How I Rebalanced Through Perilous Times

“Benign neglect, bordering on sloth , remains the hallmark of our investment process." —Warren Buffett

To rebalance, or not to rebalance? When? How? We've reviewed the sometimes conflicting and arbitrary advice of a number of experts. We've found a vague consensus in favor of rebalancing, but we've also seen studies by respected voices questioning whether rebalancing adds enough value to bother.

Now I'd like to show you my own personal rules for rebalancing. They don't require any tricky calculations, careful scheduling, or complex transactions. When in doubt they prescribe simplicity or "doing nothing" over complexity or active management. What they may lack in precision or certainty, they make up for in safety and ease of use. These are the same rules I used to grow my portfolio and retire at age 50 with security and confidence. Let's take a look:

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Blueprint: Can I Retire?

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Rebalancing: Should You Bother?

In my earlier post we analyzed when to rebalance your portfolio and discussed the mechanisms for how to rebalance. Now let's take a contrarian step back and question the entire rebalancing process. Does rebalancing actually pay off in the real world? Should you even bother?

William Bernstein: “0.5%”

William Bernstein is one of the few authorities to put actual numbers on the benefits of rebalancing. In The Four Pillars of Investing he sets up a simple model, extending over four years, which shows rebalancing contributing to an almost 1% better return annually. Not chump change, especially over the long term. But, then he qualifies that somewhat artificial model, saying the benefits of rebalancing in real-world portfolios, are "closer to 0.5%."

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When and How to Rebalance Your Portfolio

Rebalancing your portfolio means adjusting the current asset allocation, moving it closer to some previously-chosen target. In theory, rebalancing captures a portion of the profits earned by your winning investments, and reinforces your losing investments so they can shine in their own time. The majority of financial experts advocate some form of rebalancing. And virtually none of them agree on how to do it!

As we search for perspective on rebalancing, there will be two obvious questions: (1) When should you do it? and (2) How should you do it?

To resolve these questions, we'll explore what a range of experts have to say on the subject. We'll consult with some of the oldest and newest names in personal finance, with some fellow bloggers, and with some academics.

And finally we'll ask a third, equally important, and perhaps surprising, question: Should you rebalance at all?

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Diversification: Why Seeing Red Can be a Good Thing...

Can watching your investments go down ever be a good thing? To answer that, you need to know a little about my weekly investing routine.…

For years I've tracked my investment portfolio on a My Yahoo page. It doesn't take much space: currently just nine mutual funds and ETFs make up the entire portfolio across all our taxable and retirement accounts.

Though investing has long been an interest, I don't hang on the market's every move. I update my portfolio value once a week, on Fridays. And I take a more in-depth look, computing asset allocations and net worth, quarterly.

But, out of habit and curiosity, I do often check prices after the daily market closing. Though there is no long-term impact on my portfolio, it is interesting to note whether the financial world was feeling optimistic or pessimistic that day.

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A Guide to Retirement Health Care - How Will YOU Get It?

Health care is the single biggest obstacle to retirement for many Americans. My ongoing Reader Survey indicates that health care is also the most common concern for readers of this blog — trumping even running out of money, Social Security, the stock market, inflation, and taxes!

Stories of individuals trapped in jobs because of their, or a dependent's, health needs are common. There are many who have saved enough for retirement, by most other measures, but are then forced to work indefinitely, in order to keep health coverage.

Aside from government employees, and those at a few large corporations, many of us will have serious concerns about health care coverage in our retirement years. And, given federal, state, and local budget troubles, and continuing economic pressures on business, even those who think they have retiree health benefits locked up, may not be free from worry.

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My Top Investment Picks for the Future...

I'm often asked where I think the economy or market is headed. Readers of my CNN Money interview, or my recent article on overcoming the fear of stocks, might think I'm especially bullish on stocks. But that's not the case. I'm bullish on diversification.

I like bonds too. As I write this, my allocation to bonds and cash is about 53% of my portfolio. I've written that the performance of bonds in my portfolio was an essential factor in being able to retire early. I don't see my bond/cash allocation going much below 50%, ever. My comments in the two articles linked above were aimed at those who are under-allocated to stocks, in the belief they are playing it safe.

Many think that being safe means holding all cash. Well, there is very little that I'm sure about these days, but one of the things I'm least unsure about is this: If you keep most of your assets in cash, you will almost surely not make it through a 30+ year retirement without running out! Unless you have multiple millions, or live like a college student, cash simply won't produce the returns needed for your nest egg to survive. If you have any doubts about that, just look at the current microscopic returns on bank savings accounts. And, if we get another bout of nasty inflation, as so many insist is inevitable, the damage to your cash stash will be even worse.

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Is the 4% Safe Withdrawal Rate Obsolete?

One of the first questions that comes up when looking at modern retirement is "How much money do I need to save?" Amazingly, there was little hard research aimed at answering this question until about the mid-1990's. Some of the first answers were shown to be overly simplistic, but for the last decade or so we've enjoyed relative consensus around the easily understood 4% Rule. That rule says, in essence, that you must save about 25 times your annual expenses, or that you can withdraw about 4% of your portfolio in the first year of retirement and then adjust that amount for inflation each year, with little chance of running out over a 30-year retirement.

But the era of the simple 4% Rule may be drawing to a close. We are now hearing from some respected voices that it, too, is rigid and simplistic — relying too much on historical data, and not enough on current financial conditions. Most alarmingly, we are being told that it might be too generous for these extreme economic times, that the actual safe withdrawal rate for today's retirees could be less than half of the traditional 4% rate. If true, that would mean you must save twice as much!

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Mastering the Fear of Stocks

"I won't own stocks — I don't want my savings to go down." That seems to be the primary investing criteria for a number of people. But understanding and mastering this fear can be key to achieving financial independence.

There are a select few high earners who can afford not to own stocks. And there are others who are truly so risk-averse that owning stocks doesn't make sense for them. But the vast majority of savers can comfortably own stocks, and seriously need stock market returns to have any hope of reaching their retirement goals.

Yes, I know it's possible that we are in a new era where stocks could underperform for years. And neither I, nor any other observer, can guarantee that stocks will behave as they have historically.

But, if you want the surest bet over the long haul — the decades before and during retirement — the odds for your money are highest if at least a portion of it is parked in equities.

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One Solution for Cheaper Retirement Travel: A Small RV

If there's a common retirement dream across many personalities, budgets, and lifestyles, it's probably traveling more. Though there are some retirees who prefer to stay on the home front during their golden years, the majority seem to envision traveling more often or further afield. Whether it be visiting children and grandchildren, taking a tour of the national parks, or jetting to exotic overseas destinations, increased travel of some sort figures in the majority of retirement plans.

We are no exception. But we had to fit our retirement travel dreams into an early-retirement budget. How did we do it? Well, the seeds of our retirement travel solution were planted long ago with tent camping, giving way to a simple pickup truck shell, next a Volkswagen camper van, then a slide-in truck camper, and now, finally, a small RV.

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