Really, You Only Need to Do This Once a Year

A few years back, there was a rumor circulating about Fidelity’s top-performing investment accounts. As the story went, they either belonged to dead people, or to people who had simply forgotten about their accounts.

Either way, the stellar performance boiled down to one thing: The investments just sat there untouched. No one bought anything new. No one sold anything. No one panicked. And no one tried to time the market.

Now, it turns out the story was likely a myth—the Fidelity study never actually happened. But like all myths, it conveyed an important truth: If you’re constantly buying and selling different investments, your portfolio is going to suffer. Really, you are much more likely to underperform the market than outperform it.

The Trouble with Free Stuff

Experienced investors know this—they know they’re supposed to buy and hold. And yet, it’s become too easy to trade stocks. Many brokerages no longer charge trading fees, so you can buy and sell all you want.

No-fee trading is one of the worst things that’s ever happened to investors. The fees acted as a safety measure… a material obstacle that lessoned the likelihood you would bounce around from one fad investment to the next, or panic and sell at the wrong time. Because that’s what people do.

Human beings are psychologically hardwired to fail at investing. Many fail miserably. From 1999 to 2019, the stock market returned 5.9% annually. Yet the average investor made 1.9%. I would definitely call that failing.

Set It and Forget It

Trading should not be your actual day job. I’m sure you have some other job, and you’re probably pretty good at it. That is how you should spend your time. Then, take as much of your income as you possibly can and invest it, slowly and methodically.

This is where The Awesome Portfolio comes in—it’s the core portfolio I recommend for all investors. Longtime readers know that The Awesome Portfolio consists of 20% stocks, 20% bonds, 20% cash, 20% gold, and 20% real estate.

It’s as “set it and forget it” as possible. In fact, once you get your personal Awesome Portfolio up and running, you only need to rebalance it once a year to keep your allocations on track.

How to Rebalance Your Portfolio

Let’s walk through how to rebalance your portfolio. Say you start with $10,000 to invest. So, you put:

  • $2,000 in stocks

  • $2,000 in bonds

  • $2,000 in cash

  • $2,000 in gold

  • $2,000 in real estate

Now, imagine that one year later, stocks have dropped 20% and bonds have dropped 1%. But gold has climbed 40% and real estate has climbed 5%. I’m not saying that’s what will happen—this is just an example to illustrate the mechanics.

Anyway, at the end of the year, you now have:

  • $1,600 in stocks

  • $1,980 in bonds

  • $2,000 in cash

  • $2,800 in gold

  • $2,100 in real estate

Your new portfolio total is $10,480, which puts your new target allocations at $2,096 for each asset class. That is not what you have, so you need to rebalance.

This means selling enough of the assets that did well and buying more of those that didn’t, so you have 20% of each again—or in this case $2,096 of each.

Rebalancing will help you do two things: 1) better manage risk; and 2) consistently “buy low and sell high.”

Skipping this step leaves you vulnerable to a market downturn. It’s like neglecting to renew your car insurance right before a crash—everything is fine, until it’s not. In addition to too much trading, this is another common way people lose money.

Check in on your portfolio once a year to see if you need to rebalance. Set a reminder on your calendar or do it on your birthday. Whatever you need to do to make it a consistent routine every 12 months—but not more often than that.

Sometimes you won’t need to adjust much, if anything. Other times, you’ll discover that there have been wild price swings, and your allocations are totally out of whack. The only way to know is to look.

Jared Dillian
Jared Dillian