For the past 12 years, I have been a believer and practitioner of an investment strategy employing modern portfolio theory, asset allocation, and passive investing through low-cost index mutual funds.
Since obtaining my bachelorโs degree and entering the workforce in 2008, I have maintained an asset allocation consisting of 70% equity and 30% fixed income. For the most part, maintaining this allocation has involved selling equity and buying fixed income (rebalancing), since the stock market has experienced a very nice run-up in that time. I havenโt yet personally experienced a significant decline in the market until recently.
Itโs often said in personal finance literature that an investment strategy is only as good as oneโs ability to stick to it in good times and bad. Thankfully, I can still report that Iโm plenty comfort with my investment strategy in a โbadโ time.
Portfolio Analysis / Rebalancing Frequency
There are different schools of thought in the personal finance world regarding the frequency with which someone that uses a passive investing strategy should assess their portfolio, tally up their net worth, and rebalance back to asset allocation targets if needed.
For the past 10 years or so, I have employed the approach of analyzing my portfolio once per month (12 times per year) and rebalancing back to my allocation targets if needed. Typically, rebalancing has only been needed 1-2 times per year, so not that much in the grand scheme of things.
With the coronavirus now being a part of our daily lives, weโll have to see if this monthly analysis frequency results in an uptick in rebalancing. I am not sure yet what I would define as the limit of TOO much rebalancing, especially if trades are being made in tax-advantaged locations within commission-free environments (like my portfolio at Vanguard).
My Recent Portfolio Rebalance Experience
Yesterday, on target with my monthly schedule, I analyzed my portfolio. And, due to the recent market downturn, I had to rebalance since my fixed income allocation had risen to 39% (outside of the 30 +/- 5% allowable banding Iโve established).
Listed below is a summary of my findings/actions:
- As would be expected from portfolio design, my fixed income holdings (cash, short term bonds, TIPs) were unchanged in value from the previous month.
- However, every equity asset class (international, small-cap, small-cap value, large-cap value, REIT, emerging markets) had all decreased ~ 20% from the month prior.
- There didnโt seem to be a single equity asset class that was hit harder than any of the others.
- To re-establish my target asset allocation, I sold 9% worth of TIPs and short-term bond fund shares in exchange for emerging market, small-cap value, and large-cap value index fund shares.
- The equity fund types were selected due to having the lowest % asset allocation among my equity holdings.
- My small-money experiment with Harry Browneโs Permanent Portfolio that I started in 2012 is still going strong. True to its form, the Permanent Portfolio does provide stability compared to more equity-heavy portfolios, as it only declined 3% compared to the prior month. However, as I noted in my post, the shelter from declines also comes with the cost of missing out on potentially large market increases.
- My overall portfolio value decreased by only 11-13%, meaning that my cash and fixed income holdings are doing a good job of stabilizing portfolio value.
