the data of what is the research show on rebalancing and then that common ground or a comfortable ground of common sense i mean how does this actually work with real financial planning and this is a great question and this came through the law on the live stream and i think this is what's great about if you're with us live you can because sometimes we just take for granted that everyone speaks our language we have someone comment private say hey can can you define rebalance what does that mean that's probably a great way start so and also I want to tell you that we do have because I have to do some housecleaning before we jump in we gave it all in the first but this is I want to give a shout out I was just came back from vacation I was on an anniversary trip to Mexico with two other couples neighbors and former neighbors and here's what's great when you hang out with me you hang out with me long enough you start showing up with topic ideas of what you want me to cover during a show so I actually drew who went on vacation with me home and his wife he shows up with this innovations in finance from The Wall Street Journal and the this was a better way to think about rebalance okay so I took your go see we cover a little bit about this article that was written by how would you say that name but you're always better at that than me Meir Statman so Meir Statman we're good we're gonna take him as a contributor on this so Mar thank you so much for your thoughts so we'll be covering that and then I couldn't help myself I know this is not I mean it could have a section on rebalancing but it's just something that's near and dear to my heart and brand new hot off the presses this came out yesterday I mean we're live streaming this on the second Tuesday the second that's right but this came out actually yesterday and Sara I don't know if you can see it Sara Stanley you know she is obviously dr. Stanley's daughter and she has continued dr. Stanley's work and Sarah has always her and her husband have been you know friends of the the show and this is a bully tactic as well as an excitement tactic is that we want to have Sarah on the show she's already agreed it's just that I'm hoping that if we go ahead and start hyping this enough I can convince them to come to Nashville and let's do an in-person but we'll see what happens but if y'all didn't know sarah has updated and done a lot of new research I can't wait I have not read it yet but I can't wait to get into it so I thought I'd put that out there also just real quick in the fact that if you guys have not given us your email address we did a show on the last show we did we actually had retirement manifesto the retirement manifesto Fritz on and we had a deliverable of the ten command of retirement and I mean that show went over really well so we'd encourage you give us your email address go to money go comm give us your email because we're going to be creating more and more deliverables that you'll get based upon signing up yeah and if you're somebody says whoa deliverable I don't I don't remember getting a deliverable on it I went to the website I'll read the show knows I didn't say that it's not on the website and it's only available on the Monday following the release of our show we have to have your email address all you have to do is sign up let us have it and we're gonna send you guys template spreadsheets useful tools that go along with our shows to hopefully add value to your financial life more and more of you guys are connecting through it to us from YouTube you know still we're we're a podcast that is progressed beyond podcasting where we also do video now if you haven't subscribed to us on YouTube we'd strongly encourage you and then I'll go ahead and let the cat out of the bag we do have a ticker now that is tracking that so it's always fun we've watched the live shows to see those numbers increase and then also every time you see a new show come out you'll see how those numbers are changing so and you can see we're very ambitious we've bought the seven figure we should done the six one but now we're good seven numerals so that ought to be interesting so let's jump into this bow you asked the question will answer it what is rebalancing and what's its purpose so I have my thoughts but you picked on me in show prep you said good thing you're covering this topic since we all know that you know when it comes to who's actually hitting the execute button it's more of us guys in the trenches so you picked on me about this so I'm going to give you the chance to go ahead and flex then if you're saying I'm getting old and and not hitting the execute button as much as I used to yes so in its in its simplest form rebalancing is really getting your investment allocation back to the appropriate target and a real easy way to think about it is if you're supposed to have a 60/40 portfolio and one piece of that moves differently than the other piece you may very quickly turn into a 6535 portfolio now when you say cuz I like to keep this simple in the smart when you say 60/40 I want to make sure because we have we have people of all ages or all education levels with their finances a lot of times when we talk about asset allocation we're gonna speak in very broad terms but we talk about asset allocation we could be as detailed it's talking about how much you have an international how much you have in real estate how much you have domestically between large companies small companies I mean you could bonds I mean cash those are all different asset classes but when you hear somebody talk about 60 30 or 70 30 60 40 you always go add up to a hundred they're usually talking about risk assets versus conservative