In a post entitled, “How Often Should I Rebalance My 401k?” I share with readers my year to date performance, investments, 401k balance, rebalancing thought process and the minimum number of times I recommend everybody rebalance a year (twice).
Instead of dissenters talking about the thought process behind how often to rebalance and ways to maximize wealth, they focused on the definition of rebalancing! Granted I take a liberal view on the term rebalancing, but there is no rule on how an individual’s portfolio asset allocation should be and how they should rebalance. You can have three stock funds and one bond fund each with a 25% weighting that gets adjusted once a year. Or you can have 10 funds where you meticulously rebalance every quarter because you’re a scaredy cat.
My asset allocation tends to be 80% stocks / 20% bonds or 20% stocks / 80% bonds. In other words, I take more aggressive bets when I believe in something, and want to have 20% dry powder to continue pressing when I’ve entered too soon. I can never pick the bottom, but I have conviction in what I do. Of course I could be wrong about taking profits after QE3 +16% YTD this September, but if I am wrong at least I’ve provided you with some background on my thought process.
So why is it that I cannot rebalance back to 20% stocks / 80% bonds from where I was in March after taking profits during the Spring runup? Let’s talk about why people don’t focus on the main points, aren’t willing to provide an opinion of where the market is going, and don’t want to share their own YTD performance but freely criticize others. I’ll also share a funny story and some solutions if you want to learn more.
UNDERSTANDING WHY PEOPLE DON’T FOCUS ON THE MAIN POINTS
1) Lack of knowledge. People focus on what they understand, and ignore what they don’t. Instead of discussing the 10-year bond yield and comparing expected returns to one’s own YTD returns to come to a rebalancing decision, commenters focus on the definition of the word “rebalancing.” It’s much easier to try and discredit my view of what rebalancing is rather than talk finance, even though there is no rule on what asset allocation and rebalancing should be! My 401K rebalancing post was written to give readers a mental framework on what to think about before rebalancing. The goal is to remind everyone that not everything goes up in a straight line. Just 4-5 months ago, all everybody talked about was how Europe would bring us all down.
2) Fear of investing. When you fear something, you attack something. Why do you think some people who were deemed witches burned at the stake? It’s human nature to attack opinions of others if you fear you are being left behind. If you’re not up about at least 12% in 2012, you are underperforming. If you’ve got lots of cash sitting in a money market account yielding 0.2%, you are definitely falling behind. It takes guts to invest and put yourself out there. It’s scary, but if you never take risks, you will never make any returns.
3) Everybody is on track. Hopefully, this is what’s really going on from commenters who criticize and offer no details about their own investment performance, history, and balances. It would be absolutely strange to criticize if you are 35 years old with only $200,000 in your 401K that’s up only 8%. It would be equally peculiar to criticize if you are 50 years old, not working, have no alternative income streams, and provide no history. Instead of attacking, you should be keeping an open mind, sharing ideas, asking questions and perhaps learn something a long the way. Hence, I’m really bullish about the financial well being of my criticizers because I don’t know anybody who would be as stupid to criticize without doing at least as well.
WHAT TO DO IF YOU’RE INTIMIDATED BY INVESTING
I understand that investing can be daunting. I spent 13 years in finance, got a graduate degree in finance and real estate, write a personal finance blog, am Series 7/63 registered, and have been investing since 1996 and I still lose money or underperform on occassion. Yet, I will continue to try my best and learn from my mistakes.
After I published my 401K rebalancing post I got an e-mail response from a subscriber saying, “This is so over my head, but I feel like we should sit down and try to do this together. So, when?”
Well, well. Your place or mine? I thought to myself. I was pretty impressed by her courage to ask me out at 10pm PST. But, in all good form I responded back if she would like to do a financial consulting session, I’ve got some time end of the week.
While I was responding to her, she e-mailed again, “Oh, sorry. I meant to forward this to my husband. So sorry, Sam!”
I couldn’t help but chuckle and smile. This is what I’m talking about! Sitting down with your loved one and having an open conversation about investing and your finances! You can’t just ignore things because hope is not an investment strategy!
* Sit down with your loved ones and have a conversation. Whether your loved one is your spouse, brother, sister, cousin, friend, choose someone who cares for your well being and have a talk. Step 1 from my 401K Rebalancing Though Process section is: Ask yourself if you are bullish or bearish about the future. Then explain to someone why you think the way you do. If you can explain to someone your stance in a coherent manner, you might be onto something. When you talk things out with someone you feel safe with, good things happen. You will surprise yourself with how much you know!
* Enrich yourself with knowledge. Start reading the Wall St. Journal, Financial Times, and the Money section of the USA Today to get acquainted with terms. Watch a little bit of CNBC propaganda and frequently visit your favorite finance blogs. You need to know what is going on in the world from a political and macroeconomic stand point in order to come up with an investment thesis. As I wrote in I’ve Seen The Future And It Looks So Bright, part of creating wealth is anticipating the future and betting on the future, whether you agree with the future or not!
* Invest in target date funds. These funds are professionally managed and take into consideration your target date of retirement to come up with their idea of a right balance of stocks, bonds, and other investments. Of course, you should read the prospectus and understand if their approach makes sense to you before investing. Essentially, target date funds are a dummies guide to investing, which is fine! The lowest cost way to invest is through Exchange Traded Funds. There is an ETF for practically everything. But, the types of ETFs you invest in are entirely up to you. The same goes with index funds. However, you’ve got to make your own asset allocation decisions as well.
* Consider entrusting your finances with a professional. There are some people who spend their lives understanding finance and investing in ways which will help you make money. You’re not going to change the motor in your car yourself are you? If your expertise is not in finance, then its worth entrusting your finances with an expert. You’ve got CFPs, CPAs, bloggers who’ve worked in finance, and elders who’ve gone through the ups and downs to give you advice. Be open to receiving professional advice or advice from more experienced individuals, but never stop thinking for yourself. I’ve launched my career and financial consulting business if you are interested in getting help directly from me.
* Open up a CD and give yourself some time until you know more. Savings/money market accounts are only yielding about 0.1% on average. Online, you literally earn 99X more on your money as you build up your confidence to invest in riskier assets. Ally Bank also has a 5-year CD at 1.59% and a “raise your rates” CD option as well. They are currently the highest rated online bank today. CDs are FDIC insured up to $250,000 per individual.
THERE IS MORE MONEY THAN YOU THINK
Everything is rational. We do things that enrich and make us happy and we stop doing things that impoverish and make us sad. Everybody I know in the offline world maxes out their 401K and is pretty much in the 401K by age guidelines I have. Then again, everybody I know understands the importance of saving for the future.
If you are scared of investing, don’t be! Come with an open mind and be ready to ask questions and share your ideas on Financial Samurai. I encourage every one of you who is doing well to continue challenging my ideas and theories because that is how we all learn. And for those of you who would rather attack, I’m all for it. But please, at least tell us a little about yourself, your experience, your assets, and your performance so we have a better idea!
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About the Author: Sam began investing his own money ever since he opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $150,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
Updated for 2016 and beyond.