Should You Rebalance Your Portfolio? – Episode 070

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have our co-host and bestselling financial author, Kim Butler with us. Welcome, Kim. Thank you, Todd. Happy to be here today. Totally looking forward to a great discussion on rebalancing, a concept that many people like to think about at various times during the year, often towards the end of a calendar year. And boy, what an odd concept. Yeah, this is one that has just I don’t know, I guess you take it for granted because

[00:54] it’s taught in colleges. It’s, you know, most financial professionals are trained this way. But what we’re talking about is not rebalancing your tires necessarily, which is probably a good thing. We’re talking about rebalancing your portfolio. And if you just stop a moment and think about what that means, what that means is is that you’re going to take those assets that you have that are performing well and sell them to buy more of those assets that are losing money so that you still have equal percentages. At least that’s what rebalancing means to me. How about you, Kim? Well, it’s an accurate definition, whether that’s what Investopedia calls it or not, I don’t know. But backing up even beyond that is just an amazing concept of the whole typical

[01:50] balance, which is often stocks and bonds. And if we don’t think about cash for a minute, we just think about the stocks and the bonds and the people that are out there that propose this balanced portfolio of, let’s say, 70 percent stocks and 30 percent bonds or that propose a 60-40 blend or what have you. The people that propose that, you got to think about that recommendation for a minute, because everybody knows that stocks are supposed to be a good investment and, okay, they’re supposed to turn whatever percent you want to use as an average. Well, why do we use bonds at all? I mean, if we need income, OK, we could argue that. But isn’t investing in this, quote, balanced portfolio with bonds indicating

[02:40] that you don’t really believe that stocks are going to do well? Isn’t it saying, OK, I don’t trust the stock market, so I’m going to put some of my money in the bond market and create this, quote, balanced portfolio so that I have a little bit of the best of both so that maybe I can hopefully do well? It just is an odd concept to begin with. And then we take that odd concept and we rebalance it. We do it again. It just doesn’t make any sense to me. Well, on our particular show, we try to talk about both sides of everything, and I can understand the position in that we do not know what the future holds. But on the flip side, we have to ask, do we really want to diversify? Meaning that do we really want to buy something that is less than what we

[03:39] think? And the answer to this is really relatively simple. Buy things that you know about. Educate yourself and invest in those things that you personally have confidence in. And yes, you probably should not put all of your eggs into one basket. You probably should have a couple of different asset classes that you that you invest in, but absolutely never invest in something. That is our mascot. If anybody wonders, the corporate mascot is talking. I think the male person’s here or something. Sorry about that. She she does not care for this concept of de-worsification either. Wait, didn’t you mean diversification? What’s what’s de-worsification? That means selling off that which works to buy that which doesn’t.

[04:31] It’s de-worsified. Got it. A new English word. Yes, I created that. So keep going with your thought there. Anyway, like I said, we don’t know the future. So that part is a positive thing in that if you’re in more than one asset class, you could argue that by doing that, you’re better preparing yourself for the future. Our contention has always been invest where you have control and invest where you have knowledge, correct? Absolutely. Well, we use our seven principles of prosperity to guide people to a format, if you will, a philosophy that helps them choose investments. And as many of our listeners know, we have a goal for our investments. And that is low double digit returns with no loss of principle.

[05:28] And the idea behind rebalancing and the initial idea behind a quote balanced portfolio is to have a good rate of return. But nobody ever really talks about this no loss of principle issue. And we can do all kinds of proving numerically of the disaster that occurs when you lose principle. And the idea of a balanced portfolio is to try to keep you from losing principle. But we have many, many people that suffered massive losses in 2008 and nine, and of course, in prior years when the stock market had a correction. And here, as we head into 2016, we have an environment where people could lose value in bonds. And so this idea of rebalancing to take money, which typically the stocks are going higher and you’re rebalancing into bonds.

[06:25] But it could be rebalancing from one stock into another or rebalancing from one type of mutual fund into another. But this idea of the selling off of an asset that is performing well just to keep some kind of statistical numerical approach to things is so common and pervasive that most people don’t even ever stop to question it. And that’s what our seven principles of prosperity are designed to help people do is to stop and question things. Got it. And I think, you know, there’s probably some of our listeners out there right now who are thinking, wait a minute, you can’t lose money in bonds. And that is technically a true statement in that if you buy a five year bond and you hold it for the full five years, you will

[07:19] receive whatever your guarantee is, whatever the amount is that you agreed upon. Here’s what most people don’t understand. Most people buy bonds in funds or they buy bonds for short term positions. And I’m going to use some math that probably doesn’t even exist right now. But let’s say that we buy a 10 percent bond and the interest rates go up to 20 percent. We’re just using nice round numbers. The value of your bonds, if you were to sell them, have now been reduced by 50 percent. Correct. Absolutely. And this is where most people get tripped up because nobody’s going to buy your bond at 10 percent if current bonds are paying 20 percent. So the only way you can make a 10 percent bond equivalent to 20

[08:16] percent is to discount the face. So where this becomes particularly hurtful, I guess you would say, is for those people who decide to buy bonds in funds because you don’t technically own that bond and you’re not going to hold it until its maturity. The face value of those funds are going to drop every time interest rates go up. And unfortunately, we’re in a situation where really rates can well, I don’t know, your husband might argue that bonds can still go down more, but I don’t think we’re at the floor. I don’t think we’re good. We have to worry about them going down. I think eventually they’re going to start coming up. Well, and you’ve made an interesting point because somebody or someone or an entity that holds a bond to

[09:07] maturity is going to do just fine. And that’s something that insurance companies do. Life insurance companies in particular can handle a 30 year bond because they think in 100 year increments, they’re not going to have any trouble buying a bond and holding on to it for 30 years, an individual bond. But the typical investor is not buying individual bonds or buying bond funds. And consequently, they are subject to a loss in value when and if interest rates go up. And yes, we all know that the Fed plays with the interest rates and causes some false things to occur. And whether they’re going to go up or down could be a mile long discussion for many a day. But sounds like a boring one to me. We like to focus on things that you can control.