assets correct but what I mean when you throw those numbers out there that's exactly right and what we're talking about when we say risk assets when you when we talk about like a 60/40 when you say 60% is going to be risk they mean stocks they mean that probably equities whether it's you know real estate or something but they mean you're going to have equities or on the risk spectrum and then the conservative stuff might be bashed you know and when I say like real estate you might be buying REITs or even buying straight-up real estate no but that wouldn't that would take out the equity side of it but it's interesting to think about it from a risk versus a conservative side so what rebalancing means is that you you sell the things that have gotten above the allocation that you want in there and you buy the things that are below the allocation you want so that's kind of what rebuilt what rebalancing is in sort of a simplest form so in the next question you ask Brian is why should I rebalance or why is that important to think about it you you bought a 60/40 portfolio meaning 60% stocks 40% bonds if we were doing it in this simplest form after we have a financial market like we've had it wouldn't be uncommon even if the bonds never lost a dollar you could wake up and your portfolio could be very quickly be a 70/30 split meaning because the stocks have gone up you've got a 70% of your assets and stocks 30% in bonds and what does that mean now you know that's one of the things we're going to cover today is that I think under traditional terms you would automatically rebalance just because you'd want to immediately get it back to a 60/40 split that's more of the traditional take we're going to talk about a how in The Wall Street Journal article it mentions piggy banks a prettier picture that um you know maybe that's not necessarily the right action so that's something we want to make sure we go through but there are some some side effects too rebalancing it can be expensive and well there's several things that can create more taxes it can create transaction costs and there's also the time and labor of doing a rebalance and then also I thought it was interesting is that a lot of researches come out I want to kind of talk about that what is let's talk about anything before we get into the nuts and bolts details what is Vanguard because they did a whole research study was Vanguard say rebalancing adds to the portfolio yeah so Vanguard did a really interesting study now the study was a lot broader than rebalancing and this is back in around 2012 they've done a bunch of studies since then update this but the one that we really loved was back in 2012 and they were trying to quantify how much value working with an advisor could potentially add your portfolios had a bunch of different metrics that they use to measure that well one of the metrics that they use to quantify how an advisor can help is the value-added e-portfolio from systematic or strategic rebalancing and according to Vanguard they equates it a solid rebalancing strategy to potentially adding up to 0.35 percent so almost 1/3 of 1% per year to your total investment performance over the long term right so that's the term that could add up pretty substantial even and then you know just I thought there's internet if you if you if you factor an asset location which we'll talk about in a second because in our opinion you can't have rebalancing without asset location that it actually pushes that an increased value up to over 1% per year just from those two mechanisms of managing your portfolio well and those are just more tools in your bat-belt of making sure you're maximizing what's going on with the investments so one of the things I talked about in show prep Bo as I said what's the industry standard sure I mean what what is the industry standard I mean is that is there something out there yeah what's so interesting is you actually asked me that question hey Bo what's the industry standard up kind of looked around well I know how we do it and I know our philosophy but what is the standard cuz the game has changed a little bit there are now Robo advisors there now algorithms there's a quant trading that takes place so I wouldn't kind of ask to Google you know what's the standard cuz Google knows everything just agree on that what's the standard for rebalancing and this is what I found there is no standard anymore if you ask a hundred different people about what the appropriate waiter balances you're likely to get a hundred different answers which makes it really really complicated to figure out what makes the most sense for you yeah and that's where I think we can hopefully be that common sense that comes into it so let's go ahead and bring in this article sure because I wanted to bring up what makes this article because it is in the section called innovations in finance what makes this innovative and the thing that I thought is that traditional rebalancing is exactly what we'd already talked about is that if you had a 60/40 Tom goes buys you just say it's a quarter whether it's a year but just a certain period of time goes by the portfolio because of stocks going up or stocks going down but the the allocation gets out a washer hits caddywhompus it's what let's just keep you know I've probably said that all wrong you make me all insecure when I mispronounce things I've never heard the word caddywhompus almost when you pronounced it well I just asked caddywhompus I mean that's out of out of out of out of balance I didn't I mean we are doing a show on rebalancing so a word like caddywhompus seems like it would be very you know even the sound of it sounds out of balance so the fact