November 28, 2020

Fundamentally: The Stock-and-Bond Mix Is Tough to Rebalance

PORTFOLIO rebalancing — periodically resetting a mix of stocks and bonds by taking profits from outperforming investments and buying cheaper, underperforming ones — has always posed a challenge.

Rebalance too often and you’ll sell profitable investments too soon and miss out on big gains. But wait too long and the market will alter your strategy and risk profile in ways you may never have intended.

If the stock market has been rising, for example, you may be holding way more stocks than you’re comfortable with. If the bond market has been climbing, you may have gone too far in the fixed-income direction, even though you want to own more stocks.

In some ways, today’s market has made rebalancing even trickier. Since the start of 2012, a basic stock fund that tracks the Standard Poor’s 500 index has soared 29 percent, while a typical bond portfolio has returned less than 5 percent. Traditional rebalancing would dictate that investors sell some of their surging equities, thus keeping their portfolios from becoming too stock-heavy and risky. This would be a particularly important safeguard for investors if the bull market is nearing an end.

That money, then, would be used to bolster allocations to fixed-income investments. Yet market analysts note that with 10-year Treasury securities now yielding just 1.7 percent, bonds are about as richly priced as they’ve been in decades.

So should investors use discipline and stick with their plans, even if that means buying bonds they think are expensive? Or should they adhere to the lessons of the last decade by refusing to buy investments they consider overpriced? Just as there’s no right answer about how often to rebalance — studies are inconclusive about whether it’s better to do this quarterly or annually — financial planners and market analysts say that no single answer suits all investors.

Instead, there are several basic options.

The first strategy is to stay the course and rebalance if your portfolio is out of whack — just tweak the types of bonds you buy. Mark R. Freeman, chief investment officer at the Westwood Holdings Group, notes that the primary rationale for rebalancing is to manage the overall risk of a portfolio. Just because investors are wary of bonds is no reason to let their portfolios become overexposed to equities, which are likely to lose far more value than bonds in a market correction.

Harold R. Evensky, president of Evensky Katz Wealth Management, agrees. “The idea is to maintain your investment policies, but to adjust to market conditions,” he said. “For instance, you could always shorten your duration,” he noted, meaning that you could rebalance into bond funds that invest specifically in short-term securities, which are less likely to lose value should interest rates rise and bond prices fall.

Judith B. Ward, a financial planner at T. Rowe Price, said picking and choosing where to redeploy that rebalanced money might be fine for experienced investors who closely tracked the markets and their portfolios. For less engaged investors, though, she said there was a simpler approach: rebalance now if it seems time to do so, but just make sure that the money going into fixed income is extremely well diversified across all major areas of the bond market.

“If you diversify, and have exposure to international and domestic bonds, government and corporate securities, and bonds of different durations,” Ms. Ward said, “your bond portfolio is probably not going to suffer as much as you might think in a worst-case scenario.”

But there’s a catch here, too.

Many people, particularly those who invest primarily in their 401(k) retirement plans, are likely to turn to a so-called total bond market index fund to diversify their fixed-income holdings.

“There is a perception out that there that if I own one of these index funds, I own the total bond market,” said Kathy A. Jones, a fixed-income strategist with the Schwab Center for Financial Research.

That’s not the case. Many bond funds mirror the Barclays U.S. Aggregate Bond index, which includes very little non-United States debt as well as relatively few high-yield or junk bonds. Around 75 percent of the index tracks government securities or other types of government-backed bonds. Less than 25 percent is in corporate bonds.

“At the end of the day,” Ms. Jones said, “these funds may own a lot of different bonds, but you don’t get much issuer diversification, and you’re getting that at very low yields.”

Because of this, says John C. Bogle, founder of the Vanguard Group, total bond indexes “are deeply flawed — and that’s coming from an indexer.”  He adds that individual investors should keep only about one-third of their bond stake in Treasuries and government debt, reflecting the market’s mix based on private investors such as pension and mutual funds.  

Investors might consider keeping half their money in a total bond market fund, he said, while shifting the other half to an intermediate corporate bond fund. By doing so, investors would end up with an overall strategy that’s about two-thirds in corporate debt and one-third in government securities.

As far as rebalancing goes, Mr. Bogle notes that there is another option: hold off. “Rebalancing is something I don’t think anybody should follow slavishly,” he said.

To be sure, annual rebalancing can keep a portfolio from veering drastically off course over time. For instance, heading into the 2008 market plunge, more than one out of five 401(k) investors aged 56 to 65 held more than 90 percent of their retirement accounts in stocks. Presumably, many got to that risky allocation by failing to rebalance.

But Mr. Bogle says that over very long periods, rebalancing doesn’t necessarily pay off, because investors are constantly selling out of higher-performing assets.

A compromise is to set basic thresholds. Rather than automatically rebalancing each year, investors can just establish a range — say, of five percentage points or more around their allocation target. So you don’t have to rebalance back to, say, 60 percent stocks until that weighting hits 65 percent or even higher.

At the least, he said, “Don’t say, ‘Oh my God,’ I’m up to 60.4 percent stocks and I want to stay at 60.’ ”


Paul J. Lim is a senior editor at Money magazine. E-mail:

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Global Manager: A Career in Ballet That Continued Offstage

Kevin O’Hare is the director of the Royal Ballet in London.

Q. You started your career as a dancer when you were very young. Did you think you would become the director of a company like the Royal Ballet?

