Investment Risk: Rebalance Your Way to Peace of Mind

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Another day, another dollar… hopefully.

Aside from some small hiccups along the way, the stock market has continued its way upward since 2009 after the 2007-2008 financial crisis. As an early retiree, I’m happy to see that happen as our portfolio easily continues to outpace our spending. When I retired at the end of 2018, our net worth was not quite $1.1 million. Currently, we’re floating at a little over $1.75 million even while it pays our living expenses

No complaints here!

But with that portfolio growth, investment risk can continue to grow as well. When you look at the total pie value of your portfolio, as the stock market goes up, so does the percentage stocks represent compared to your other investments. Depending on your investment risk comfort level, this can be dangerous.

When you’re not depending on your investments to cover your expenses (aka you’re working), going all in on stocks makes a lot of sense. But once you’re nearing or in retirement and planning to use that money, you likely need to be a lot more careful because a down market can cause you to sell at low prices.

I’ve talked about my initial rebalancing as we were nearing retirement in my post, Adjusting My Asset Allocation… Tastes Great, Less Filling. A couple of years later, I discussed the details of how I rebalanced our portfolio again in Portfolio Rebalancing: Get Your Asset Allocation in Line.

Here we are though in 2024 and, after reviewing our portfolio, it was time to rebalance again. We needed to get our asset allocation in line and our investment risk back to a level I would be comfortable with.

Since this is an area that a lot of folks might not recognize the importance of, I thought I’d take you through the changes I made and why I made them in the first place.

Disclaimer: It’s silly to have to say this, but this is not investment advice. Call it “for entertainment purposes only” or whatever you want. Don’t take your advice from some guy on the internet you don’t even know. Learn the actual subject matter and work with a professional (fee-only fiduciary) advisor before making any financial decisions you don’t understand or feel comfortable with.

Setting an investment risk comfort level… and sticking with it

I think we all pretty much get that stocks are riskier, particularly over the short term. Investing in low-cost broad-based index funds (I personally focus on VTI) helps spread that risk across thousands of stocks for some diversity (with emphasis on the word “some”). However, even the market as a whole will go down at times.

That’s not a big deal, especially when working – those dips and bear markets mean you’re buying at lower prices. In other words, that risk usually equates to more reward over the long run.

However, when you need to rely on this money, you generally want to lower some of that investment risk by having some of your eggs in other baskets like bonds, treasuries, etc. This can help smooth the ride, so to speak.

For us, our portfolio contains investments in a handful of years of expenses in a bond fund ladder through Invesco BulletShares ETFs. Although it’s changed slightly since I wrote it, you can see how our portfolio is structured here: Opening the Books to Our Investment Portfolio.

But you want to have a target percentage set for investment risk that you feel comfortable with. When I was working, that percentage was 100% in stocks. I wanted that growth and had an income that meant I could afford (and benefit from) those downtimes.

Now that I’m retired, that number has been around 70% stocks. Some might say that that’s still a little high, but considering I retired at the end of 2018 at 43, I hopefully have a long duration that the money needs to last – possibly 50+ years! And you need those stocks to keep growing to make that happen.

Once you decide on the investment risk level you’re comfortable with, you want to rebalance when things get too far out of whack. When stocks grow faster than your other investments, that percentage is going to become higher than your target number. When the market drops a lot, the percentage of stocks in the total pie is going to go down to the point where you could be losing out on the growth you want.

So periodically, you need to rebalance. You don’t want to just do this anytime the market goes up or down – you’ll drive yourself batty and possibly incur unnecessary fees or tax ramifications, depending on how your investments are held. Most experts recommend rebalancing no more than once or twice a year.

I check my asset allocation to decide if I want to rebalance on two random days throughout the year. The first is right around my birthday in the summer and the second is at the beginning of December when I’m doing Roth Conversions and other money moves.

So how do you even know what your asset allocation is?

You could waste a ton of time doing this manually. Instead, I prefer the easy way. One of my favorite tools I use, the Empower Dashboard, shows you the asset allocation of your portfolio (from wherever it’s held) at any time. There aren’t a lot of tools out there that do this and since it’s free to use, this is really a no-brainer.

Determining how much to buy and sell to rebalance

Ok, great – so it’s now the day to determine if we need to rebalance. Remember, we’re not timing the market. We’ve set a date to evaluate this and it doesn’t matter if the market is up or down – this is when we’re doing it.

So we can just log into the Empower Dashboard and look at the asset allocation. This tells you what amount of your total portfolio is in:

• Cash
• International bonds
• U.S. bonds
• International stocks
• U.S. stocks
• Alternatives

I failed the mission and didn’t take a screenshot of the “before” in Empower, so look at the screenshot in the above section to get an idea of what you’ll see there.

It gives you both the dollar amount and percentage. For us, percentage is the key. To keep it simple, all I care about is my total stock percentage so I just add the numbers for U.S. stocks and international stocks.

When I went to do this on my birthday (happy birthday to me!), this is when I saw that stocks were almost 79% of my portfolio. That’s a lot higher than the 70% asset allocation goal I have in mind.

The struggle is that you think, “Yeah, but the stock market’s been doing so well. If I sell now, I could miss out on some growth.” Absolutely true. You could also save yourself from a train wreck though if the market suddenly drops 20% right after the change. Nobody knows what’s going to happen. So you just need to make the changes because you don’t have a crystal ball and you want to get your numbers in line again.