is it needs to be adjusted so traditionally you would just from a you know standpoint of Tom Tom would be your indicator you would rebalance well the article lives in The Wall Street Journal said that no we're not you don't go base it off of Tom we're gonna base it off of once what are the wants of the person that is trying to has the goal of rebalance or and what well here's what I thought was very interesting about this it took something that's very Tom based as an analytical concept if you make it once based that's very behavioral sure it completely puts it on its ear in the fact that instead of thinking about from an analytical standpoint it's now becoming gold space of what do you want to have happen behaviorally and that way because here's what was in and this is because and I don't mean to get you in trouble because we know we're live here if you say something to get me in trouble that's not gonna be you weren't impressed with that article I'm ear I'm sorry so it was not my favorite I don't mean to put you on the spot but here's what I do like about it I'm always looking for when I'm thinking about any financial concept I'm trying to think about how is this useful in helping me educate somebody or to make somebody more successful and when you tell me something is behavioral based because what is the biggest limitation with the average investor it has definitely behavior 150 it's easy to tell somebody just go by the sp500 and if you do it historically you'd be great so we know that there's this little thing in the background that causes all kind of problems and it's called human nature human nature is greedy but human nature is also very fearful so people are that I think it connects with them when you think about the behavioral side of it so when this article is written there's two components of the goals base there's two things it breaks it on two very simplified things and I think what I like about this right so while I didn't love the whole article I do like that I think it allows you to have this overlay that allows you to stick with it because really when you think about rebalancing just purely academically there are three distinct benefits that you most often cite for why rebalance okay the first is it naturally creates a mechanism where you buy low sell high that's right that's kind of the first piece you know if you're just rebalancing you sell the things have done well you buy the things have not done well that's how you get better self-correcting it's self-corrects of your portfolio the second thing and this is where I think the article was brilliant is that generally speaking rebalancing allows you to keep your allocation where it should be meaning it allows you to keep your risk in check if you're supposed to be a 60-40 then getting back to a 60-40 keeps in check this actually a this defines risk a different way yeah and more of a behavior which I think was beautiful and then the third thing that he doesn't touch on as much that we'll end with is it does allow you to Tax manage your portfolio and we'll talk about that that's that location so academically those are the three things that rebalancing does this is a very different intellectual approach to house you think about that and what I like about this one is this one makes it make more sense in the real world well I think it creates that bridge I'm always looking for ways to connect with people who maybe don't traditionally understand personal finance or they think they want to go at different and we've had a prospect I'll go ahead and say this we had a prospect who came to us that had a multiple seven-figure portfolio we're not even known old he's my age so I don't consider him old you might consider a molder but and the portfolio was a hundred percent in cash and the reason it was a hundred percent in cash is that and now rose from a a vocational standpoint this gentleman made a lot of money sure so that that seven-figure portfolio was strictly on a hundred percent of his behavior of saving money but he was not going to invest outside of cash and he never became a client because I never could convince him that he ought to go move away from his aversion to this risk so when I read this piece where it talked about the behavioral side of it it really kind of connected because I thought it was a tool that we might be able to use in the future so here's the two things in life the two goals based things that the author used as the motivation to think about for rebalancing number one is you have two things as one is not to be poor so somebody who is older and scared or somebody who's very risk-averse their whole fear is I don't want to be poor and don't want to run out of money and if I n if I go take too much risk or I do something I'm going to be poor so that's that's one goal based thing the other side of it is I want to be rich the other is to be rich so a person wants to be rich is like well we got to grow we got a we got to get these get the money the army of dollar bills has to be working for you so those two goals are in complete conflict with each other and by the way being rich we're not talking about like robin Leach we're talking about this is someone who wants to do the things they want to do when they want to do them the way they want to do them so it's things like paying for college stopping working buying a vacation or whatever the case may be it's just being able to do with your money the things you want to do with your money and that's a good point because when you say one is not to be poor not to be poor means you're not taking no risk it means that you have enough money to provide an adequate retirement income you're financially independent and