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Over the past month, the stock indexes have been extremely volatile. There have been multiple instances when the major indexes have gone up or down more than 10% in a day. Stocks are down considerably overall.

portfolio out of balanceMany investors argue that because stock prices have fallen dramatically, this is a great buying opportunity. They’ll back up this assertion with “_________________” (Insert your favorite Warren Buffett quote here).

This position eliminates all nuance and fails to ask a fundamental question. Is buying more stocks a good value?

I’m not using the word value in terms of traditional metrics. Stock valuations are most commonly discussed as a relationship between a stock’s price and the company’s earnings. With the abrupt and extreme disruption of the economy that we’ve recently experienced and continued uncertainty about how and if we can contain the virus that caused it, any earnings projections are pure speculation. 

Instead, I’m talking about value at a personal level. In my book, I discussed the concept of being a valuist, writing “you have to determine what you value and then start spending your time and money accordingly.”

People in this audience tend to understand this with consumer purchases. Most of our readers will not buy a new sports car because 0% financing is offered, or purchase five pairs of shoes in different colors because they’re 50% off.

Yet many become dogmatic about how others should invest, as though there is one right way. I recently considered whether I should rebalance my portfolio by selling off bonds to buy more stocks as we transition into early retirement. I also talked to my parent’s about what to do with their portfolio in traditional retirement. 

Despite being guided by the same investment principles, the conclusions for each were dramatically different.

Principles of Rebalancing

Darrow has written in depth about rebalancing on this blog. He covered several expert opinions on when and how to rebalance and also his own personal strategies for and experiences with rebalancing. Both are excellent reads if you are unfamiliar with the concept or need a good refresher.

For the Cliff’s Notes version, rebalancing is a way of periodically selling off investments that represent a relatively high percentage of your portfolio to buy more of those that are relatively low to keep your asset allocation within parameters consistent with your investment goals, risk tolerance and overall financial plan.

Doing so systematically either at a predetermined time or when your portfolio is off by a predefined percentage of your target allocation prevents emotion from driving your actions.

When I was using a financial advisor, he made rebalancing seem like a big production. In reality, in the eight years I’ve been managing my own investments I’ve never moved more than a few thousand dollars around or spent more than an hour on rebalancing my portfolio in a given year. Some years, I did nothing.

When working and investing regularly, I was able to periodically direct new money to investments that were low and maintain balance in that way. Even with the large run up in stocks last year, I was able to use our HSA contribution and my wife’s 401(k) contributions to purchase bonds, keeping us close to our target allocation.

Bottom line, there is no magical time, frequency or method for rebalancing. Michael Batnick reinforced this in this recent article. The key is to have an investment policy statement and have a plan for rebalancing be a part of it.

Straying From the Plan?

With the recent rapid drop in stock prices, many people believe this is a great time to buy stocks. Our personal investment policy statement calls for us to rebalance once a year around tax time. So rebalancing was front of mind for us. (Note: We tend to file early. If you haven’t filed yet, the deadline has been moved back to July 15 and you may want to wait to file.)

I generally put minimal thought or effort into rebalancing. But with our portfolio down by hundreds of thousands of dollars and regular daily volatility of +/- 5-10%, choosing the wrong day to rebalance could result in substantial losses. This caused me to revisit our plan and give it more thought than usual.

Why even have an investment policy statement if you stray from it? The best analogy I can give is that of a football coach. The average NFL or college head coach works over one hundred (out of 168 available) hours per week during the season to plan for a single sixty minute game. Then they assess and adjust at half-time, or more frequently, as needed.

These are fine lines to walk. Follow the plan verbatim vs. adjust to conditions. Emotion vs. reason. It’s why being an investor is  difficult, even if you follow a simple passive index fund strategy and have a plan.

Why to Buy/Rebalance

Following our plan has been a no brainer in past years under normal circumstances. But with the market in free fall, fear everywhere, and insane volatility (i.e. the exact reasons you write out a plan in calm and rational times) I began to second guess our plan.

That’s not a bad thing. It caused me to go back and double check my initial reasoning. This left me with some questions to ponder before deciding how to proceed.

Why Do We Hold Stocks and Bonds?

Before shifting more money into stocks, it was important to reiterate why we hold them and why we hold the bonds we would have to sell off in order to buy more stocks.

We hold 80% or our portfolio in stocks. We rely on the dividends they produce and growth in stock prices as companies become more productive and valuable. This growth is necessary to support spending needs for a potentially fifty plus year retirement time frame without it being eroded by inflation.

With interest rates at all time lows, bonds don’t produce much income and they have little potential for substantial price appreciation. They do have substantial inflation risk over long periods of time. They also face considerable interest rate risk if rates rise. This risk is particularly high with interest rates at all-time lows.

High quality bonds historically hold their value well, or even go up in value when people flee stocks in fear or when interest rates are lowered, often in times of financial distress. They’ve done this over the past month, giving us the capital to buy more stocks.

Will We Need To Sell Stocks At Depressed Prices in the Next 5-10 Years?

The second question I had to ask before feeling confident following through on buying more stocks is how likely it might be that I’d need to sell them at a loss.

Even after rebalancing our portfolio, we would still have over three years of our normal living expenses in bonds. We also have over a year’s worth of normal living expenses in cash. We also have the ability and willingness to continue to earn money and/or cut spending. 

My wife continues to work part-time and her income covers most if not all of our normal spending. In this time when many companies and individuals are being thrust into working remotely and figuring it out on the fly, her company is spending time and effort to create free webinars to share how they built their company to work virtually in an effort to help others. Her job and income appear to be solid.