Ok, fine, but how do you know how much to sell and buy to get you back in line with what you want?

Lucky for all of us, I solved that little dilemma a few years ago with a handy dandy spreadsheet that lets you just input the handful of numbers right from Empower and it tells you what to do. It even tells you if you’re only off by a small deviation and it’s not worth doing this time around.

Here are what my numbers looked like…

The numbers in the beige cells in the top section are simply the numbers I inputted right from Empower. Then you have a choice of if you want to know asset allocation for all of those as they are in detail, which is in the top section. You can just put your percentage goals for each asset in those green cells in the top section.

I don’t care about all that though. You’ll see that I just want to know what I’m looking like in stocks and then everything else. So in the bottom section, the numbers from the above section are already added and brought down to see. In the two pink cells, I just have my desired percentages listed (70% and 30%). That tells me right off the rip how off my percentages are, how much I need to sell or buy in those classes, and whether it’s even worth rebalancing.

Cool, right?

To get your hands on that spreadsheet and a bunch of other cool goodies, just sign up for my mailing list and I’ll send you a welcome email with all of them for you to enjoy…

Did you do it? Good! You can also read more about that spreadsheet in my post, Portfolio Rebalancing: Get Your Asset Allocation in Line.

Looking at these numbers, I would need to sell $150k in stocks and then buy the same in bonds to tone down my investment risk. That’s a hefty jump, but it’s good because it also tells me that the market has continued to grow.

Funny enough, we had decided a while ago to scale back from our ladder of 5 years of living expenses in BulletShares to 4 years. So when our 2023 ETF matured in December of last year (BSCN), we did not buy another year of BulletShares. That likely tipped the scales a little more toward being too high on the equities side.

Regardless, Lisa and I discussed where we were at and what we wanted to do. As I mentioned, we’re on the higher side with our 70% equities goal so over 78% is really pushing it.

However, we’ve been doing this early retirement thing for well over 5 years now. I’ve learned a lot and have a more comfortable handle on everything. Even though being at 70% equities might be considered a high allocation goal in general, I would be just as satisfied moving that number up higher a little more.

At any given time, we have a ladder of 4 years of living expenses in our bond-fund ladder plus the current year’s expenses in the bank. So if disaster hits the stock market, we don’t have to sell a single share of stock for 4-5 years. In most cases, that should be a good amount of time for the market to recover and/or for us to decide on another strategy. Heck, if we need to go get part-time jobs somewhere, no big deal.

But I do still think being at close to 79% equities is a little much though. So after we talked about it, we decided to sell $60k of VTI and buy another year of year of BulletShares to put on the tail end of our ladder.

Making the changes to put us back in our investment risk comfort zone

I mean, there’s not much more to it. I logged into my Vanguard account, sold shares of VTI to the equivalent of $60k, bought shares of BSCS around the same dollar amount, and called it a day.

The next day, I logged into the Empower Dashboard again to see the updated information on my asset allocation…

I grabbed those numbers and popped them into my spreadsheet and here’s what it shows:

Note that the “cash” from Empower only includes what’s in your portfolio – not what’s in your bank accounts, even if they’re connected in Empower. I prefer to include that as part of my numbers so I add that into the cash on my spreadsheet.

The bottom section is what you want to focus on. I’m now at just over 75% with stocks. I also set my desired percentage from 70% to 72% though I’m no longer stuck on that number since those bond funds are a bigger piece of our comfort level in retirement. However, you’ll see that even though we didn’t do the entire amount recommended before and I changed our desired percentages, the spreadsheet is no longer recommending that we rebalance. Since we have a 5% allowed deviation set, we’re still good to go.

But that’s it. I won’t even think about this again until doing our Roth Conversion in December, at which time I’ll re-evaluate.

The task of rebalancing is not very difficult when you think about it. Here’s what it comes down to:

1. Determine the asset allocation you’re comfortable with for your investment risk.
2. Choose 1 or 2 days per year to evaluate and make changes. Put those as recurring dates in your calendar and stick to them rain or shine.
3. On those days, use the free Empower Dashboard to look at your asset allocation.
4. Enter those 6 numbers from Empower onto the free spreadsheet you got from being on my mailing list.
5. Log into your brokerage account and buy and sell equities, bonds, or whatever using the numbers from the spreadsheet as your base numbers.
6. Optional: Once all trades have been confirmed, repeat steps 3 and 4 to ensure your investment risk is back on track with the right asset allocation percentages.

Honestly, that shouldn’t take you more than a couple of hours once or twice a year. Well worth it to ensure your portfolio is on track and help you keep peace of mind.

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On another note, if you’re someone aiming to get a better handle on understanding the ins and outs of investing in the stock market, please read this book:

The Simple Path to Wealth by JL Collins

I talk to so many people that are overthinking everything. Wall Street tries to sell you on the most convoluted financial things. If you read this book, you’ll get it. The path to wealth really can be extremely simple. JL does a fantastic job of making this book easy to understand. This is hands down the book I recommend to anyone trying to get a handle on investing and building wealth – it’s my favorite financial book.

Until next time, folks!

Plan well, take action, and live your best life!

Thanks for reading!!

— Jim