I think that's a good point to point out business because and this is this or this example is made in the piece as well is that you could say you know I don't want to be poor so I'm gonna go put all money into a money market but that's horrible that doesn't mean of putting all of your money like this gentlemen I was talking about is not taking away the risk portfolio because we all know if you put all your money in the money market yes you've taken away market risk but your purchasing power very much could be in risk by inflation there's all kind of variables that could come into play so it's it's a less risky asset but it's riskier in the long term goals I think you said that perfect what the article really mentioned is that you have a much lower risk of being poor in the short term but a much higher risk of being poor in the long term and it's where you weigh then I think I think that was a great way to look at so let's let's dig deeper into this goal paced approach because it is kind of unique and then we're gonna bring it back because you guys I know this stuff gets somewhat nerdy but I want you to know this that we're gonna bring it back to tell you kind of what the best practices or what the money guy take is on what you should be doing with your portfolio so hang in there with us as we kind of go through this this goal based approach before we kind of bring it back and marry the two concepts together so that you have the first group which is a young saver trying to build assets so when you have a young saver their goal is is that their first objective is to be rich mm-hmm the second objective is not to be poor because the rich over ways to be poor so they're going to have the majority of their portfolio probably 80% of the assets in riskier stock growth type assets the 20% which is the conservative is going to be primarily their income you know because they are because remember the good thing about when you are working is that when the markets get beat up another things you always go well I'm still working or have my income so you have yourself to rely upon and then of course the the concert' the the conservative part that not be poor part is also buying into bonds or things like that so what happens is is that if you're somebody who's who wants to focus your young savouring you want to build on this if things continue to grow let's just say that the bonds don't necessarily go down in value but the stocks go up if you had because of your income and because you allocated that 20% to bonds just because you got out of whack and say maybe it's 85 15 because the stocks you might not need to rebalance because the level that you had there is protection with between your income and the fixed income was enough that you could let it keep growing that's right and that's what this this is kind of unique in the fact that you wouldn't do that automatic rebalance yes this is what so so that was a lot and and I'm not as smart as you right so I'm gonna go and throw that out there so it was difficult for me to track on the article but I started thinking about it in common sense terms I'm I'm gonna use round numbers because I can do the math in my head right if you had a million dollar portfolio and you determined that 8020 was the correct mix and that 20% of that million dollars or two hundred thousand dollars should be in the conservative side just because the portfolio goes up in value yeah and your portfolio grows to a 1.2 1.3 million dollars so long as you're two hundred thousand stable base stays there it's gonna be a smaller percentage but if that's like your comfort level you're not be poor level that that the reason you're cute or the reason you're not having rebalance is because the dollar figure is staying where you kind of had assigned it that's really what he's saying here well let's go the other way cuz I already I will tell you my spidey senses are starting to kick in a little bit as that man this could get dangerous really quick I love the narrative that this creates because it lets you communicate with people who might be thinking about risk in a different way but this this from an analytical standpoint could get dangerous but let's let's flip it over let's go to the other side let's talk about the retiree okay the retiree is obviously their first objective is to not be poor right meaning they want to have a good retirement then want to take too much risk and their second objective is to be rich you know because now they've given up on swinging for the fences they're trying to hit singles for the rest of their life they don't need to go find the next Facebook Google Apple whatever the stock is out there so that they might very well have a portfolio of 80% bonds or conservative assets and 20% growth since its objective is much smaller so if we base off your same system if we had a million dollars and we realized that eight hundred thousand was going to be in conservative assets right and then two hundred was gonna be in growth if it grew to 1.1 your because of the stock yeah we could say one more keep it simple you're saying that 800 would have let them keep it rolling I felt like that's what I was hearing in this article that doesn't make sense because remember the first objective is we know what our number is to keep us safe not be poor and the fact that we have this 800,000 that's keeping us safe letting us sleep at night and just because the stocks have gone from two hundred thousand three hundred thousand it lets that second objective of becoming rich kind of percolate and work but those assets keep growing so that that that's a cool way that's a cool narrative I like what it does and I think it is definitely useful