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As a personal finance blogger, it’s important to be transparent about how I invest my money. I’ve  considered writing an annual post describing actions I’ve taken with my investment portfolio.

investment allocation portfolio management

But I do so little with my portfolio most years that I couldn’t fill a blog post with interesting material. This has been anything but a normal year.

Amidst substantial market volatility this year, I did an abnormal amount of buying and selling. I also changed my asset allocation.

So I’m going to share what I did, how it’s worked out so far, and how my portfolio is positioned to move forward in early retirement. I’ll also share how I managed my parents’ traditional retirement portfolio far differently and how that is playing out.

Disclosure and Warning

Although I may have left my career in the medical field, I will never leave behind the mandate to “First do no harm” that continues to guide my actions. Before discussing the changes made to our portfolio, I want to acknowledge and emphasize that the decisions that are best for me and my family may not be right for you and yours.

This post is written with the intention of provoking critical thinking to help you manage your own portfolios more effectively. It is not meant to be taken as advice that you should take with your investments.

Only you can know what is best for you. If you need specific advice, consult with a CPA, CFP, or other professional who has the expertise to provide the help you may need.

Benefitting from Rebalancing

At the end of 2019, I was pondering taking some risk off the table with our investments. We were coming off a big year. Our year end portfolio value was 22% higher than it was just one year earlier.

Stocks were near all time highs by most valuation metrics. This made me question if it was time to start transitioning to a more conservative portfolio.

However, interest rates were simultaneously near all time lows. Thus inflation risk and interest rate risk of bonds was higher than normal. With bonds looking like an unattractive alternative, I didn’t make any moves at that time.

By mid-March our portfolio had dropped over 23% in less than three months. Our plan called for us to rebalance, but with many pundits predicting the pandemic could cause us to spiral into an economic depression unlike anything we’ve experienced in nearly a century, buying more stocks was scary.

I stepped back and evaluated the arguments for and against rebalancing. Buying more stocks amidst massive uncertainty left a sick feeling in my stomach. 

I ultimately decided to stay with our plan, selling a substantial portion of our bonds to buy more stocks. At that time, I wrote about possibly changing our policy on frequency of rebalancing over the coming weeks or months “as life regains some normalcy.”

Taking My Mulligan

Rebalancing worked out far better than I could have imagined in the short term. Before we ever had that period of “normalcy,” our portfolio value increased by a whopping 47% from the mid-March lows to the end of November!

In the process, we drifted back up to 81% equities, substantially higher than our target allocation. Still feeling some regret over not taking risk off the table at the end of 2019, I made a second big move to sell equities from this position of strength, putting us at our 75% target equity allocation.

Going for Gold…Slowly

We didn’t shift our allocation at the end of 2019 because interest rates were near all time lows. Ten year treasuries were yielding about 1.75%. The 10 year real interest rate was essentially 0% at that time.

After rebalancing our portfolio in March, I put more thought into reallocating capital to reduce volatility of our portfolio. Bonds, which were unattractive at the beginning of the year became even less attractive. The ten year rate for treasuries dropped below 1% and the real ten year rate went negative.

Due to extremely low interest rates, I got more serious about investigating alternative asset classes to stocks and bonds. We decided our best option was to allocate some of our portfolio to gold

By the time we reached this conclusion, gold prices increased considerably as well. We chose to purchase shares of the iShares Gold Trust (IAU) ETF. IAU started the year with a price of about $14.80 per share. By June, when we decided to start allocating some money to gold, the share price jumped to close to $17 per share and quickly peaked at nearly $20 per share by early August.

With another asset class now looking unattractively expensive, we decided to be patient and slowly start dollar cost averaging a few thousand dollars into IAU shares each month. When prices temporarily dropped recently, I purchased some additional shares.

All in all, I’ve been spending more time and mental energy than I would like watching gold prices and fiddling with our portfolio. I still don’t have a strategy for buying into this asset class that I’m completely comfortable with. I’m going with dollar cost averaging because it forces me to take small actions rather than being stuck in paralysis by analysis.

