Rebalance Your Portfolio With Mark Biller

This faith and finance podcast is underwritten in part by Soundmind Investing. For more than 30 years, do it yourself investors have relied on SMI for proven strategies and trustworthy guidance. SMI helps people build wealth so they can provide for their families, prepare for the future and give generously. Learn more at soundmindinvesting.org. Question for you. When was the last time you rebalanced your investment portfolio?

That long, huh? Well, maybe it's time you did. Hi, I'm Rob West.

If you're a do-it-yourself investor and not working with a financial advisor, you need to periodically look at asset allocation. Mark Biller is here today to talk us through the process. Then it's on to your calls at 800-525-7000. That's 800-525-7000.

This is faith and finance, biblical wisdom for your financial decisions. Well, Mark Biller is executive editor at Soundmind Investing and underwriter of this program. And each month, Mark leaves his corner office at SMI and joins us here on the program. It's always one of our favorite days. And Mark, do you really have a corner office?

Probably not. No, not so cornerish. But it's good to be back with you, Rob.

Great to have you here. All right. So portfolio rebalancing, asset allocation. These are terms people here use but don't always know what they mean.

So why don't we start there? What does it mean exactly to allocate your portfolio or for that matter to rebalance it? Yeah, those are great questions, Rob. You know, these are foundational investing ideas, but you're right that people don't always know exactly what they mean when we throw them around.

So let's dig into those. So when we talk about asset allocation, we simply are talking about how much of your portfolio is invested in each type of asset. So the two big asset classes for most people are going to be stocks versus bonds.

Now, of course, you can branch out into other things as well, whether that's gold, real estate and so on. You can also have different types of stocks or different types of bonds. But for most people, the fundamental asset allocation decision is going to be how much do I need in stocks versus how much do I need in bonds? And that target allocation between those becomes your portfolio starting point. So then when we move over to the idea of portfolio rebalancing, this is just the process of getting your portfolio back to those target allocations, because what happens is over time, certain parts of your portfolio are going to do better than others. You don't necessarily know which parts are going to do better than others.

But some are going to go fast, some are going to go slow, some will go forward, some will go in reverse. And so because of that, your portfolio gradually drifts away from your original target allocations. So rebalancing is just the act that you do occasionally to bring you back into alignment with those original targets.

If we go through a really quick example, that might help. So let's say you start with a portfolio of $100,000 and you just split it half and half for simplicity for our example between stocks and bonds. So you have $50,000 to start in each of stocks and bonds. Then let's say that stocks have a good year, they gain 10%, bonds have a terrible year and they lose 10%. Now at the end of the year, you're still going to have the same $100,000 you started with, but your stocks now have gone up to $55,000, your bonds have gone down to $45,000, but your goal is to be $50,000. So rebalancing would have you take a little bit of money out of stocks, put that back into bonds to get your allocation back to your original target of $50,000. Yeah, that's really helpful. So a lot of the initial asset allocation decision really boils down to how much risk you're willing to take, right?

Yeah, absolutely. You've got to consider your goals and your risk tolerance and determining what percentage of your portfolio you should have in stocks and what percentage in bonds. Now we also usually include your age or the years until your retirement in that equation because someone with many years before they're going to need to tap their investments, they can typically afford to take more risk than somebody with a shorter time horizon. And you know, this type of risk assessment process that we're talking about, it's usually one of the first things an advisor or a service like SMI is going to take an investor through, because it's really important to arrive at an appropriate asset allocation target. So we have, you know, step by step instructions for this process in the start here section of the SMI website. And if you're working with an advisor, they would certainly be hitting this very early in the process as well. All right, very good. We're talking today about rebalancing.

How do you get back to that target asset allocation you intended as your stocks and bonds have moved around in value? We'll continue to unpack this with Mark Biller today of Sound Mind Investing. Much more just around the corner.

Stick around. As a faithful listener of this program, you know that there's life changing financial wisdom in God's Word, and Faithfi is here to help you and millions of others learn to be good and faithful stewards. As a nonprofit organization, we rely on help from monthly Faithfi patrons, supporters of this mission, to help us continue and expand our outreach. Has God provided financial answers for you through this ministry? If so, consider becoming a monthly Faithfi patron. Visit faithfi.com and click Give. Create your free Faithfi account by going to faithfi.com and click Sign Up to begin receiving weekly wisdom in your inbox. Great to have you with us today on Faith and Finance. I'm Rob West.