but I think we have to talk about what does that mean in reality yeah yep we talked about remember rebalancing in some terms is - it's kind of like pruning a your favorite fruit tree or your blackberry bush like you know blackberry blueberry bush that you have in your backyard is that you know sometimes you have to trim things back so that you can get better grow you know get better future long-term growth and and what I mean by that is is when you have periods in reality what happens with rebalancing is that the in theory you said that's the beginning but I think it's worth repeating is if you have outsize performance like the stock market we know trees don't grow to heaven I mean the stock markets go through cycles where it very well you could have two to three down years every decade right so it's nice when you get through those irrational periods if you have a process that pulls I get the market makes 30% wouldn't it be nice if you have something a system that pulls some of those gains down and puts them into the undervalued assets or the assets that now are out of out of proportion I meaning they're under weighted that under this system I mean you could see how this thing could get really crazy you could well I got an 8020 could very easily turn into a 93 7 yeah very quickly now you I worry and here's where I'm playing and I'm just talking this out loud with you Bo this not in the notes we talk about this all time is that you get to a point and this is why it's important to have a financial plan is because it's not all the nuts and bolts of what your asset allocation could be there is going to come a time where you look at it and realize I've kind of won the game yeah you're so my goal is now how do I not screw this thing up and I still get reminded it's easy to forget now because 2008 was a decade ago we're seeing that by when we've run proposals for prospects and brand new clients one of the discussion points we've had to talk about here recently is all the scary data is falling off because it was 10 years ago now does that mean that we're never going to have another 2008 or a bad correction no it just means we've had I consider it part of the pluck effect where when you pull you know something that we were so bad the market because it was called the Great Recession was the worst downturn since the Great Depression that the market got its teeth kicked in so bad that it makes sense that we've had this prolonged recovery this extended bear I mean bull market that that kind of connects the dots on my common sense but that means that at some point I don't know when it is I don't want you to think this is me trying to sell you some fear-mongering newsletter because I'm telling you six weeks from today that markets going down nobody knows that stuff so don't pay attention but you can start thinking hey I want to make sure my allocation is set up so that when the next town turned does come that I'm not left holding the basket right and so if you figure out that your retirement plan requires this and that you are 55 or you know and truthfully if you're younger you get to have and that's why your allocations going to be more aggressive but you need to have all the different components working together instead of just knowing whether it's going to be I'm going to rebalance quarterly or I'm just gonna make a goals base so I mean do you see what I'm saying build a bridge form there's a marriage between the two and this is a really easy example and we talked about this with with prospects all the time because when you talk about portfolio management portfolio construction there are two pieces of risk that you have to consider risk tolerance and risk capacity how much risk comfortable with that you can still sleep at night that's your risk tolerance in the risk capacity how much risk is it makes sense for you to realistically take on and this is a real easy way that we describe this to folks let's assume that tomorrow you have a 10 million dollar portfolio right it's real easy to not screw up with 10 million dollars I mean it's gonna be kind of hard to run out of that money so there are two bodies of thought there one is I don't need to take any risk because there's no point I don't need to grow it's gonna provide but for me for the rest of my life the second is I can be as aggressive as I want to be with that because even if I lose half of it I still have 5 million dollars both of those answers are right but it's true and that's what's really interesting about me now be truly not instead of just being goals based it needs to be financial planning but that's exactly right because and I thought I will give credit to the article it talks about how there was an older lady who if you looked at her and said what's her needs you would think that it was to be rich because she was only living off of a portion she was much more aggressive than she's supposed to be but then you find out later that she gave just seven figures to her favorite charity her desire to grow was to fund some of the the organizations that she was very passionate about and this is just like you have other people who just do not want to have any type of risk because they just they feel like it's not worth it for them so those things are definitely there is a tight way I've always get that visual of somebody walking a tightrope between risk and reward of figuring out what they need to accomplish so I think it's interesting what's what's cool if you did a Gold's based system is that you know that would probably be great for somebody like 2009 because we've had a great extended bear coming bull market from 2009 all the way through now so you're probably loving if you never rebound