A friend of mine from a former life recently resurfaced. He asked if I would look at his portfolio, which I was happy to do.
I felt a bit like an emergency room doctor who got a patient with a very obvious problem, like, a missing arm.
My friend started out years ago with a small position in Apple. It turned into a very large position in Apple.
What was once 2% of his portfolio was now 40% of his portfolio. In other words, his entire retirement was tied to Apple’s fate.
This had to be fixed.
Portfolio Rebalancing
People believe in companies like Apple, but it’s still one company. Like all big organizations, it’s fallible and prone to stupid behavior.
So the obvious solution is to rebalance the Apple holding. Sell Apple, and buy other stuff (which we will get to in a second).
People have a tough time rebalancing. A stock does really well for them, and they get attached to it. This is known as endowment effect.
People have no problem selling small winners, but they have a hard time selling big winners.
Even when that position has reached a trillion-plus market cap and probably doesn’t have a lot of growth left in it.
Even when that position has basically become systematic, undiversifiable market risk.
Even when, if you told people they were holding an index, they would probably sell.
Psychologically, people just can’t do it when they’re attached to the company.
We have had a very long bull market, and there are quite a few beanstalks that have grown to the clouds. I suspect my friend’s portfolio looks like a lot of people’s portfolios, if they were left alone for a long period of time.
They probably have one or two home run stocks dominating the returns of the portfolio—with everything else basically going nowhere.
A portfolio is like your landscaping. You have to tend to it every once in a while or it gets overgrown.
You shouldn’t wait to rebalance once every fifteen years. Once every 1–3 years will probably suffice.
Anyway, I wasn’t done playing portfolio doctor. There was one other big, glaring problem.
Asset Allocation
I said to my friend, you are 45 years old. So let’s round up to 50. That means that you should have a 50% allocation to bonds.
Or more.
My friend had a 2% allocation to bonds.
This is an extreme example—but maybe not! I suspect there are a lot of portfolios out there dominated by one or two stocks, massively loaded up on equities, and very underweight bonds.
The subject of asset allocation is a meaty one. And we’re not going to get deep into it here (if you want more details, read my essay on asset allocation here). But if you’re rolling with less than 10% bonds in your 40s or 50s, you have a serious asset allocation problem.
This asset allocation problem exists partly because people aren’t rebalancing.
If you have a 70/30 portfolio of stocks and bonds, what happens when the stocks grow over time and the bonds don’t? You end up with a 90/10 portfolio, even if that wasn’t your original intent.
Again, take out the hedge trimmers and do some landscaping. It’s great that your stocks have done well. Sell them, and rebalance to fixed income.
Rebalancing is sort of a systematic way to buy low and sell high. By selling your fluffed-up stocks, you can sell high, and buy bonds which are currently low.
Or, you can just buy a balanced fund, which is one-stop shopping. But some people don’t like to mix their peas and carrots.
Log onto the Brokerage Account and Do It
If you’re not financially oriented, investing might seem hard, and a lot of work.
The only thing that’s hard about it is doing something outside of your comfort zone. You had better get used to spending some time outside your comfort zone.
Because this is urgent.
This may sound like a jackass thing to say, but there are few things more important than money.
There are few things more important than your level of material comfort in retirement.
If you screw this up, and you have to lower your standard of living as a result, it will be an unforced error. An own goal.
I don’t know what’s stopping you from doing it, but you have to log into your brokerage account (click on “forgot password” if necessary), and literally enter buy and sell orders to get everything straightened out.
If you are afraid, or need help, then get help. It is the most important thing you will do this year.