Reviewing Rebalancing Strategies

By Dean Barber

December 9, 2021

Reviewing Rebalancing Strategies

Key Points – Reviewing Rebalancing Strategies 

  • Markets Keep Climbing Despite New Challenges
  • Reviewing Rebalancing Strategies for Retirees, Near Retirees, and Workers
  • A Year in Review in the Markets
  • What Does the Immediate Future Hold for the Markets?
  • The Tremendous Impact of Technology
  • 18 minutes to read | 37 minutes to listen

Market performances continue to make investors jolly during the holidays, but there’s something else you should be doing right now rather than just enjoying the ride. Dean Barber and Bud Kasper share why the holiday season is a good time to be reviewing rebalancing strategies.

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Show Resources:

Find links to the resources Dean mentioned on this episode below.

    • Video & Article: Retiring with $1 Million
    • Video & Article: Retiring at Market Highs
    • Video & Article: What to Prepare for in 2022
    • Download: Retirement Plan Checklist
    • Podcast: The Basics of Bitcoin
    • Sign Up for the Modern Wealth Management Newsletter

    • Register for the Modern Wealth Management Education Series

    Stock Market Cheerleaders

    Dean Barber: Thanks so much to everyone who joins us on America’s Wealth Management Show. I’m your host, Dean Barber, along with Bud Kasper. Hey, Bud.

    Bud Kasper: Hey, Dean. How are you doing, buddy?

    Dean Barber: I’m doing great. The cheerleaders are out in full force right now, and I’m not talking about NFL or college cheerleaders.

    Bud Kasper: You mean my daughter when we went down to Disney and she was doing a cheerleading competition there?

    Dean Barber: How’d that go? You wore your uniform, too, right?

    Bud Kasper: No. My ears fell off, but it was fun and exciting. She did a great job.

    Dean Barber: That’s good. That’s exciting for you and for her. What I’m really talking about, though, is the stock market cheerleaders. If you take out COVID-19 for March of last year, the markets have just been on an absolute tear since April 2020. There seems to be no end in sight for that tear.

    Markets Keep Climbing Despite New Challenges

    Bud and I have spent a lot of time this year—not just on America’s Wealth Management Show but during our Monthly Economic Updates and things like that—talking about how we have markets that are extended in valuations. Yet the markets continue to climb.

    We’ve got the new Omicron variant of COVID. We’ve also got Jerome Powell saying that he’s going to taper faster than what he was going to before. He’s also admitting that he needs to remove the term transitory from the inflation number.

    Bud Kasper: They want to retire it.

    Dean Barber: We’ve got volatility that’s really creeped back into the market over the last several days, but we still have this buy-the-dip mentality. Money keeps flowing in.

    We even saw the 10-year treasury retreat from about 1.7% back down to about 1.43%. It’s now sitting at around 1.5%. All these things come out and make headlines, we get a splash of volatility, but nothing really happens.

    Giving Thanks for the Blessing of a Great Market

    Bud and I did a video called, What to Prepare for in 2022. We feel like markets will end the year higher than where they were at that point when we made the video. We didn’t know about the Omicron variant of COVID then. However, the markets are still looking good.

    Bud Kasper: I predicted a few months ago that we’d have a 5% to 6% increase before the end of the year. I’m sticking with that. What happened last Tuesday was incredible. It was the second-biggest move of the year. In the face of that, we still have this inflation factor. Just look at the gas pumps. It still looks like the market is overlooking that.

    At this time each year, we should be thankful for the blessings that have been passed onto us. This market has certainly been a blessing for our clients. It’s going to be an exciting new year. I’m already thinking about it.

    It’s a Good Time to Be Reviewing Rebalancing Strategies

    Dean Barber: We want to visit the whole concept of reviewing rebalancing strategies, which we’ve talked about that a few times this year. We’ve seen more opportunities to rebalance in the last 24 months than you would typically see. Normally, you look at it once a year and your rebalancing is OK because allocations don’t get that far out of whack. But in the last 24 months, we’ve had rebalancing situations.