against it if you have a systemic rebalance you know you're probably loving the fact that you did that in 2007 right before we have the collapse of 2008 you're even liking it at the beginning of 2009 because it made you do at the end of 2008 you got that rebalance beginning of 2009 but let's kind of talk about what we do getting in the nuts and bolts of it the nitty-gritty I like to give people actual details I want people to know the research shows because there's a whole research report that that Vanguard did is that should you do this daily should you do it monthly should you do a quarterly should you do it annually do you think they there's a difference between those yes I don't know I don't know the answer to that question I'm gonna say yes it's very it's it's almost unmeasurable I mean if you actually the research shows that you choosing the time as your your indicated or rebalance that's why when somebody is pitching you whether it's a system or whether it's professional and they tell you they do automatic rebalancing if they're basing that off of just Tom I don't know that it adds as much alpha I think having I think the thirty five basis points that you mentioned the beginning of the show Bo that there is just having a principal and having an indicator a why of why you're doing rebalancing can add that alpha but just saying we're going to do it once a month doesn't necessarily add value it's got to be tied to your financial plan and the goals and looking at the allocation as a whole and then the other thing you have to think about it is it very much depends on one there are trading costs for rebalancing so if you're using funds or ETFs or stocks or whatever you're investing in that have charges when you trade every time you rebalance its triggering charges so a great solution there might to be used no load funds or Commission for ETF the second thing is if your assets are held inside of a taxable account when you rebalance if you're doing it well there's a change you're triggering taxes well the two things in your portfolio that you get to control you can't really control what the market does but you get to control what you pay in fees you know commissions trading charges and what you pay in taxes sometimes systematic rebalancing to go from twenty point two percent back down to twenty percent yeah might not make this most sense because there's a point that once a year rebalancing is just as effective if not even better than doing it daily or monthly because you're saving so much in those trains transaction costs as well as just the manpower of having to do that system so I think that that dispels a big myth out there so if somebody's telling you they're doing it daily or monthly they're probably it's just as effective if you're doing it annually um talk about a little bit about what do we do both because it's more if we don't do it annually and we're not even it doesn't have to be like on the 15th of this month we're going to do it what's what's kind of the process that we're doing without with our clients yes so this is this is something we actually learned from uncle Warren and we took this from him we think the way he describes this is really really well and what he tells folks in his letter to shareholders he says that he is a money manager he's not really a money manager he's an owner of businesses but he is a money manager he gets paid for the quality of his decisions not the quantity of his decisions and so we kind of subscribe to that thing so for every one of our client portfolios we're looking at their allocations every quarter right so we're kind of reviewing allocations every quarter if you asked us what our stated rebalancing policy is we look to rebalance portfolios twice a year meaning we're looking at portfolios with a specific purpose of rebalancing twice a year does that mean that we're placing trades twice a year absolutely not there's a lot of rebalancing that had you done that in 2013 14 15 16 there's a lot of you know momentum is the technical term but there's a lot of return you left on the table by not doing that or by doing just a fixed rity ecstatic allocation and that's what the Vanguard research shows there's a threshold of change nice try need to take into account too so it not only needs to be goals based but think about the threshold of change if you're looking at when you look like we said we systematically try to make sure from at least quarterly to semi-annually we look at the allocations and make sure that they reflect the goals and the risk and all the other concerns that a client has but that doesn't mean a trade is actually being placed because if you see a tweak of 1% 2% the first of all might not be big enough to see value in just making the change for the total portfolio so you got to pay attention to those bands of threshold of difference you know because there's a big difference so like you said of something appreciating by half a percent versus something having appreciated 5 or even 10 percent that's from where it was let me make one let me throw one other just wonky thing in there when you think about rebalancing we use the very easy example of a 60/40 portfolio it goes from 64 additional balance well the assumption that you're making there is that when you rebalance you're rebalancing either from risk to off risk or from off risk to risk a lot of times when we approach rebalancing it might be inside of those spectrums so we might be rebalancing domestic exposure for international exposure or vice-versa selling off international buying domestic that's not actually affecting the 60/40 split that's affecting something inside of the split so you have to think of rebalancing