Joining me today, my good friend Mark Biller. He's executive editor at Sound Mind Investing, and you can learn more at soundmindinvesting.org. You can also check out more on the topic we're talking about today at soundmindinvesting.org. Look for their 2024 rebalancing guide. Mark, before the break, you were explaining rebalancing, how we should periodically get back to that target allocation we intended.

If you have a financial advisor, this is something they would do for you. But if you're a do-it-yourself investor, this may be something that slips off your radar. But once a person has that appropriate target asset allocation, that's where this comes in. So this actually accomplishes a couple of different things, doesn't it?

Yeah, it really does, Rob. So, you know, again, it's really important the investor determines their target allocation thoughtfully because that's going to function as their ideal. That's how their portfolio should be ideally positioned. And if that's true, if they've come to that conclusion through a thoughtful process, then as their portfolio moves away from that ideal, really what we're saying then, Rob, is that there's an implication there that their investments have drifted away from their ideal mix of risk versus reward. And so when we're rebalancing, we're keeping an investor aligned with that predetermined investing ideal for them.

So that's why this is an important thing. But there is kind of a secondary benefit to that, too. And that is that occasional rebalancing can actually help us with that ever elusive goal of trying to buy low and sell high. The reason that is if we think back to the example we were just talking about, if we're trimming from stocks after they've gone up and we're putting that money into bonds after they've gone down, well, that's a subtle way of taking advantage of these temporary price moves.

And especially if you've got any kind of a temporary price spike or a price discount, you're naturally going to be doing more of your selling near tops and more of your buying near bottoms. Yeah, there's a vivid example of that right now in the markets, isn't there? Yeah, I mean, there sure appears to be, given that the big stock market indexes had a surprisingly strong year last year, and they're back near their all-time highs.

And in contrast to that, bonds have had one of their worst three-year stretches in many decades. So if we just take that at face value, it seems that now is a pretty good time to be selling some of your stocks near their highs and adding money to bonds after a really rough stretch. And that's really what most people going through this rebalancing exercise would probably find as being called for right now in their portfolio. So hopefully they're selling high in stocks, they're buying low in bonds. The thing is, with rebalancing, you never really know until later if today's prices are actually near highs or lows.

You just know that if you're following this discipline over time, you're going to tend to take advantage of those opportunities, even if you're not aware that it is an opportunity right now in the moment. Yeah, that's really helpful. And the conventional wisdom seems to be that investors should do this maybe once a year.

But how exact does it need to be, Mark? Yeah, when it comes to rebalancing, close enough really is good enough. And for most people who don't own a lot of different types of assets in their accounts, this is a pretty straightforward process. They might just need to log into their company 401k account online, make a few quick calculations, sell a thing or two here, buy a thing or two here, and they're done. Now, if you've got multiple accounts, and if you're more diversified into other types of assets, it can be a little bit more involved. The main thing is just to get your portfolio back close to your targets.

This is definitely not a place where you've got to sweat every calculation to the fifth decimal point. But because it is kind of one of these close enough sorts of things, a lot of people just mentally bookmark the beginning of the year as a natural time to kind of rebalance start the year fresh with those clean target allocations. Yeah, that's helpful. Now, is rebalancing something that typically a financial or investment advisor would do for you?

Yeah, it really is. It's one of the conveniences of having somebody handle your investing for you. There are also some other forms of rebalancing other other ways of doing it that can sometimes be a little bit preferable to just doing it once a year at a set time.

And, you know, advisors would be more likely to follow some of those ideas. But again, the main thing is just making sure that some type of this rebalancing idea is happening in your accounts one way or another. Yeah, and obviously, Mark, there's some funds that actually have this as a feature built in, right? Yeah, there are and they're increasingly popular, especially within company retirement plans, often referred to as target date funds. You can easily identify these by the fact that they have a year listed in the fund name. So for example, if you see a fund in your 401k, that's named the target retirement 2035 fund, well, that's going to be a fund that's managed with an allocation of stocks and bonds that that fund manager thinks is appropriate for somebody who's planning to retire in 2035. And like I mentioned, 401k plans have really gravitated to these other company retirement plans as well. And the reason for that is just that they take care of both that asset allocation issue and this rebalancing task automatically. The investor doesn't have to think about that, when they're using these funds. Now, the one thing I would just say, Rob, is these are a one size fits all tool. And just like any other one size fits all product, you just want to make sure that the assumptions in that fund match up with your specific needs and circumstances.