    For example, let’s say you had a 60/40 portfolio at the beginning of last year. By the end of March 2020, you were closer to a 50/50 portfolio because the equity got killed by COVID-19.

    That was a time to rebalance and increase equity exposure back to the 60% percent. You bought low. Markets went up. Now, you’re out of whack on the other side and maybe you’re 70/30. You need to go back to 60/40.

    Defensive Rebalancing

    Bud Kasper: This is something that I refer to as defensive rebalancing, which means you’ve had gains in your portfolio. Go back into those assets that aren’t making you as much money and rebalance the portfolio from a risk perspective. If the markets weren’t doing well this year, I would call it offensive rebalancing. We now need to reapply money back into those assets that haven’t given us the best returns this year to hopefully get them next year.

    Dean Barber: Right. And there are other ways that you can approach this rebalancing using our Guided Retirement System™. Once we create the create the financial plan, we basically say, “What is the allocation from a historical perspective that gives you the highest probability of success with the least amount of risk?” That’s our ideal asset allocation at that time.

    With what the markets have done over the last 21 months, your portfolios are likely worth far more than they were on January 1, 2020. You need to rerun that through your plan using Guided Retirement System™. What’s your ideal allocation now because your portfolio is worth more? Can you take more risk off the table at this time? Or on the other side of it, can you now spend more money than what you would have before?

    We have two other great resources for finding your ideal asset allocation in our videos, Retiring at Market Highs and Retiring with $1 Million. Those will help you understand more of what we’re talking about and how the Guided Retirement System™ works.

    Thank You, Veterans!

    Before we forget, we want to thank all our veterans. December 7 was obviously Pearl Harbor Day. Thanks to all vets who served throughout the history of the United States.

    Remembering Bob Dole

    Bud Kasper: One of those veterans who we want to pay tribute to is the late Bob Dole. He’s a great Kansan from Russell, Kansas, who passed away last weekend. He was a Senator, head of the Republican Party, head of the Senate, ran against Bill Clinton for the presidency.

    What a history this gentleman had. He made a great contribution to his country, including his military service. In World War II, he was injured and lived with that throughout his life. He will be lying in state at the Capitol Rotunda in Washington, D.C. I heard that he may be buried in Arlington National Cemetery as opposed to his hometown of Russell that he loved so dearly.

    Dean Barber: Interesting. What a great man who did a lot of great service to our country.

    Bud Kasper: He was incredible. What an unselfish man he was.

    Dean Barber: Yep. What would’ve happened had he won that presidency versus Bill Clinton?

    Bud Kasper: I’d probably have another $2 million right now. It’s a could’ve/would’ve kind of deal with that. I think he would’ve been a great president. I really do. He was one that could reach across the aisle and get cooperation from almost anybody. We would’ve learned that.

    Dean Barber: We would’ve missed all the drama of the Senate hearings and the blue dress had he been elected.

    Bud Kasper: You had to bring that up, didn’t you?

    Dean Barber: It just came to mind with what would’ve been different. I just listened to a podcast series on that whole fiasco. There was a lot that went on behind the scenes that I didn’t really realize at the time. It was fascinating, but I’m glad that time is over.

    Bud Kasper: No doubt.

    Back to the Markets: A Year in Review

    Dean Barber: Anyway, let’s get back to talking about the crazy good markets that we’ve had across the board. Some sectors and indices have done better than others, but we’ve seen a broad increase on a year-to-date basis.

    The last three months have been relatively flat. There has still been a lot of choppiness, but there hasn’t been much of an uptick. Bud and I believe that we could see a little bit of a gain between now and the end of the year.

    Reviewing Rebalancing Strategies for Retirees

    Let’s first address this for people who are retired. If you’re retired now, chances are very good that you are expecting your portfolio to drive income for you. That’s what we do as CERTIFIED FINANCIAL PLANNERS™ Professionals. We build the portfolio and position it in retirement to deliver income.

