2022 EP0611 - Planning Matters Radio - Rebalancing

Plan planning matters when you are very good to see you.

I will ask you an important question because of the hearing a lot of people around me is now a good time to rebalance and I think a lot of people are wondering because as you and I have talked about at length market volatility right. We know that bond yields are following stocks are down so is now a good time to rebalance. Why think it's always a good time to rebalance. Not that you want to do it every day or anything.

I don't want to try to time the market with it, but regular rebalancing is one of the fundamental financial principles for long-term success. It helps us in our risk exposure. It helps us to capture profits when profits are available. There's really three types of rebalancing that should be done with regularity or when it presents an opportunity so there is strategic rebalancing. That's kind of your regular quarterly rebalancing to make sure that everything stays in alignment as we track along our financial progress tactical rebalancing that's that's kind of as conditions dictate. Again, not trying to time the market with this but when we are seeing momentum shifts when there is a movement in the market tactically going in and making sure that our portfolio is not overexposed to risk or that we are capturing gains when they are there when their present and time optimized rebalancing because we don't want to balance to the same allocation when we are 50 or 60. As we were balancing to when we were 30 we were probably much more aggressive at 30 and and maybe at 60. We are rebalancing to a more conservative kind of approach and that is a shift that evolves over the course of our investment lifespan and explained everybody watching why this is important. I always love these visual cues right Peter, but this is the effect of not rebalancing what we looking at here. Well, if we do rebalance over a period of time over the years, then our risk tolerance matches our risk exposure and then continues to play out over time. The second chart. The chart on the right there shows if we do not rebalance after a run up in the market. We have a much higher exposure to risk and equities and untruthfully both of these charts should sort of be skewed counterclockwise and and kind of facing upward, because hopefully the trend is that both of these grow over time, but you don't want the amount of equities and therefore higher exposure to risk and volatility to overtake the portion of your portfolio that you are comfortable seeing right risk and volatility with ER facing economic headwinds right now. Would you recommend rebalancing toward value cyclical and international equities will yes so the, the answer is that rebalancing inherently has diversification in mind to where we would be exposed to all of those anyway were were not rebalancing directly toward one of those. We are rebalancing to include our pre-existing exposure to any of those asset classes because the best-performing asset class is almost never the same year after year after year. It cycles and so if all we had was tech sector exposure. For instance, we had Apple and Microsoft and Amazon rebalancing our portfolio. If that's all we held isn't really going to accomplish a whole lot because the three of those generally move in tandem. But if we have some non-correlated asset classes then rebalancing helps us to capture gains when they are present in in one asset class and reposition those gains dollars to an asset class.

Perhaps that is underperforming at the moment so that we can capture when those things swing right will about that a little bit more in-depth than Peter either take a look at asset classes here today while at the top of the list. Of course I feel that all the time, but also the bonds and stocks both going down is when we kind of take a closer look at our presented percentages from 7030 and got a 6040.

Why think that what we're seeing here is a little bit of the convergence in rising rates and then supply and demand mixed with the fact that we have necessities right so interest rates are rising, you would expect bonds to fall and that's what were seeing. However, the market volatility that has resulted in that has actually made investors more risk adverse, meaning they don't like the volatility that they're seeing so they want to move toward something that is considered more stable right. However, Econ 101, the law of supply and demand. If if more people are trying to buy a certain thing then the pricing does not have to be as attractive and so as interest rates have have risen, we would expect to see bond values falling and we have stocks and bonds are both down for the year right. But what I think were seeing is that bonds still are attractive. There still being purchased as a result of the stock market volatility and then if you look up at the top of that chart. You know, commodities and oil or things that we are depending on and because of the supply chain issues I have had disruptions and so again Econ 101 when there's less of something and yet people are still demanding it prices rise right right well set so I want to ask another question which is right in your wheelhouse. Are there any tax implications that we should be considering before rebalancing yeah absolutely we we have to understand that buying and selling and trading and rebalancing inside of a qualified account such as an IRA or a 401(k) does not result in any tax implications because the entirety of the account is tax deferred. That's the beauty that's the benefit of these retirement accounts. These qualified accounts is that you are deferring any and all taxation on those until you actually withdrawal them for income, but that is not the case inside of regular after-tax nonqualified brokerage and investment accounts. So if instead of investing in my 401(k) or my IRA. I paid my tax on my money and then brought it home and invested it that has already been taxed but the growth on that money still will have tax implications, and that growth is actually realized when there are transactions inside of the account so the act of rebalancing can actually incur and generate some tax implications.

It is something to be aware of.

It doesn't say that we negate the necessity of rebalancing because it is going to be important, but you do have to be aware of the potential tax implications when you go to do that and that's why you should absolutely consult with a qualified experienced financial advisor if you have any questions about that or or want to make sure that you understand what those implications will be yes. So, must consider. I'm glad you said that because this kind of feels like advanced math. To me, Peter. So if somebody hasn't questions to figure out exactly what's right for them what the best way to reach you yet. Just give us call 919-300-5886. You can email me peter@rochonplanning.com you can visit the website Rochon planning.com it looks like Rich on planning.com is my last name is Sean and it is a little bit like advanced math area.

There definitely some unknowns within that equation is like algebra, you gotta figure out what that unknown variable is and a lot of times that unknown variable is always a pleasure. Thank you.

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