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Should I Rebalance My Portfolio

Should I Rebalance My Portfolio

Should I Rebalance My Portfolio? Several of my last few articles have been about retirement and I will continue with that theme today. Most of my readers have a diversified 401(k) or at least an individual retirement account (IRA). If you are like me, you have noticed that the portfolio asset allocation changes with time. Stocks have outperformed bonds for the past decade, especially large cap growth stocks. For example, Vanguard Total Stock Market Index (VTSMX) has returned approximately 16.8% in the past decade. On the other hand, the Vanguard Total Bond Market Index (VBMFX) has only returned about 3% in the trailing 10-years. These kinds of asymmetrical returns will change your asset allocation over time. What you intended for your asset allocation and volatility may no longer hold true. You may be asking yourself should I rebalance my portfolio? There are pros and cons to rebalancing.

Should I Rebalance My Portfolio
Should I Rebalance My Portfolio

What is Rebalancing Your Portfolio?

But first, some of my less experienced readers may be asking themselves what are you talking about? What is rebalancing your portfolio? It is simply the process of selling one type of asset and using the proceeds to buy another type of asset. Continuing with the above example, you would sell a certain percentage of your stock fund and then buy more bond fund periodically. The time interval can once per year, which is common, or when your portfolio becomes obviously unbalanced and off target. For example, if your target asset allocation is 60% stocks and 40% bonds and this deviates by more than 5% then you would rebalance. There is really no right or wrong interval but just what works for you. If you target asset allocation is 60% stocks and 40% bonds, then you would try to maintain that target allocation.

How to Rebalance Your Portfolio?

There are two accepted methods for rebalancing. In the previous paragraph I described the first one, which is to sell high-performing investments and buy lower-performing ones. The second method is to allocate new money to the underperforming asset until the target asset allocation is achieved. Today, both methods are easy as most retirement account platforms have the ability to rebalance in some way and often automatically. But the real question is why should I rebalance my portfolio?

Pros of Rebalancing Your Portfolio

The main advantage of rebalancing your portfolio is that it allows you to maintain your target asset allocation and thus risk tolerance. When I say risk tolerance here, I am talking about volatility. Stocks tend to produce higher returns than bonds over time but that comes with greater volatility. In the past 10-years VTSMX had a standard deviation of 19.38 while VBFMX had a standard deviation of 3.65, according to data from Morningstar. Increase your asset allocation of the bond fund and it is obvious that the expected volatility of your portfolio will come down.

There are some other benefits of rebalancing your portfolio including providing the opportunity to periodically review your asset allocation in a disciplined manner.

Bogle on Rebalancing Your Portfolio

There are always cons about doing something and rebalancing your portfolio is no exception. In this case, I am going to quote John Bogle, the father of passive index investing.

I am in a small minority on the idea of rebalancing. I don’t think you need to do it. The data bear me out, because the higher-yielding asset is going to be stocks over the long term. That’s the way the capital markets work. Not in every 10-year period, or even for that matter every 25-year period. But the higher-returning asset you’re getting rid of to go into a lower-returning asset, so it dampens your returns, and the differences turn out to be, if you look at 25-year periods, very, very small. And sometimes rebalancing improves your returns. Sometimes it makes them worse.

Final Thoughts on Should I Rebalance My Portfolio

To answer the question, should I rebalance my portfolio, it depends. In general, there is no right or wrong when it comes to rebalancing your retirement portfolio. That said, Bogle does not think you need to do it and it is tough to argue against him. If it provides a certain comfort level to maintain your asset allocation and you have lower risk tolerance, then by all means do it. I personally only rebalance infrequently when the asset allocation is far from my intended target. Mostly because I like to keep things simple. 


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Chart or Table of the Week

Today I highlight the market data summary tool from Stock Rover*. The market data tool includes 1-day, 5-day, 1-month, 3-month, year-to-date, and 1-year returns for market indices and alternative assets. It also includes the same information for the 11 stock sectors of Basic Materials, Communication Services, Consumer Cyclical, Consumer Defensivce, Energy, Financial Services, Healthcare, Industrials, Real Estate, Technology, and Utilities. It is clear that Crude Oil has performed the best and Gold has performed poorly. This is somewhat surprising because gold usually rises on inflation expectations. It is also clear that Financial Services are performing very well YTD while Consumer Defensive is having a tougher year after a record breaking 2020. The screenshot below is from Stock Rover*.