    We seek a total return, especially in an ultra-low interest rate environment like we have been in for quite some time. That’s where your asset allocation comes in.

    For example, let’s say you have a 60/40 portfolio—60% equities, 40% fixed income. By no means am I saying that 60/40 is a magical portfolio. We’re just using it as an example. If you had a 60/40 portfolio in January of this year, you probably don’t have a 60/40 portfolio anymore.

    Bud Kasper: Right, because of the gains.

    Dean Barber: A 60/40 portfolio this year is probably up somewhere in the range of about 14%.

    Bud Kasper: Yeah. That’s fair.

    Dean Barber: It’s somewhere in there. We did a show last week on how Morningstar said that 3.3% is now supposedly the new 4% when it comes to safe withdrawal rates. If you are following that old distribution rate of 4%, you just got three years-plus worth of returns that you need for income in retirement.

    Most people would simply take that 60/40 portfolio and probably wouldn’t rebalance. They will let it ride because they get greedy. They’ll say, “Why would I want to sell something that’s the doing so great and put it into something that’s not doing so great like fixed income pieces?” That’s typical thinking.

    But when you’re in retirement and need to have that money produce income for the rest of your life, it’s time to do some defensive rebalancing. What exactly does that mean?

    Setting Up the Ideal Portfolio

    Bud Kasper: The whole purpose of retirement and retirement portfolios is to generate enough income to support you during your retirement years. When you’ve had wonderful gains that we’ve seen this year—some have been in the 20% range—now is the time to do what seems difficult and harvest them.

    Let’s take that money and put it into a safe position where we can get some income off it. Those are the capital gains that you’ve experienced, which are going to give you the income that you need for the next year, two years, maybe even three years.

    Dean’s example is example right on. The gains this year have been so superb that you should be in a position now where you don’t have to worry about that income for the next three years. If we are fortunate in the years to come and can still to eek out solid returns, it will continue to support that entire proposition.

    Dean Barber: Right. Let’s just say that your portfolio was $1 million and it was designed to produce $40,000 per year in addition to Social Security and whatever other sources of income you have. Take $120,000 or 100,000 or however much that gain is and keep it in the portfolio.

    We’re not going to tell you to pull it out and put it in a bank. We want you to keep it in the portfolio, but we want you to put it into a safe position within your portfolio. Have that be the piece of money that you spend for the next two and a half to three years. Now, why would we do that now? Because you got a gift of income.

    A Dynamic Withdrawal Strategy Makes a World of Difference

    I want to bring up another Morningstar article that Bud and I have talked about for several years, Alpha, Beta, and Now… Gamma. That highlights the application of five different financial planning techniques. You can increase your income in retirement by as much as 22.6%.

    One of the financial planning strategies is something called a dynamic withdrawal strategy. That’s exactly what we just explained. In the years where your portfolio does better than your withdrawal amount, take the excess and put it into a safe position so it’s there for withdrawals in the next couple years.

    Bud Kasper: People always say that they want to sleep at night. Well, congratulations. You’re going to have a nice three years of sleeping because you just harvested those capital gains you received. The reward is secure income.

    Dean Barber: There’s one other thing that it does at that point. The markets are at or near all-time highs. Equity valuations are higher than we’ve seen since pre-Great Recession. This is a time where you capture those gains and harvest them. It’s OK if we have volatility over the next couple of years because we’re not going to sell any of those things if the market is down.

    Bud Kasper: People say at this point that this can’t go on forever. They’re right. It can’t. That’s why defensive rebalancing is essential. Take your winnings and make them work for you for the next three years.

    Dean Barber: I want to emphasize that there’s a big difference between retiring at market highs and retiring when valuations are where they are. Being retired and asking your portfolio to create income is the same thing as retiring at that time. This is where our Retiring at Market Highs video comes in. It illustrates several great examples.

