Ongoing Management

Once you have formulated your investment plan and put it into action, it still requires ongoing maintenance work.  Most importantly, your life circumstances will likely change.  And, in any case, you will need to rebalance your overall portfolio at regular intervals.  Rebalancing means periodically returning the percentage weights of the various asset classes in portfolios to the target mix.

While I advocate a systematic, long-term approach to investing as the best way to maximize the likelihood for success, there is no such thing as “set it, and forget it.”  Life is simply not that tidy.  Your goals will likely change along with your priorities as you move through life.  And events will arise that change your financial circumstances, for the better and the worse.  You will have to adjust your plan accordingly.  So, as you evolve, so too will your plan.

Once thing you will certainly have to manage is portfolio rebalancing—regularly managing your goals-based portfolios to their proper asset allocations.  There are actually several aspects of rebalancing:

  • First, you will revisit your target asset allocations over time. Perhaps your risk tolerance changes; for example, I hope the risk averse might grow more comfortable with how markets behave over time.  This would merit a change in asset allocation.
  • Second, you will need to make gradual changes to track along with the natural approach of your goals.  As you move toward any goal, unless you decide to push the goal date out, your time frame shortens, and you should adjust your portfolio accordingly.
  • Finally, different asset classes will very likely generate different returns in any given period. Asset classes that have enjoyed relatively high returns will increase in value and thus will have a greater weight in your portfolio, with the opposite being true for assets that have not performed as well.  Rebalancing offsets these movements caused by shifting market prices, maintaining the desired risk/reward profile.  Additionally, rebalancing like this creates a rules-based method for exercising a valuation discipline—selling assets that have become more expensive and purchasing those that have become relatively cheap.

You need to weigh these benefits of rebalancing against any associated costs.  These costs can include transactions costs (commissions on buying/selling funds that your broker may charge) and taxes on realizing capital gains.   One of the more valuable services provided by an investment adviser is managing the rebalancing task in a disciplined manner, including making it as tax efficient as possible.  For example, tax-exempt accounts, like Individual Retirement Accounts (IRAs), can be rebalanced without regard for capital gains taxes.  And good advisers will use cash flows (deposits and withdrawals) to buys/sell funds in a manner that moves portfolios toward target allocations.  This includes, if possible, the reinvestment of dividends into funds that have fallen below target weight.  Ultimately, costs will be unique to your circumstances (brokerage, tax situation, etc), and advisers can help manage the rebalancing effort to these.