Yeah. Mark, have you found generally speaking that target date funds tend to be a bit more conservative than you would advise? Or is it really across the board? Yeah, it varies a fair amount, I would say that they tend to be a little bit more conservative, especially like the ones that are further out. So if you're, you've got say, a couple of decades, a few decades out, those tend to be managed a little bit more conservatively than we might suggest. But of course, there's so much personal preference built into that, Rob, that you really just want to go in and look at a fund like that and see how much is it allocating to stocks? How much does it have in bonds, and make sure that that matches up with roughly how you want your account allocated. One nice thing is, you know, if you're looking at retiring in 2035, and you go look at that fund in your plan, and it's allocated to conservatively, well, you might find that the 2040 fund just moving the year out five years or 10 years, you might get a blend that you like better, just by using a different fund like that. So it doesn't necessarily mean you can't use them.

You just want to hone in on the one that's right for you. This is great, Mark. And then quickly, I know you have the 2024 rebalancing guide. What's in there?

What can folks expect? Yeah, so it's going to run through really how do you do this in your account. And again, if your account is is allocated pretty simply, you may not even need the guide. But what we run through in our guide is if you have multiple strategies, multiple accounts, it just kind of walks you through that process.

So it'll be a good review for anybody listening to this, that isn't exactly sure how they need to do it in their own account. Very good, Mark. Thanks for stopping by, my friend. Thanks, Rob. Always a pleasure. Soundmindinvesting.org.

Check it out today. We'll be right back. We'll be right back. Heart for Lebanon is bringing them hope. And now you can help. We endured shelling and hunger.

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Give now at faithfi.com slash Lebanon, or call 888-201-5577. Welcome back to faith and finance. I'm Rob West. We're going to head back to the phones. Continue to take your calls and questions.

We've got room for a couple more before now in between now and the end of the broadcast at 800-525-7000. Let's go to West Palm Beach. Hi, Georgia. Go right ahead. Hi, yes.

I was trying to find out. I have enough money saved up to pay off my car loan and I was wondering if that's a good choice to just get rid of it. The car interest rate was 3.84% and I was just wondering if it just makes sense to just pay it off and then I can just recoup and save again. I still have money saved up even after I pay off the car loan. Yeah, very good. I mean, it may be.

Let's talk about that for a moment. I love the idea of you being paying this debt off, but we want to make sure that it's wise and you hit on a key point and that is that it's not going to completely deplete you of any kind of liquid savings. So what is the balance on the car and how much do you have in savings? The balance on the car is like $12,000 and in savings I have $34,000. Okay, and what would you say is roughly your monthly expenses?

And I do have those written out. My monthly expenses are basically, I think, everything. I might include gas and all in this. Gas and food for the week.

So I did everything. It's like about, I think, $2,000. Was it like $2,900? Okay, so $3,000. Yeah, I mean, so if you were to pay this off, you'd have $22,000 left and $3,000 a month. That'd give you about seven months, a little bit more than seven months worth of expenses in your savings account.

So that's great. Do you have any other debt that has a higher interest rate? No, the only debt I have besides my mortgage is the car loan. Okay, and are you contributing to retirement? Yes, through school through FSR. I'm a teacher so it's through the retirement system. Yeah, FRS, Florida Retirement System, great.

Yeah, I like this option a lot, Georgia. I think this makes a lot of sense because like I say, you'd still have seven plus months worth of expenses. You'd eliminate that car note. Now you've got more margin on a monthly basis so you could give more, you could save more, you can enjoy that. Maybe you fund a Roth IRA that would supplement or be growing alongside the FRS as an additional asset for retirement. And you could set that up equal to the amount you're putting away currently paying toward the car and just have that automatically go into a Roth IRA into good high quality mutual fund. Another option would be you keep making that car payment but pay it to yourself in a separate savings account that is the Georgia car replacement fund so that when that car is to the end of its useful life, you're ready to buy your next car with cash. What do you think about that?