    Reviewing Rebalancing Strategies for Younger People

    We have a different set of rules for reviewing rebalancing strategies for people who are five to 10 years from retirement and younger people. Let’s start with those younger people.

    Bud Kasper: When you have more time to recover from market lows, it gives you the opportunity to build that nest egg for your future at that time. We have a very interesting category of investors now with the young folks that are getting a little bit extreme with what they’re doing with Robinhood, crypto and all that.

    It’s exciting, but there’s an experience factor that’s going on with these young people today that I think really is encouraging. I think it will provide them opportunities to secure their retirement as well. They’re just going to have to learn to moderate where their expectations were rather than just getting a fast buck and bragging about it for the next week.

    Dean Barber: I think most people that are in their 20s, 30s, even into their 40s have money in their 401(k) plan or IRAs, those types of things, and that’s their long-term money. Most of them should be 100% equity allocation because of their dollar cost averaging into that every month.

    If they did happen to have an 80/20 portfolio or a 90/10 because they wanted to have some of it in a safe position, this is still a good opportunity to get in and do that rebalancing. And of course, the dollar cost averaging does a wonderful job of allowing them to buy more shares when prices are down.

    Reviewing Rebalancing Strategies for People on the Verge of Retirement

    Now, let’s move on to reviewing rebalancing strategies for people who are in their mid-40s and older. That happens to be the main demographic of our America’s Wealth Management Show audience. The questions we hear all the time from that group are, “Do I have enough money to retire? Can I retire, stay retired, and get the income that I need for the rest of my life?”

    Even though we had that sharp downturn in March 2020 when COVID-19 hit, last year and this year were both good years in the equity markets. It’s still an ideal time to be reviewing your rebalancing strategies. People need to think about taking their winnings and rebalancing back to the appropriate risk level inside their portfolio.

    People that are already retired should be taking that money and setting that in a very safe spot within the portfolio. Especially if it’s IRA money, don’t pull it out and pay taxes on it all in a year. Just set up a different holding within that portfolio, that IRA, and use that as your income stream for the next two to three years because you got a gift.

    Capitalizing on Decisions in the Red Zone

    Bud Kasper: I think people that have done well in their preparation for retirement have one thing, and that is discipline. Discipline typically comes through our work with 401(k) plans and things like that, but obviously there are other ways of saving money as well.

    When you have that discipline in the growth of the money, now we have the discipline of planning appropriately for the rest of your life. By the way, I’ll use a football analogy when saying that you’re in the red zone. This is the time when everything counts because we don’t have an income stream coming in from our job as we did all the way up to the point of retirement.

    Dean Barber: For those of you that are approaching retirement within the next five years or so, this is a time to be reviewing your rebalancing strategies. When you get markets as elevated as they are right now, there’s a good chance over the next five years that we’re going to have some sort of a pull back and potential bear market.

    If you don’t do the appropriate rebalancing now and keep your portfolio in the position where it needs to be, it could cause you to go back to work or delay retirement.

    Looking Back at The Great Recession

    All we need to do is go back to the financial crisis. I’ll give Bud some accolades for the When Subprime Goes Primetime white paper that he wrote in 2007. His thesis was basically if the subprime mortgage problem were to leak into a prime mortgage problem, the consequences would be dire.

    Bud and I started talking about it then on America’s Wealth Management Show. We said that it was time to get it defensive. We had some great years since the Dot-Com Bubble. It was time to take some of those winnings and get into a more defensive position. The people that didn’t listen got smoked in that 2008, early 2009 bear market of The Great Recession.

    There were a lot of people that were planning on retiring and couldn’t do it. There were also people were retired but had to go back to work because they didn’t have the proper risk controls within their portfolio. A definite risk control in your portfolio is the rebalancing process. You can get more scientific with that rebalancing process by using our Guided Retirement System™.