I’ve spent the past two years writing a book and working on this blog to develop a modest retirement income stream. Given the loss of traffic to the blog, anticipated loss of advertising dollars, and decreased discretionary spending over the past month, I anticipate little to no income this year beyond what I’ve already earned. Still, I’m positioned well for when we get through the medical part of this crisis, the economy restarts, and people again focus on their financial well being.

Should We Change Our Plans?

Answering the first two questions gave me confidence to follow through with our plans to rebalance our portfolio. 

On March 30th I sat down and looked at our balances as I do at the end of every month. By using mutual funds, we get the price of the NAV at the end of the same day we make trades. Given the extreme volatility of recent weeks, I kept an eye on the markets on April 1st.  When I saw they were down considerably that day, I made our transactions to rebalance later that afternoon.

After thinking through these questions I’ve realized that our lives have changed considerably since we wrote our investment policy statement, but our plan has not. We wrote our plan when we had two full-time incomes and a high savings rate to invest. We now have little to no new money to invest.

It may be time to change our policy on rebalancing by considering it more frequently to take advantage of buying opportunities. Another option would be to rebalance if our allocation is off by a particular percent from our target. This is something we’ll discuss over the coming weeks or months as life regains some normalcy.

Why Not to Buy/Rebalance

I help my parents with their investments in their traditional retirement. We typically rebalance around the end of the year when I can sit down with them and get a handle on  their annual financial information.

At the end of 2019 we took a sizable distribution to replenish their cash position by selling appreciated stocks. We then sold off more stocks to rebalance their portfolio back to their target 50% stock, 50% bond allocation.

They called me in mid-March as the health and financial news were getting really scary. Should they be doing anything with their investments? I went through the same three questions with them.

Why Do We Hold Stocks and Bonds?

My parents hold 50% of their portfolio in bonds for several reasons. They are at a stage in life when going back to work to generate income is not realistic or desirable. Thus, they can’t tolerate great portfolio volatility. Bonds are there to provide for their current living needs.

Stocks are not held for current consumption. They are only to be sold from a position of strength if they outperform. This was the case last year, when the gains were used to replenish cash and bonds.

Will We Need To Sell Stocks At Depressed Prices in the Next 5-10 Years?

The little bit of income bonds produce, combined with Social Security, goes a long way towards covering my parent’s current modest spending needs. Even in their “go-go years” of retirement when (pre-Covid-19 and hopefully one day again soon) they were traveling extensively, my dad was playing a lot of golf, they were enjoying spoiling their young granddaughter, etc. they were drawing about 3% from their investment portfolio annually. 

In a worst case scenario, my parents would need to start considering selling stocks in about 15-20 years. In the most likely scenario, my parents are in the fortunate position that they will never have to sell stocks unless they choose to. 

We’re most likely managing their stocks for future generations. This is something that we’ve discussed and that excites them. Given my fortunate financial position, this quickly starts turning into a conversation like JL Collins wrote about in the blog post Investing for Seven Generations.

Should We Change Our Plans?

So my parents are in a position where they could buy more stocks. But should they do it just because they can?

Now that Jack Bogle has passed away, my go to voice of reason for investment decisions is William Bernstein. I read and listen to anything he writes or says and consider it carefully.

Bernstein has a famous quote: “If you’ve won the game, stop playing.” At the time that we developed my parent’s defensive portfolio, I felt that’s what we were already doing. 

But I recently listened to this outstanding interview Bernstein gave to Ben Carlson. One  statement, actually one particular word, caught my attention. Bernstein stated that if you’re in retirement and in the fortunate position to do so, you should only invest in stocks if you can do so with “equanimity.”

Equanimity is defined as mental calmness, composure, and evenness of temper, especially in a difficult situation. That was not the emotion I heard on the other end of the phone in March.

At a time when there are real stresses and pressures, particularly for older individuals who are at medical risk during this pandemic, is there any reason to be adding risk and decreasing security just because you can?

For me, the answer was a resounding no. We will not rebalance now out of fear of missing out on a buying opportunity. We will have a longer discussion when their fears are less about whether their portfolio already has too much risk and we may adjust their target allocation simply by not rebalancing when their plan calls for it in December.

Enough?

One of the hardest and most important financial decisions we have to make is determining when we have enough. For many people the answer to the question “How much is enough?” is always “Just a little bit more.”

As always, I am not your financial advisor and I can not tell you what to do or whether you have enough. I can only share what I’m thinking and doing, and hope it provides value and insight.

I have a great deal of financial independence, enough that I felt comfortable retiring from my career in 2017 at the age of 41. But I don’t feel like we’ve won the game yet. So, as I wrote a few months ago in better times, we’re continuing to play offense with our financial decisions. One way we continue to do so is by rebalancing our portfolio to buy more stocks.

Others may have determined your consistent saving and careful planning mean you already have enough to secure the comfortable retirement lifestyle that you desire. If so, I encourage you, as I have my parents, to embrace the equanimity that provides, and cherish the fact that you don’t always have to chase more.

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Last fall, my friends from the blog Plan, Invest, Escape publicly shared the news that David was diagnosed with Glioblastoma, an extremely aggressive brain tumor. His wife, Emily, did so with an incredibly touching and insightful string of Tweets. I felt it was something all of our readers should see. With her permission, I shared her words on the blog.

I was apparently not the only one moved by Emily’s words. That ended up being one of the most read and widely shared posts on the blog last year.

So it is with a heavy heart that I’m sharing one more Tweet from Emily:

Please join me in offering thoughts and prayers to Emily and her two boys and raising a glass to David. Cheers!

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Valuable Resources

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  • Our Books

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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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