Source: Stock Rover*

Dividend Increases and Reinstatements

I have created a searchable list of dividend increases and reinstatements. I update this list weekly. You can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

I updated my dividend cuts and suspensions list at end of July 2021. The number of companies on the list has risen to 527. We are well over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic.

There is one new company to add to the list this past month. This company is Shell Midstream Energy Partners L.P. (MPLX).

Market Indices

Dow Jones Industrial Averages (DJIA): 35,124 (-1.10%)

NASDAQ: 14,711 (-0.75%)

S&P 500: 4,442 (-0.58%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 34.7X and the Schiller P/E Ratio is at about 38.6X. These two metrics down the past week. Note that the long-term means of these two ratios are 15.9X and 16.8X, respectively. 

I continue to believe that the market is overvalued at this point. I personally view anything over 30X as overvalued based on historical data. The S&P 500’s valuation came down as companies in the index reported solid earnings lapping a Q2 2020 that had depressed earnings.

S&P 500 PE Ratio History

Source: multpl.com

Shiller PE Ratio History

Source: multpl.com

Stock Market Volatility – CBOE VIX

The CBOE VIX measuring volatility was up over 3 points this past week to 18.56. The long-term average is approximately 19 to 20. The CBOE VIX measure of the stock market’s expectation of volatility based on S&P 500 index options. It is commonly referred to as the fear index.

Source: Google

Fear & Greed Index

I also track the Fear & Greed Index. The index is now in Fear at a value of 25. This is down 18 points this past week.

There are seven indicators in the index. They are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.

Market Volatility is set at Neutral. The CBOE VIX reading of 18.56 is a neutral reading.

Market Momentum is indicating Neutral. The S&P 500 is 6.12% over its 125-day average. This is further above the average than normal over the past 2-years.

Junk Bond Demand is indicating Neutral. Investors are accepting 2.01% yield over investment grade corporate bonds. The spread is down further from recent levels indicating that investors are taking on more risk.

Safe Haven Demand is in Fear. Stocks have outperformed bonds by 1.28% over the past 20 trading days. This is still close to the weakest performance for stocks over the past 2-years as investors move back into bonds.

Stock Price Breadth is indicating Extreme Fear as declining volume is 8.78% more than 

advancing volume on the NYSE during the last month. This indicator is near the lower end of its range over the past two years.

Stock Price Strength is signaling Extreme Fear. The number of stocks hitting 52-week highs compared to those hitting 52-week lows is at the lower end of its range.

Put and Call Options are signaling Extreme Fear. In the last five trading days, put option volume has lagged call option volume by 47.98%. This is still amongst the highest level of put buying in the past two years.

Source: CNN Business

Economic News

The US Census Bureau reported advance retail sales fell 1.1% in July to $617.7 billion, ex-autos, retail sales dropped 0.4%. July’s figures are 15.8% higher than July 2020. For the period May 2021 to June 2021 U.S. retail and food services sales were up 20.6% over the same period in 2020. U.S. retail sales were weighed down by supply chain disruptions as auto dealerships sales were down 3.9%, after declining 2.2% in June. Vehicle production has been hampered by the semiconductor shortage. Online retailer sales fell by 3.1%. Although clothing stores dropped 2.6% in July, they were still up 43.4% as compared to July 2020. Sales of furniture (-0.6%), sporting goods (-1.9%) and building materials (-1.2%) all reported declines. Spending rotated to restaurants and the food service industry as receipts expanded 1.7% in July, increasing 38.4% year as compared to July 2020.

The U.S. Census Bureau reported new residential building permits were up 2.6% in July to a seasonally adjusted 1.635M, 6% above the July 2020 rate of 1.542M. Single-family permits were down 1.7% from a revised June figure of 1.066M. New residential building permits increased in the West (+13.3%) while dropping in the Midwest (-4.4%), South (-1.9%), and Northeast (-0.7%).

Minutes of the Federal Open Market Committee’s latest meeting suggest that tapering of monthly asset purchases may start before year’s end or perhaps early next year. The central bankers made it clear that the tapering of assets was not a precursor to a rate hike.  Although FOMC members broadly agreed that employment had not met the “substantial further progress” benchmark, they were “close to being satisfied” with the improvement in job growth.  There was disagreement as to when and how fast to taper.

Thanks for reading Should I Rebalance my Portfolio? – Week in Review!


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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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