Its beach renourishment time again! The dredges and pipes and bulldozers are all hard at work this offseason fighting with Mother Nature to try and keep
those free-spirited sand grains in one place. Or at least temporarily reset them, I suppose. The more cynical among us might argue that it’s a bit of a losing
battle… but man does that new beach look good!
From time to time, it’s a good idea to give your portfolio a little renourishment as well. We’re not talking about selling everything and starting over - after all,
you don’t scrape the beach away down to bedrock and then rebuild it. You just need to move some things around a little bit.
There are all kinds of pithy sayings out there about how to renourish your portfolio: “Cut your losers and let your winners run,” “If you liked it before, you should
like it even more now that it’s cheaper,” etc. Gag. All you really need to do is a simple rebalance.
You have (or had, at one point) an idea for how to allocate your investments. There was some thought and rationale behind that idea, no doubt, even if only
to the extent of “everybody says a 60/40 portfolio is the way to go.” So you start with a 60/40 portfolio, but over time your portfolio will drift away from that
allocation. It tends to drift less the more diversified you are, but take last year as an example. US equities were up about 30%, on the whole. Bonds were up
more like 13%. Now your portfolio is more like 64/36.
Well, you say, that’s not a big deal. And you’re right, it’s not... but that allocation drift compounds with time, and It’s not too long before your initial 60/40
allocation is more like 70/30, more than 15% away from your initial allocation.
Here’s the tricky part though, and what separates investors from speculators. Presumably, there was a reason you wanted a 60/40 allocation. Presumably, it
was a reason that involved risk and not being comfortable with too much equity risk inside your portfolio. Presumably, the fact that stocks have “done well”
and caused your portfolio to drift up to a 70/30 allocation does not change your fundamental feeling about risk.
So it’s time for a little renourishment - move some things around a little bit. Sell some stocks, put the money back into more conservative investments, and
get back to your 60/40 portfolio that you started with.
Another example - say you’re currently invested in pot stocks, since they seem to be all the rage these days. Maybe you put 1% into pot stocks in case they hit
it big. What’s the end game? If you say “to make a lot of money” then you’re just speculating and good luck to you. If you’re investing, there should be a reason
you’re in pot stocks in the first place, and there should also be a limit at which you’ll sell in order to rebalance your portfolio back to appropriate risk levels.
Even if you don’t invest in individual companies and all your money is in broad-based target date funds inside your 401(k), take some time at the beginning
of every year to review your portfolio and make sure it’s in line with your investment strategy. You might not have to make changes every year - we certainly
don’t do it with the beach here - but from time to time a little renourishment can go a long way.
TYBEE BEACHCOMBER | FEB 2020 5
Rogue Waves By Russell Robertson, CFP
Portfolio Renourishment