A. I didn’t think that two years ago! My dream was originally just to be on stage, and then when I decided to retrain in management, it was because I liked to be right in the thick of it. I realized that I did have that ambition. The job is the link between the dancers and the management, the orchestra and the marketing and all those people. And you hopefully keep that ship rolling.

Q. What did you learn from people you worked for?

A. It’s important to make people feel that they matter, whether you are in the corps de ballet or the top principal. Peter Wright was my director and was really somebody I admire. You could be there in a studio, tired, trying to get the will together, and he was somebody who would walk into the room and not scare you but actually get you enthused about what you’re doing. He would say to all the girls, “Each one of you, you’re all ballerinas, you’re all going to sparkle,” and you could see them physically grow.

Q. Dancers are much admired for their discipline. Do you think that discipline helps you as a manager?

A. A lot of that discipline comes from the daily class. You have to be in there at 10:30 a.m. or earlier, and you know that if you miss that more than once or twice in even a month, things will start sliding. It’s not even guilt — it’s just that you know that that’s what makes things possible. So I think from very early on, it’s a great lesson to see that if you put the work in, you might not be the greatest dancer in the world, but you will have a career, and it will be a good career. And it’s a great equalizer as well, because a star like Marianela Nuñez has to do that, as does the newest person in the corps de ballet.

Q. So physical discipline is important. What else do you need to be a success as a dancer or a manager of dancers?

A. Your brain has to be active all the time. People can’t believe that. You go to a reception and people ask, “What do you do during the day?” And of course during the day you’d be learning five ballets. Your brain is having to go from one to the other very quickly. You’d finish at 5:30 in the evening, and the next thing is you would go on stage and do the “Nutcracker” that you rehearsed weeks ago. And you have to go on stage and look like it’s easy or like you are in love or tell a story. Your brain is being worked constantly. In this management job now, it’s pretty long hours, but I’ve never felt as absolutely exhausted as I did as a dancer.

Q. How was it to move from being among the dancers to someone who is managing the organization?

A. Doing that is really hard. You have to walk away and then come back, because I do think it’s great to have that bit of separation. When people see that you’ve gone out and tried to get different experiences, I think they then feel that you’re more rounded and you’re more able to give them advice.

Q. How do you hold together a bunch of extremely ambitious people?

A. It’s a challenge. I want everybody to feel like they are worthy, and of course not everybody can be a principal dancer. It’s hard to make them feel their worth in what they’re doing, but of course some people measure that in titles or solos. In all the other jobs, I felt if I worked hard enough or gave it 150 percent, I’d be able to make everybody happy, but in this job there’s no way I can.

And it’s this realization and thinking how can I do it and not bring people down. I haven’t found the answer to that yet. Of course you have to remember that just getting into the Royal Ballet is the ultimate goal for many people.

Q. When times are difficult, where do you pull your strength from?

A. I make decisions honestly and I stick with them. I’m thinking, yes it’s not really working now, or people are not that keen on the decision, but I believe in it. Everyone wants to be liked, and I have it in my character a bit, but I’m trying not to make decisions because of that.

Q. How would you describe your leadership?

A. There’s a saying: Look at the past, but don’t stare at it. We have a history now, and a lot of this history was quite amazing. You’ve got to acknowledge that, but you can’t hang on to that. You’ve got to move forward. Yes, we want wonderful dancers, and we have great stars, but it’s about the performance of the company. If you have two people dancing brilliantly in the middle and then nobody else is doing anything around the sides, I don’t think it works.

Q. Who do you look to now for inspiration?

A. Tony Hall, the chief executive of the Royal Opera House, is the most amazing person. He’s somebody who has time for everybody, who listens to what people say, and I’ve never heard him raise his voice.

Q. Was it difficult to stop dancing?

A. It was definitely the right decision. I had always in my mind that I would stop at 35, but then I had an injury. There is literally no cartilage in my knees, so they drilled into my knees and created some soft tissue, and one really worked well and the other one didn’t. So the nurse came and said, “Oh, I heard you’re a dancer and you will stop now.” I was determined to go back, but I found it very hard. While I was recovering, I spoke to the chief executive of Rambert [Dance Company] and said, “Can I just come and see what you are doing?” And that’s how I got the idea to retrain as management.

Q. Do you miss being on stage?

A. I thought I would miss the performance. And I didn’t miss that at all, but I miss the physicality of it.

I miss going to class, sweating, knowing your body. Going to the gym just doesn’t do it for me. My mom used to say, “How lovely to go into work and you have music.” And it’s true. That’s just such a nice thing when someone’s playing the piano and you do your exercises.

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Bucks: The Right Model for Lower Cost Investment Management

In this weekend’s Your Money column, I take a look at Betterment and Flat Fee Portfolios. These are the latest efforts to bring investment management to the merely six-figured — the people who many fancier wealth managers no longer want to help.

Many of you, I know, prefer to manage your investments yourself. And for those with a steely discipline and a commitment to low-cost funds, this can work. But the majority — maybe even the vast majority — of people ought not to be running their own money. They simply don’t have the right combination of knowledge or emotional resolve to do it well.

So for those inclined to pay for advice and investment management, I ask you this: Do the fees for Betterment and Flat Fee Portfolios seem fair to you?

And for people in the business of selling advice (and thus compete with potentially lower-cost offerings like Betterment and Flat Fee’s), how would you poke holes in their business models?

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