Cash is King

So with all asset classes at or near extreme valuations, where are we putting our money? We’re holding a substantial amount of our portfolio in cash, more than we ever have.

When Kim and I were both working and saving a high percentage of our income, we rarely had more than a few thousand dollars in cash at any time. I’ve always believed in being fully invested, emphasizing time in the market over timing the market.

As we started transitioning to early retirement, we decided (on paper at least) to start holding more cash. In reality, it has been hard for me to park money in a bank account when it could be working for us. 

Until this year, we were consistently short of our target allocation to cash. That has changed as well recently.

Target and Actual Allocations

We started the year with the same 80% stocks, 15% bonds, 5% cash target allocation we’ve had for years. This year we decided to shift our target allocation to 75% equities, 15% bonds, 5% cash and 5% gold.

We continue to have an aggressive allocation to stocks. In an ideal world, I would prefer to not be subject to such a high degree of volatility. In my opinion, with a long investment horizon of potentially 50+ years, a healthy allocation to stocks is still our best bet for the long haul.

Within our stock allocation we diversify between domestic and international equities and a domestic REIT fund. Within the bond allocation we diversify between a total bond fund and TIPS.

As of Monday, December 14th, after our second rebalance of the year, our asset allocation is 75% equities, 14.3% bonds, 9.5% cash, and 1.2% gold. In the event gold prices drop dramatically, I have limit orders in place to buy more gold ETF shares. Otherwise, we’ll continue to gradually dollar cost average into gold, buying a couple thousand dollars of shares a month for as long as it takes to reach our target allocation.

How It’s Worked Out So Far

When I shared my portfolio a few years ago, I disclosed that I don’t calculate our annual investment returns. At that time I wrote: 

It’s tempting to calculate returns, but I think calculating investment returns would have more potential for doing harm than good. So I don’t do it.

Knowing I beat an arbitrary benchmark may make me feel smarter than I am and lead me to start tinkering with the portfolio. Knowing I applied extra effort and paid more fees to under perform a benchmark may tempt me to bail on our strategy at the wrong time. Either scenario is possible any given year.

I’ve historically done a good job of sticking to this policy. This year I’ve applied a lot of mental energy to our portfolio and spent far more time tinkering with it than I know I should.

For all the thought and effort I put into managing our portfolio this year, our account balances as of December 1st are up 12.5% year to date. In addition to market returns and portfolio moves I’ve made, reflected in our increased portfolio balance is the fact that we ended up being net savers for the year.

We were able to repay cash we took from savings to pay for big purchases earlier in the year. We also added to our tax advantaged investments this year. Throughout the year I used my income to max out an HSA. Kim contributed to her 401(k). We also reinvested our taxable dividends to max out two Roth IRAs.

A Case for Doing Nothing

I’ve disclosed in the past that I also am helping my parents manage their investments in retirement. They have a simple 50% stock, 50% bond portfolio. Our actions with their investments create a stark contrast with my own. We essentially did nothing this year.

This year we didn’t touch their portfolio when the market dropped in March. My dad continued to take RMDs from his IRA. We didn’t stop RMDs even though we could have due to a change in the law this year, because they liked the convenience of this regular “monthly paycheck” to supplement their Social Security checks. They also continued to have all taxable dividends swept to their checking account.

I recently checked their account balances while we were doing year end planning and preparing to rebalance their portfolio. After all the effort we didn’t apply to their portfolio, all the income they took from it, and the additional risk they didn’t take this year, guess where they ended up?

Their portfolio is currently positioned 50.5% in equities, 49.5% bonds. Their ending balance was 8.5% higher than it was at the beginning of the year. 

All that was left to do was absolutely nothing. When it comes to being a good investor, doing absolutely nothing is often the best thing you can do. 

This is an enviable position. As an early retiree with a long time horizon and much greater uncertainty, I’m not there yet.

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. You can reach him at chris@caniretireyet.com.]

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