I think that is true and I know a lot of people do that and here's the thing. The most important thing I got rid of that is I live in a villa, and the villa is 30 years old, and there's a sliding glass door in the back that leads right into my home, but the sliding glass is, I think, in dire need of repair. Nobody wants to repair it. I've had companies, glass companies that have come out and given me a quote because what's happening is if the rainy season has passed, but when it rains and the rain hits a certain way in the wind, I got water underneath the tracks of my sliding glass. I've been there.

And if the wind is heavy, I can actually see my blinds moving a bit. Wow. Yeah. How much will that project cost?

Have you found a contractor who'd be willing to do it? One quoted me $15,000, then another one quoted $12,400. Okay.

All right. And so they have something with Wells Fargo where they said there's no interest for 18 months if you're approved. So there's no interest for 18 months. So let's say that's 12 something.

That payment is 720 something dollars. And for me, I'm wondering if I'm stretching it a bit. I don't know what to do that's pushing it. Yes. I see.

That makes sense. What is the amount of your car payment right now? Well, I pay 300, but it was like 283. Okay. How much do you typically have leftover at the end of the month in a typical month? Anything?

Yes. At the end of the month, that was three. I think I have like $1,300, $1,400. I don't want to lie because I had that all on my paperwork, which is not in front of me. But I think I have like $1,400. All right.

So then, yeah, I like this a lot. I mean, I would do a lot of checking online, look for as many reviews as you can on this sliding glass door company before you go ahead. But assuming that checks out, maybe you get one more bid, you know, with somebody who'd be recommended.

Maybe you find a general contractor in your church who can make a referral to you to a sliding glass door company that he or she's worked with and get a third bid. But assuming you determine this is a reputable company with good reviews, I like the idea of you doing the $12,400 over 18 months with zero interest. I just make sure you pay that amount in full every month. And you should have that because, you know, not only do you have $1,200 or $1,300 a month extra, you're about to have 300 more when you pay off the car.

So I think that all makes sense to me, Georgia. Okay, so because I'll have like with the car payment being paid off, I'll have like $1,500. So that means that having to pay them almost $700 a month, my disposable income now would be just $800 left over. Right. But you've still got a healthy emergency fund of more than seven months expenses. You're debt free, except your mortgage.

And you know, 18 months from now, you'll have new sliding glass doors and you will have paid no debt or no interest. Right. Okay. All right. Thank you so much. I appreciate that. You're welcome. God bless you. Thanks for calling.

Let's stay in West Palm Beach, actually. Peter's driving down the road. And do I understand this correctly, Peter? Is today your retirement day? Yeah, I just called up today.

I spoke to the guy, but I forgot to ask him the question that I want to ask you. I'm 65 and a half. So I made it there.

But the only point is, you know, I'm going to continue to work and I want to know if I continue to work. Does Social Security still go up a little bit more as I work until 70? I think right. That's the number. Yes. So you haven't taken Social Security. Is that right? Yeah, we're taking it.

I should have a check in about a week, about a month, I guess. Okay, well, as soon as you start taking your benefit, it locks it in. So if you if you decided to wait and not take it, and you may not have had that choice, I understand you retired today. But if you had not taken it, it would have continued to grow at 8% a year until age 70. So now that you've taken it, the only way for it to continue to grow would be to number one is the cost of living adjustment. That happens every year. This year, I think it's 3.4%.

You know, going into 2024. So the cost of living adjustment will increase it that's going to happen whether you work or not. The other way is if you do continue to work, and your earnings that you pay FICA taxes on for that year, that you're continuing to work is higher than any of your high 35. So your Social Security is based on your highest 35 years of earnings. If your new earnings moving forward are higher than any of those high 35, it'll drop that off and replace it. And that'll push your checkup as well.

So those are the two ways. Hey, congratulations on your retirement. Thanks for listening. I hope you'll make plans to join us again next time for another edition of Faith and Finance. Faith and Finance is provided by Faithfi and listeners like you.