    Getting the Goldilocks Allocation

    Essentially, you get to see what the Goldilocks allocation is for you. What’s the one that’s just right? It’s going to be different for you than it is for your coworker, neighbor, aunt or uncle, friend, or whoever. Your allocation is going to be based on everything that you’ve accumulated—all the sources of income that you have and your spending objectives through retirement.

    Once you understand what that Goldilocks allocation is, you get it and continue to rebalance to it so that you never take on any more risk than what you need to.

    Bud Kasper: That’s right. This is a critical time because we know that things are going to be choppy. I wish I knew what was going to happen next year, but I think there’s some favorability in the market which will continue that positive trend.

    However, we’re going to have our challenges. We all know that. A lot of these have more to do with governmental changes and leadership than anything else. On a pure fundamental basis, I think we’re still going to have companies making profits. If that’s the case, that should be the underpinning necessary to see the market have a decent year.

    What Does the Immediate Future Hold for the Markets?

    Dean Barber: I don’t think it’ll be anything like this year, but I think it’ll be a positive year. I think we will see a slowing growth pattern going into the second quarter that will take us through the end of 2022 and through 2023. It won’t be the robust growth that we’ve seen coming out of the heights of the pandemic, but it’ll be a slowing growth period. It’ll be a growth period, nonetheless.

    Unless something comes out of left field, I’m not predicting a recession over the next 24 months, but that doesn’t necessarily mean that equity markets will continue performing like they are.

    That’s why we say take the gift that’s been given to over the last 24 months in the equity returns and get back to the proper allocation. Another great resource for finding your proper allocation is our Retirement Plan Checklist. It gives you an idea of all the things that you should be thinking of and doing as you approach retirement. For those of you that are already retired, there are also a ton of things that are useful for you as well.

    Bud Kasper: We have such a wealth of free information and educational pieces for everyone. You should take advantage of this just purely for yourself to understand some of the concepts that Dean and I talk about so often. Our dedication to education is very much in place.

    Dean Barber: You can also sign up for our biweekly educational series. Every other week, we’ve got a webinar that we do for you to continue to learn. Just sign up for that and you’ll automatically get invited every other week with what the topic is about.

    Taking a Deeper Dive into the Great Equity Positions

    Dean Barber: As we finish up with reviewing rebalancing strategies and that beautiful gift we received with the equity positions that we had this year, let’s look indices have been at over that period.

    Bud Kasper: As of Tuesday, the Dow Jones Industrial Average was up 16.8%. That poor thing can’t keep up with the S&P 500, which was up 25.05%. The NASDAQ 100, which is tech heavy, was up 23.47%. Then, the Russell 2000 was up 14.58%.

    On the bond side, we’re just going to use the aggregate bond average. It’s -3.26%. If you had a 60/40 portfolio, you’re probably about 75% now in stocks versus 25% in bonds because of the gains in the stock market. This is what we’ve and talking about with it being a good time to be reviewing rebalancing strategies.

    Dean Barber: It’s interesting because I’ve been diving deep into the different stocks within the different indices. When we say that the markets are overvalued, people seem to think that all stocks are overvalued, but that’s simply not the case.

    There are some stocks that are way overvalued, but there are others that I would consider to be fairly valued or undervalued. Even some of the undervalued portions of the major indices have had great performances this year and contributed greatly to the total return that we’ve seen this year.

    This is a time where we might say that active management can tend to enhance performance because of active management as opposed to just owning the index. The active management seeks to own the best stocks within an index. It doesn’t mean that they will always outperform, but it does mean that are certain times when active management will outperform.

    The Leverage of Big Tech Companies

    Bud Kasper: If you look at the week before last, tech suddenly started to weaken a little bit. I did a little research on this. Last year, Congress queried Jeff Bezos from Amazon, Tim Cook from Apple, Sundar Pichai from Alphabet, and Mark Zuckerberg from Facebook about if they were breaking antitrust laws. We’re talking about companies that worth near or more than $2 trillion.

