What Is Rebalancing? | Erik Averill, Brandon Averill | AWM Insights #2
Episode Notes
Welcome back to another edition of AWM Insights. With all the recent public market volatility, we've been highlighting the importance of our long-term investment strategy. Since 1928, there have been 24 bear markets. A unique trait they have all shared is that every one in U.S. history has then led to new all-time highs. However, while it's important to stay patient and stick to the plan - we also don't want to just "do nothing" during this time. In this week's episode, Erik and Brandon begin their discussions on smart financial strategies that we utilize during these market downturns to add tremendous value to portfolios. First, we breakdown the value of Rebalancing and cover items such as:
What is rebalancing
Why is it so valuable?
When should you rebalance?
What are the potential pitfalls?
+ Read the Transcript
Erik Averill (00:00):
Hey everyone. Welcome back to another edition of AWM insights. I'm your host Erik Averill. And today I'm joined by my cohost who is the co founder, a certified private wealth advisor and arguably the most important fact, my older and wiser brother, Brandon Averill. Brandon, welcome to podcast. Thanks Eric. We're really excited to be here. Brandon is disciplined longterm investors. We know that we're not supposed to focus on the short term of the volatility of the markets, right? That the ups and downs. Um, and we hear all of these stats since 1928 that there's been 24 bear markets and uh, and what all of them share in common is that every single bear market in the history of the United States leads eventually to new all time highs at some point in the future. And so the rational part of my brain is telling me, Hey, I should stay patient. I need to trust that while this may be a unique event, the results are going to be no different than the other 24 bear markets in that ultimately things are going to end up in higher markets. But what's really difficult to hear is when people say, you know what, just do nothing. Just wait it out. Just write it out. Is that really the best advice to do? Nothing during these times when the markets are moving up and down? Or is there something that we can be doing better to be proactive?
Brandon Averill (01:23):
Eric, that's a great question. I think, you know, one thing that we do know is that doing nothing probably isn't going to work. A yes from a strategic standpoint, we certainly don't want to go out and change the portfolios and react to what's going on. Try to guess where interest rates are going, or guess what company's going to do better, better than others. Um, but what we have figured out over time is that just sitting on your hands and doing nothing probably isn't the right movie there. Uh, so one thing that we're doing currently, uh, as we're recording, we're going through a fairly turbulent time in the financial markets, uh, is that we're rebalancing. Um, and so from a strategic standpoint, this gives us an opportunity, uh, to take advantage of some volatility. Um, and for those of you that don't know what rebalancing is, um, you know, when you're invested in a globally diversified portfolio, different pieces within that portfolio are gonna move up and down on a con constant basis.
Brandon Averill (02:24):
So if we just think about this, the very top end, uh, you think about a stock bond allocation, um, you're going to set a target weight with your, you know, your investment professional, um, that's going to fit your risk tolerance and risk capacity. So we'll use the example of a moderate portfolio, uh, which would be 40% on the bond side, 60% on the stock side, uh, over the long term stocks generally rise faster than bonds. Uh, so the stock portion of your portfolio will likely go up relative to the bond portion. Or conversely, you know, in turbulent times in the, in the stock market, which we're currently going through, you'll have the opposite happen where stocks will actually decline and bonds will go up. Um, so you set that target allocation, that 40, 60 target allocation, uh, like we're going through right now. You may have a period where stocks decline a little bit and maybe go down to let's say 55 or 50% of your portfolio. And on the flip side, that bond side goes up to 50 or 55%. So, uh, what rebalancing is, is taking the time to make sure that you're adjusting those allocations throughout this process to make sure that you're always, you know, aiming for that target target waiting.
Erik Averill (03:41):
So just to make sure that I summarize the two key takeaways that I'm hearing from you is first rebalancing is a way to make sure that I'm not taking more risk than I originally planned on taking from my allocation. And so it's a risk mitigation tool. And then second, what I'm also hearing is that this is the classic example of how to make sure that we're actually buying low and selling high. Is that correct? That, that those are the two main takeaways?
Brandon Averill (04:10):
Yeah, I think those are two significant takeaways. Um, so right now the all address the buying, uh, buying low and selling high, that is, this is a systematic way of doing so. So, uh, we know we always want to have that stock side in our portfolio. And if we're allocated to a moderate portfolio, we want 60% stocks. It's there for a reason. We know over the long term that's what's going to produce our, our expected rate of return for the entire portfolio. So if we go through a time like this, we certainly don't want to sit there and, and have a lesser equity allocation that we want from the, for the longterm. So, uh, it's a way of selling our bonds in the current environment when yes, they have increased and we're buying stocks when, you know, a lot of people would say are on sale, uh, or have at least gotten cheaper from where they were, uh, at least even a month or two ago.
Brandon Averill (05:00):
So it's a way, if you're a longterm investor to, to continually buy low, um, whether it's on the stock side or the bond side and, you know, kind of flipping over to the risk side, certainly that's a big part of it. Uh, if you just allowed your portfolio to drift when, when stock markets are doing well, you're putting yourself in a position where you're accepting too much risk. So let's the last year, if you are two or five or 10, quite frankly, if you just allowed your portfolio to drift, you may have a target of 40, 60, uh, your stock side's probably closer to 70 or 75 and you go through a turbulent market stock market like we've currently gone through. Uh, you're certainly bearing more risk than you anticipated.
Erik Averill (05:43):
Well Brian, that is super helpful and just in the interest of time and being respectful to our listeners, I think a great way to close it out is I've heard it summarize that there's really three types of investors when we go through these periods of volatility. And first and foremost, there's a, there's the person who went to cash that they want to wait things out. And ultimately that result is what we know is that they're the ones who are getting burned that they uh, are going to actually miss the time to get back into the markets, which we all know is, is rather impossible to try and figure out when is the perfect time to get back into it. Uh, the second group or what we know is they're the wise investors, they're the ones that they did nothing. They collected their dividends and they waited things out.
Erik Averill (06:28):
But ultimately what we want our clients to be and hopefully for all the listeners here is, is we want to be, wants you to be a brilliant investor and what brilliant investors continue to do through these pullbacks is to rebalance, they shift from bonds to stocks and then ultimately also take advantage of something called tax loss harvesting that we will review in future episodes of AWM insights. And so listeners, we really appreciate your guys as attention. We're going to be putting in some awesome resources for you guys in the show notes that you can follow up on, on a specifically what rebalancing is and additional tools to help you on this investment journey. And so we appreciate your attention and look forward to, uh, catching back up on the next edition of AWM insights.
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