Let’s talk about how to rebalance to buy low and sell high with your investment portfolio!
To remind clients to keep saving for their future selves, we try to make the investing process fun. Instead of solely announcing numbers at clients with multiple pages of legal paperwork, we remind clients to focus on what they can control with their investment accounts. To see how we do this, check out this sneak peek below of a Quarterly Email which we send to clients.
We mix up the themes each quarter, and also personally tailor recommendations for the client’s unique situations. My favorite part of these Quarterly Emails is that we attach a Paid Invoice so clients can understand how Well-Rounded Success gets paid and the amount of money which was taken out of their accounts for our services. As you can read in a previous blog post, the smoke-and-mirrors nature of the Personal Finance industry really grinds my gears, so we try to be as transparent as possible.
If you wish to explore a business relationship so you can receive this type of help, learn more at Well-Rounded Success’ Services.
Email Subject Line
2nd Quarter of 2018: Your Quarterly Email from Dan & Well-Rounded Success
Greetings <Insert Name>!
Please allow me to put on my ‘Financial Planner hat’ to discuss the below points as well as personalized recommendations for your investment account. Don’t forget to scroll down to the Tweaks For You section as well as your paid invoice.
You can’t control the markets so we encourage you to focus on what you can control with your investment portfolio. We created a process to address the below themes when we opened your investment account and we’ll discuss all these bullet points in future Quarterly Emails.
- Consistently invest (2017 Third Quarter)
- Keep your money invested during fearful moments (2017 Second Quarter)
- Keep your costs low (2017 Fourth Quarter)
- Be diversified
- Position your portfolio to your risk tolerance and time horizon
- Systemize your portfolio to sell high and buy low (This Quarter’s Theme)
- Efficiently invest with taxes in mind (2018 First Quarter)
When building investment portfolios, an important strategy involves Asset Allocation. To keep things simple, we’ll discuss your ratio between bonds (income based securities) and stocks (growth based securities).
Stocks are typically more volatile while bonds are typically more boring. We created an investment strategy by balancing stocks and bonds within your portfolio by taking into consideration these main factors:
- Your ability to cover more pressing financial needs.
- Debt obligations, emergency fund, and your other investment options.
- Your overall goal(s) why you chose to invest.
- Saving for retirement or other future goals.
- Your investing time horizon.
- The amount of years before you start taking withdrawals from this portfolio.
- Your investment composure towards up-and-down markets.
- The likelihood you’re able to stick to the plan during uncomfortable markets.
With these major areas considered, we developed a target allocation of stocks and bonds within your investment portfolio. Yet, as markets move, your portfolio’s asset allocation changes because the valuations of investments go up-and-down.
For example, you may have an initial target ratio of 70% stocks and 30% bonds when you first started investing. The stock market has performed well in recent years where your portfolio could be 80% stocks and 20% bonds due to the stocks increasing in value.
A rebalancing strategy addresses this ratio variance so you can stay on track with your original asset allocation goal. You’ll see that a portion of your stocks is sold to then buy bonds so you again reach your original target of 70% stocks and 30% bonds. Many investment professionals advocate for this strategy because you allow your investment portfolio to Buy Low and Sell High.
As stated by Burton Malkiel in A Random Walk Down Wall Street: A Time-Tested Strategy for Successful Investing:
“We all wish that we had a little genie who could reliably tell us to ‘buy low and sell high.’ Systematic rebalancing is the closest analogue we have.”
With Betterment’s software, when your portfolio drifts from its original asset allocation goal, a portfolio rebalance is triggered and occurs without any transaction costs. What’s most important is that this system allows you to Buy Low and Sell High without letting your own emotions dictate your investments.
Three Psychological Investing Traps
As you know, I’m an advocate to take the emotions out of investing. People suffer from many quirks when it comes to their investments and here are three major areas listed below. Rebalancing combats each of these major psychological traps.
1) Failing to Stay On Track
Gambling psychology can teach us about our investment behaviors. As Mark Griffiths, Ph.D., says in a Psychology Today article titled, Why Do You Gamble?,
“In the height of the action, rationality often goes out the window.”
A plan only works if people follow the plan. Many people set initial goals when first sitting down at a gambling table or when opening an investment account. For example, many gamblers say when sitting down at a blackjack table, “I’m only willing to gamble $100.” Good luck with that.
The odds are against your self-control in these settings. Casinos are designed to disorient people and stock market gains can get exciting. Yet, a person’s pride is typically to blame for his/her irrational behavior causing small or even large financial losses.
When people choose individual stocks, people tend to get emotionally attached to their decisions and become stubborn. Their pride holds onto the position even when the investment isn’t helping them reach their financial goals. Yet, what’s worse in gambling and investing settings, people sometimes become riskier to try to win their money back. DOUBLE OR NOTHING! Thus abandoning all premade plans for the original goal.
By creating a system to automatically rebalance your investment portfolio, you no longer need to make decisions on when to ‘take money off the table’ or when to ‘cut your losses.’ The software makes decisions for you so you can stick to your plan.
People get attached to their successful decisions. Just like in the previous gambling analogy, it’s hard to nudge people to ‘take money off the table’ because people get overconfident in their decision making. Think about a time when you got a little cocky and then believed you were invincible. Chances are the world humbled you down.