    When you take that into context, show me any other conventional type of corporation that even comes close to those valuations. There are none. They said, “You know what? You’re too big to fail. You’re buying up all these little tech companies so that you remain number one.” This seems somewhat non-competitive. If that’s the case, will they force these companies to break up?

    Dean Barber: If you’ll recall, we had this same situation with the telephone companies back in the early 1980s.

    Bud Kasper: 1982.

    Dean Barber: A lot of good came from the breakup, but I believe that there are a lot of startup tech companies that are developing very unique technology. Their hope is that they will get bought by one of these other companies. They’re not building it to become a behemoth. They’re building it to be a plugin to the way that these other companies are running.

    Bud Kasper: It’s the leverage that they have.

    Strategies of the Startups

    Dean Barber: Absolutely. I don’t think this is a scenario where only the big companies are profiting from this. I believe that the startups—the smaller, the medium-sized companies—are being built by entrepreneurs in a hope that they will get acquired by or merged into these larger companies. You’re getting a benefit across the board unlike what we had with the big telephone companies where they had a monopoly.

    Bud Kasper: They truly did. When they were forced to break up for antitrust laws, they became what we refer to as the Baby Bells. We’re talking about the Verizons …

    Dean Barber: Lucent Technologies, which no longer exists.

    Bud Kasper: New England Bell. Anyway, and the spinoffs did quite well while the mother company didn’t go anywhere for a considerable period. That would be highly disruptive to the major companies on the tech side that I just talked about. The spinoffs could be incredible if in fact that were to happen, but I’m not sure that’s in the best interest of the whole technology sector.

    The Tremendous Impact of Technology

    Dean Barber: Think about the speed at which technology is changing our lives. COVID-19 basically ramped up the speed of change because it was forced upon us. I think that we need to step back and determine if are these companies created a greater good.

    Let’s face it, our lives today are nowhere near what they were 10 years ago. A lot of it is due to the technology and advancements in technology. It’s not just the big companies that are making it happen.

    Bud Kasper: That’s exactly right. What we’re seeing out of tech is an exciting proposition. I believe it will continue to evolve as one of the best areas for investors.

    Dean Barber: I want people to understand that you can see where money is going if you know where to look. If you think about what drives the markets higher, it’s basically the money flow coming in. In 2020, we talked about how so many people are putting money into their 401(k) plan. So much of that money is going into the index fund within inside of that. That’s greatly propping up the S&P 500.

    Bud Kasper: The considerations that people need to think about, especially with what technology is doing, involves something called Moore’s Law. It suggested that computer chip power was increasing exponentially for a considerable period. If that’s the case, then we’re saying tech is still in its infancy in terms of what the potential is.

    Building Your Education on Blockchain

    Dean Barber: There’s no question about it. We’re seeing that every day by how quickly things are changing. We’ve done a couple of special programs, especially in our educational series, on Bitcoin and the technology behind Bitcoin and cryptocurrency is the blockchain technology.

    That blockchain technology can once again change the technology industry, the speed, efficiency, and privacy at which we can do things. Even though the technology sector has been hit harder than some of the other sectors during fourth quarter, I think it’s still something that you must have some good exposure to within your portfolio.

    We did a new podcast on that on The Guided Retirement Show™, which you can find on your favorite podcast app. It’s Episode 56, The Basics of Bitcoin with Matt Kasper and Will Doty. As you’re listening to that, keep in mind the question I brought up earlier: Do I have enough to retire?

    Get a conversation started with one of our CERTIFIED FINANCIAL PLANNER™ Professionals. We will answer that question and help give you the confidence that you need to move forward. Thank you to everyone joining us on America’s Wealth Management Show. I’m Dean Barber along with Bud Kasper. We’ll be back with you next week same time, same place. Everybody stay healthy and stay safe.

    Whether it’s reviewing rebalancing strategies or other aspects of financial planning, you can schedule a complimentary consultation with one of our CERTIFIED FINANCIAL PLANNER™ Professionals by reviewing our calendar. We’re available to meet with you in person, by phone, or during a virtual meeting. 

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