Set forth below are some words that I recently posted at the Get Rich Slowly blog. The blog entry advocated rebalancing. I put up a comment pointing out the dangers of rebalancing. J.D. Roth, owner of the site, then put up a response stating: “Hey, Rob. Not picking a fight here, but asking a simple question: What investments do you recommend instead? My stock portfolio is up 65% since I moved it to Fidelity in 2009. I’m about to rebalance to have less in stocks, but I’m not going to move everything out. What would you recommend instead?”
What investments do you recommend instead?
You’re not picking a fight, J.D. You’re asking a question that is on the minds of all of your readers. I am grateful to you for asking it and thereby helping us all engage in a little bit more of an effort to figure this investing stuff out together.
There is no one stock allocation that I can suggest everyone adopt. And there is no one non-stock asset class that I can suggest everyone move to when stocks are not a good choice. There are obviously lots of factors that come into play. You would never tell all of your readers to follow one allocation and it is not fair of you or anyone else to think that I might be able to do something like that either.
What I say is that we all should evidence much more skepticism re claims that rebalancing is a good strategy than we have in the past, given the economic crisis we are living through today (which I believe was brought on primarily by the heavy promotion of Buy-and-Hold investing strategies).
Rebalancing is staying at the same stock allocation at all times. Yet there are some valuation levels when stocks offer great returns at low risk and other valuation levels when stocks offer poor returns at insanely high risk. Why would you want to be at the same stock allocation in both sets of circumstances? Rebalancing simply does not make sense. The historical explanation for why it once was considered a good idea is that there was once research suggesting that the market is efficient — rebalancing would be the ideal asset allocation strategy if the market really were efficient).
If you are saying that 65 percent stocks is the allocation that you think makes sense for you at times of moderate valuations, I would say that a stock allocation of perhaps 30 percent makes sense for you today (and 90 percent will make sense when we go to super-low valuation levels). My choice would be to put the money you moved out of stocks into TIPS or IBonds or CDs. That way you will have it to invest in stocks when the likely long-term return on stocks improves (that is, when valuation levels drop).
Please understand that I am not trying to tell you what to do. It is obviously not my place to do that. I’m just a guy who posts on the internet, like you (the difference is that you have been about 500 times more successful than me and please understand that I believe that you deserve your success).
I believe that you are sincere in your Buy-and-Hold convictions, J.D. I also believe that part of the reason why you hold those convictions is that you rarely hear them challenged. That’s because there is a Social Taboo today against saying the sort of things I say about rebalancing and about Buy-and-Hold in general. My hope is that in time (perhaps soon!) you will use your influence in the Personal FInance Blogosphere to overturn that Social Taboo. I am 100 percent confident that we would all be better off as a result.
I don’t know everything there is to know about stock investing. Neither do you. Neither does anyone else. The usual rule that applies when that is the case is that we all post the best thoughts we can with good intent and we all are grateful that the friends we meet on the various blogs are doing that. We learn together. I want to see that Learning Together process take place in investing discussions too. For that to happen, we need to make those who don’t think rebalancing is a good idea as comfortable expressing their thoughts as those who favor rebalancing are comfortable expressing theirs.
I want to help you and all your readers, J.D. I cannot do that with both hands tied behind my back. I respect your views. But I do happen to think you are wrong about this particular point. I’m happy to answer any questions. But I really think it would be a huge plus if some of the leaders in the Personal Finance Blogosphere could get together and issue a statement saying that they oppose the bans that apply today at all of the large discussion boards and at a number of important blogs. To make real progress on these questions, we have to welcome input from all points of the spectrum of opinion.
My bottom-line response to your question is: I don’t want you listening only to me when forming your opinion re rebalancing. I know that, if signals were sent that we want to hear from people who don’t favor rebalancing, we would be hearing from many more people with that viewpoint. I know this because people who hold these views have told me that they are afraid to post. That’s very, very wrong. We all should want to change that, regardless of what particular investing views we happen to hold.