One of my favorite quotes is from the surfing documentary Riding Giants where Greg Noll described his relationship with Waimea Bay’s surf break:
“There were times where the surf would get perfect and you’d go out and catch a wave. You’d just make this [big wave] and just have your adrenaline dripping out of your ears. Paddle back out, do it again. You’d get a little cocky and you’d get your ass slapped a bit.”
The same can happen in the stock market so don’t get cocky. It’s easy to think you’re an investing rockstar when the overall market rises. Just know that the markets will go up and down.
For your portfolio, algorithms identify when positions are out of target. Instead of getting excited to see how high the position will go, the algorithm sells a portion at a high to then reinvest the proceeds into the lower valued position. Another example of combatting overconfidence to allow you to Buy Low and Sell High.
3) Decision Paralysis
When markets get scary, the markets provide buying opportunities. As Warren Buffett says,
“Be fearful when others are greedy and greedy when others are fearful.”
This is a lot easier said than done. When the market got scary in 2008, the Morningstar Total US Market Index lost 38.45%. This made many people abandon their plans and sell their positions to cash. The challenge then becomes when to invest again. If people sat on the sidelines in 2009, they missed out on the same index gaining 25.58% which was one of the best performing years since the market crash.
In unnerving times, automatic rebalancing takes the emotions out of investing by buying positions when they’re low in value. This allows you to invest in positions when other people are sitting on the sidelines.
For example, as of 6/30/2018, the same index listed above has seen 310% growth since its low in the Financial Crisis on 3/9/2009. Yet, we’ll see more unnerving times ahead but, if you have the optimism that markets will rebound and grow over time, then times of crisis are buying opportunities. Buying opportunities which automatic rebalancing can take advantage of to help you Buy Low and Sell High.
What You Can Do
For some final takeaways, here are three ways to take advantage of automatic rebalancing strategies:
1) Asset Allocation Rebalancing
Our partnership with Betterment will automatically rebalance your portfolios at no extra cost to you when your asset allocation drifts from your stated target allocation. These drifts can occur by changes in the market, your account contributions, and/or your withdrawals.
2) Tax Loss Harvesting
This strategy is another included feature provided by Betterment. This strategy allows you to rebalance and position your portfolio for tax efficiencies.
- This is only available under certain conditions so be sure to ask me or learn more here: Betterment’s White Paper on Tax Loss Harvesting
3) Target Date Funds
Outside of Betterment, in many company sponsored retirement plans (like 401(k)s, 403(b)s, and Thrift Savings Plans), you can select a ‘Life Cycle Fund’ or ‘Target Date Fund’ which automatically rebalances your portfolio as you get closer to retirement.
- Select the Target Date Fund with the year you anticipate to retire. If you plan to retire in around 40 years, select the ‘Target Date Fund 2060’
- A common mistake I see people make is that they invest in multiple target date funds for all the years rather than the one or two which accurately reflect their anticipated retirement year.
- Before selecting a fund, always look at their fees as well as other considerations.
Some General Stats: As of the end of the second quarter (06/30/2018), the broad-based Morningstar US Market Index increased 3.71% for the second quarter and is up 3.08% for 2018. The broad bond market (Vanguard Total Bond Market) was down 0.93% for the second quarter and down 2.92% for 2018. International Markets (MSCI ACWI Ex US NR USD) was down by 4.91% for the second quarter and down 5.41% for 2018. For more numbers, check out this link: MorningStar Quarter-End Insights.
Please let me know if you want to check-in about your goals or to refresh anything with your portfolio. I’d be thrilled to chat. I nerd-out about this stuff and it’s an honor to help you.
Tweaks For You
To be as transparent as possible, attached to this email is a Paid Invoice breaking down the money that came out of your account for our Investment Management services. This is for your reference only and there is no need for any action.
Your Returns, Quarterly Account Statement, and Tax Forms
Update From Dan
2018 has a lot of life responsibilities and it’s a pleasant challenge to deal with them all. Sometimes the days feel overwhelming where a pal recommended the Headspace app. Headspace provides guided meditations from a gentleman with a soothing British accent. To learn more about this, you can also watch the founder’s TED Talk: Andy Puddicombe – All It Takes is 10 Mindful Minutes. Taking time each day to pause allows me to be aware of my mind and also recharge when things get tough. Give it a try!
Overall, the last few months provided many good memories with time in San Diego, a Bachelor Party in Carlsbad with good pals, a hike in Scottsbluff with my lovely fiancee, I started volunteering with Meals on Wheels, and I got to see a Turkey Stampede at the Del Mar Fair. And someone was even eating a turkey leg at the Turkey Stampede! I can’t make that one up!
It’s a privilege to help you and please let me know if you have any questions!
Thanks for reading and if you want guidance on how to navigate your personal finances or you want help with your investment strategies so you can receive these personalized quarterly emails, please get in touch with me or learn more at Well-Rounded Success’ Services on the website.
About the Author
Dan Andrews is the Leader & CERTIFIED FINANCIAL PLANNER™ of Well-Rounded Success. Dan enjoys guiding and encouraging millennials through their ‘adulting’ responsibilities. His behavioral-finance style focuses on helping individuals in the Well-Rounded Success community define his/her own definition of success, make good decisions, and to also be philanthropic while along their journeys.