[09:53] And so, by the way, we used to and I have in the past built bond ladders for people who have short term needs. We have recently come across some products that only have a one year commitment and are paying five to six percent. So there are some alternative things out there that pay much better than bonds these days, aren’t there? Absolutely. And the normal reason, the most common reason for people to want a bond is because they want either liquidity, they want some capability for getting cash quick or they want income. So if you look at the two reasons for buying bonds and the reasons for rebalancing back to our original discussion to have a percentage in bonds is for cash or liquidity and then also for income.

[10:45] And our listeners know and can be confident in the fact that we have a much better place to store cash, which is whole life insurance. And the cash value of whole life insurance is even paying better than a lot of short term bonds right now. And then, as you indicated, if people do need income on a monthly basis where they get a pay check, some of our companies are paying on the seventh of the month, some of them pay on the 20th of the month where there’s a pay check every single month and then where principal gets returned. And this is the bridge loan environment that can be so much more effective for creating an income stream rather than this guesswork of rebalancing where you have a certain percentage of your

[11:30] portfolio that’s designed to create income. And the scary part is, is most financial advisors, your typical financial advisor that’s out there working in the stock and bond markets, is going to recommend a higher and higher percentage of somebody’s portfolio, the older they get in order to recreate the income that was lost from working. And it’s just, again, so pervasive in our society, but an environment that just does not make sense. The creation of income should come from a monthly check where you get your principal back at the end, not where you’re subject to the fluctuation of the bond markets, where your TV screen is burned to the financial channel and you’re not sleeping at night because

[12:18] you’re so worried about what interest rates are doing. That’s just not a good way to create income. Well, and sadly, we do have to, we do have to mention the advisor side of this and two things. If somebody tells you, you need to rebalance and to diversify your advisors, telling you one, they have absolutely no idea or opinion what’s going to happen in the future, which is scary. And two advisors are paid when money moves, not when you necessarily make money on your investments, as long as they’re moving from one investment to another. So diversification is a large percentage of fund manager and advisor’s income. Absolutely. And there’s nothing wrong with advisors making an income. You want a profitable advisor or they’re not

[13:12] going to be around very long, but it should come from them giving you the best advice that they have for your situation. And I’m guessing that most advisors don’t ask people to rebalance because that’s how they eat. But most advisors do fall into the trap of the typical thinking and they just don’t step back enough to look at the big picture. And that’s another of the principle of prosperity that we recommend is those seven principles really help people look at things and think for themselves rather than just do what the advisor says to do or do what the media says to do. And one of those principles of prosperity is to see the big picture. And it’s a difficult thing to do because your typical view is just of the portfolio at hand or

[13:59] maybe you use some kind of thing on the web that combines all your portfolios, but you’re still just looking at your assets. You’re not really looking at your debt, your cash flow. You’re typically looking at just one thing at a time and you can make mistakes that way. Whereas if you can define your entire asset base and your income and your expense and even literally if you can get it all on a single piece of paper so that you can look at that big picture easily, it’s an easier environment to make the better decisions. And then if you use the seven principles of prosperity and you take every single asset through them, you’ll know when an advisor or the media is making a recommendation that might

[14:42] not fit the best philosophy for your money. And as our listeners know, we really like the control and the knowledge to be on the side of the client, not the side of the advisor or the media or some financial guru that they choose to listen to. And in the interest of full disclosure, I will tell you that not even prosperity economics advisors can predict the future. Our goal is to have at least a portion of your money into what’s called non-correlated investments, meaning that regardless of what happens in the real estate market or regardless what happens in the financial markets, we can get a good rate of return and protect that principle at all costs. Any comments you’d like to make, Kim? Well, I’m just grateful that we had a

[15:32] chance to talk about this. Hopefully it’s been helpful for people. It’s definitely something that if they need some guidance on, we’re happy to give and people can reach out to us at hello at partners number four, Prosperity.com. We’ve got a lot of great things on the blog these days that people can listen to if they like the podcast idea. There’s some videos that are available. If you want to see the inside view of what advisors do when they get together with other prosperity economics advisors, we have videos available from an event that we created for advisors called the Summit for Advisors that was last October. And now you might check out those videos. And there’s an additional video that you

[16:17] would enjoy on Todd Langford’s Truth Concepts website. If you’re interested in this subject, it’s his diversification presentation. It’s available for free that he made on the Summit for Advisors stage. It’s about an 85 minute video, but really worth the watch if that’s something that you’re interested in getting a little bit more information about. We talk about this idea of rebalancing on that video. And most importantly, is there a picture of the P4P mascot out there? I believe there is. You know, somebody told me that they thought it was a horse and they looked at this picture and they swore there was a horse in the family photo. Awesome. Well, this is No BS Money Guy Todd Strobel for the Prosperity Podcast.

[17:04] Once again, special thanks to Kim Butler and take care, everybody. Thank you for listening to the Prosperity Podcast to take control of your money and have it work for you. Visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.