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57% of boomers who manage their own money should rebalance their portfolios: Fidelity

Ethan Wolff-Mann
Senior Writer

The S&P 500 index (^GSPC) is up almost 25% since January. 

That’s not unusual. Since 1928, there have been 23 years of 25% or greater returns, according to DataTrek. (DataTrek also noted that “very bad years almost never follow from very good ones.”)

But what is unusual is for average investors to follow best practices and regularly rebalance their portfolio to the appropriate allocations. 

In 2019, the Bloomberg Barclays U.S. Aggregate Bond Index (AGGBND), the standard benchmark for the bond portion of a stock-bond portfolio, is up around 6%, which means the stock portion of a portfolio has grown much more than the bond portion, sending people off of their target allocations.

“My target may be 60/40 (stocks to bonds) but if there’s a long and consistent run in the market, that 60% may be more along the lines of 70%-75%,” Maria Buono, head of US wealth planning research team at Vanguard, told Yahoo Finance.

According to Fidelity, 57% of baby boomers (people born between 1946 to 1964) who manage their own money are holding more equities in their portfolio than the company would recommend – largely due to the bull market of the last 10 years.

A portfolio’s equity-bond breakdown is a traditional way for people to think about and manage risk. A portfolio heavily weighted toward stocks is favored for investors with a long-term horizon — there’s a large potential for upside in the long run, but far more volatility in the short term. A bond-heavy or cash-heavy portfolio is the opposite: There isn’t as much upside, but bonds are traditionally more stable investing instruments and are a hedge against major stock market declines.

Today, many people invest in target date funds, which take a full-service approach and deal with the allocation question automatically. At Fidelity, for example, 50% of 401(k) investors saving for retirement use a target date fund — and for millennials the number is even higher, around 70%.

That’s why rebalancing isn’t as common as it once was, according to Meghan Murphy, VP at Fidelity Investments – there’s no need to think about it when your 401(k) target date funds do it for you.

But for the other half of people who choose to manage their own retirement portfolios at Fidelity, only 10% of them actually exchange one asset class for another each year — an indication that most people aren’t rebalancing.

“For those who aren’t using a professional solution, say a managed account, it takes a lot of engagement to [rebalance],” says Murphy. And not surprisingly, she says, they “see a huge lack of engagement in the investment space.”

According to Vanguard’s Buono, it’s a behavioral challenge. 

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“It’s tough for investors to rebalance in a disciplined way on their own,” she told Yahoo Finance. “You’re selling your winners and purchasing your losers. But rebalancing is a way to minimize risk, not necessarily to maximize returns.”

What should you do?

To deal with this, around 80% of the employers that work with Fidelity offer a monthly or quarterly feature of “automatic rebalancing.” An investor can set the rebalancing interval to rebalance at a specific time or specific deviation from the target allocations. 

The best practices, according to Murphy, is to adjust when the allocations are 10% higher or lower of the target risk allocation. For example, if you’re trying to be at 90/10 stocks to bonds, and you’re at 80/20, it’s a good time to get back to 90/10. Some advisors recommend rebalancing when the assets drift just 5 percentage points past the target allocations. 

A Vanguard study found that in the long term, “no one rebalancing strategy is dominant,” but that rebalancing is certainly better than “not rebalancing at all.”

“We really kicked the tires on this a lot in terms of number crunching,” Buono says. The team compared weekly, monthly, annually, as well as percent off target rebalancing strategies. “The numbers weren’t that different in terms of tax-adjusted returns and volatility,” she says.

Vanguard’s takeaway is that broadly speaking, it doesn’t really matter what someone does as long as they do it, and that it can be smart to pick a strategy that makes sense for your particular situation.

For example, end-of-year might make sense for non-retirement accounts as you could sell winners to finance annual giving, killing two birds with one stone and not take on any undue tax burdens. When you sell at a profit, you have to pay capital gains in a non-tax advantaged account, so the fewer times the better.

This is a major factor in the rebalancing conversation, unless it’s purely about accounts like 401(k)s that are tax-advantaged. (You can buy and sell in a 401(k) and you don’t pay taxes until you begin withdrawing from the 401(k).) Rebalancing every month, if it involves selling, might help you track your goals, but it might cost you more, Buono says.

Rebalancing as accidental market timing?

There are a lot of times people could choose rebalance their portfolio. In a recent Twitter thread, Corey Hoffstein, CIO at Newfound Research, discussed whether this could inadvertently lead to market timing. Investors are generally advised to avoid trying to time the market.

Hoffstein cited research that found that from 2002 to 2009, annual rebalancing was heavily dependent on the month in which it happened, and that the results did not even out over time. To avoid market timing that could accidentally affect someone’s portfolio dramatically, the paper suggested staggering portfolios into different sub-portfolios that rebalance over time — similar to how dollar-cost averaging (investing a similar amount every month) irons out market ups and downs. 

In Hoffstein’s own research found that having a bunch of sub-portfolios would help. However, a DIY investor might not be able to handle this. It’s a lot of work to manage one portfolio and its rebalancing — let alone a complex one with many sub-portfolios.

Though Hoffstein’s research suggests this would be optimal, experts at Vanguard and Fidelity don’t think this is necessary — and Vanguard has a paper showing timing isn’t that important. Both point to rebalancing as a tool for managing risk. Hoffstein’s method may be good for some ambitious investors, but the important thing is to make sure that investors aren’t more exposed to market risk than they want to be.

Clarification 12/2: A previous version of this story had a headline that noted that 57% of boomers should rebalance. It is 57% of boomers that manage their own money.

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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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