on the big macro portfolio level because just because equities might be overvalued does not immediately mean that bonds are undervalued especially in a rising rate environment like what we're now so you have to get creative in terms of not only what are you selling but what are you buying cuz you have to kind of make that decision right on both sides if you're gonna make sure your portfolio is structured appropriately for your circumstances as well as what's going on in the broad economy I want to kind of close down with the why sounds like it's the driving factor of things you know this is why your asset allocation your rebalancing strategy all needs to be implemented with your overall financial plan which takes into account your goals your age your risk tolerance all those things are interrelated one thing I thought that was buried in that our research when we were doing show prepping you said it nothing I don't know if everybody caught it so I felt like I'd kind of bring it home and draw attention to it beause you said at the beginning that in that you know whether I think Morningstar calls it gamma Vanguard calls it alpha right of what is your financial advisor where do they add value you said that the the number for rebalancing was 0.35 percent but if they took into account asset location has sprung up to 1% that that's 0.65 or 65 basis points that comes back to the asset location right net and I felt like that is something that when we talk to people I think very few people are paying attention so I know it's it's kind of like a cousin of rebalancing when we talk about location let's talk to them because this is something guys that a lot of you because here's what here's what I want you to think about we talked about diversification that's what when you talk about asset allocation you talk about vacation but something that doesn't get a lot of attention is your tax diversification right I mean you have different pots of money if you think about I mean it's so funny is I got a call from a client because somebody you know in her community is all nervous about these RM DS because they're getting older and they got RMDs and they're trying to figure out oh my goodness what does that mean because it's making my time my social security more taxable to making money Medicare payments go up and I'm sitting there thinking well this is you know a strategy if you have somebody who's taking account of asset location when they're younger mm-hmm you might not have these fears on our MDS required minimum distributions when you get older and we also see it with younger people is that you'll see people who have it's not uncommon for you to have all these savings opportunities with your employer where they you can have free matching so all your money ends up being in your employer plan like a 401 K 403 B but you don't have any taxable money you don't have any tax-free money so but welcome through when we talk about tax location what's some of the biggest benefits and some of the biggest tools that we see people that they should take advantage of yeah so you know one thing to think about is you know you have your overall asset allocation you know how your portfolio should be invested across different investment types but those different investment types don't all behave the same some of them pay off ordinary income like bonds they spit off income to you some of them don't spit off a ton of income at all they're more based on capital appreciation some of them distribute capital gains so each of the incentive identify better tax rate so each of the investments behaves differently well the accounts that you house also behave differently so IRAs or 401ks have a different tax circumstance then Roth IRAs and those have a different tax and I go to tax degree Roth's grow tax-free taxable accounts grow at qualified tax rates you know long long-term capital gains rates and so your ideal scenario is you want to make sure that as you're building up two or three pots right as you're building up your 401k as you're building up your Roth assets you're building different taxable assets you are monitoring the types of investments that you hold in each it's not uncommon for when you first start out maybe you sell a business or you sell a piece of land something happens your parents leave you money or whatever and you have a big taxable account right and that's what you start your life with a hundred thousand dollars well there's a chance that taxable account is going to hold inefficient stuff in it because you don't have a 401 K built up or Roth assets built up and so one of the things that you do is as you do build up your tax buckets as those buckets start to equalize and as you build assets each one of them you can control what your asset location actually looks like and when you get to retirement if you do have these three distinct tax buckets you get to pick and choose what you pay in taxes and we had that conversation with fritz last week about just how powerful that can be so when you're younger if you pay attention a tax location it helps you minimize taxes on what gets distributed out to you every year because you know and just telling you where the rubber meets the road it's nice at the ordinary income type assets like bonds are put into your tax deferred like your retirement account right it's nice if you're fast growing appreciating assets go into something like your tax-free Roth accounts that's really exciting to stick it to the government legally legally later because you have all that hyper compounding growth and then you try to put a kind of a mix between what you need in liquidity as well as what has favorable tax treatment like dividend paying stocks and you can put those in growth because capital gains are favored tax treatment as well you can put that stuff in your taxable account that can kind of be your catch-all but it's really helpful when you're younger because it helps you minimize the income that's being thrown off from your portfolio it helps you when you get older because you can essentially once again legally potentially manipulate your tax rate in retirement so if you're one of these fire people and you think you're going to be leaving the workforce at forty five at fifty of 55 or 60 any time between you know before 70 and a half you have the potential to be talking about Roth conversion strategies and other things all based upon tax location so one of the things I want to make sure we get out there to you guys is that when you're younger there's a simple solution you don't need have to get into all this minutia and overwhelm yourself I want you to focus you're younger on building up enough foundational assets so they can start working for you that army of dollar bills without getting caught up and all this other stuff by target retirement funds by the index funds so that you don't have to focus all this stuff you know one of the key things we tell people though is that really you probably can you're ok buying target retirement funds and simple index funds till you get to be about two or three hundred thousand dollars of assets and then ball means I think that you can start adding that additional alpha or gamma or what other things we were talking about earlier but you got to have that foundational level of assets so that you can get the benefits of compounding interest so don't lose focus of that because there's a whole industry out there selling you complexity don't get caught up in it I know that we start the show and the purpose is very purposeful to talk about rebalancing asset allocation but so often there's this cousin over here that has such a valuable thing which is called tax location we want to make sure you're not forgetting that show I mean that's what all this stuff works together and that's why bringing it back to the rebalancing don't let somebody sell you on one concept there's so many people out there they get excited and they share you sell you on something because their algorithm or their Robo system does something daily you're like well that sounds great you know this is good then it must be the more of it is that be better and I'm telling you that's one component of what success in your finances is actually you need to know something that's 360 it's not only taking an account to rebalancing it's not only taking an account the asset allocation it's taking an account that you actually want to retire at date X that you actually want to go on this trip with your family on this date that you you actually want to go start the venture you know a venture like you want to start a business or you want to go just move in a different direction all that stuff needs to be interrelated and that's why I think we love what we do for a living so hopefully you've enjoyed the content today's show I know we got a little in the weeds but we have to do these shows every now and how I get so excited about all the vision shows and trying to get you exotic excited and motivated on saving but every now and then we need to give you a little bit that meet so that you have the tools in that that bat-belt of yours to make sure that you're effective with your financial planning so you're like you listen to this and you're going Wow so I found this this show and they're just giving away this free advice how is this possible first go check us out money guy comm make sure you sign up and give us your email 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if you have questions right because we do this for you I mean we do it because we love to do it so even if you didn't listen we probably still do it because it's a lot of fun but we do this for you guys if there are things you want to know there are two ways that you can that you can get actually there's a couple ways but the two I'm gonna talk about is you can come to one of our live streams hangout and be in the chat ask questions away turnt when we stop recording we're still gonna be here do a live Q&A yeah Braun's gonna give away some tumblr a lot of you were wondering how you get these live streams but we also have a brand new same if you have a question go out to your favorite social use the hashtag ask the money guy ask us a question you know we'll ride around town answer your question and then you can always contact us you can go to money guy calm and go to our contact us and go to a bound wealth and contact us we want to be engaged with you so please reach out let us know your questions go sign up for the email you know give us your email money go calm on Monday calm so that we can communicate with that's well that's what we're here together let's help each other through things so guys thanks so much I'm your host Brian Preston mr. beau handsome we'll be back soon

Channel: The Money Guy Show

Views: 21,851

Rating: 4.8297873 out of 5

Keywords: A Different Take on Rebalancing: What Investors Should Know About this Asset Management Tool, Watch This Before Rebalancing Your Investment Portfolio!, rebalancing, investment, stocks, stock market, investment how to, investing 101, stock, economy, retirement planning, portfolio management, investing, money, mutual fund, diversification, stocks to invest in, dividend investing, investments, invest, investing for beginners, best stocks, index fund, trade, analysis, portfolio managment

Id: b7QmpE0H7H8

Length: 44min 33sec (2673 seconds)

Published: Fri Oct 12 2018