Thursday, April 9, 2020

Rebalancing Does Its Job

The COVID-19 stock market crash has certainly thrown off the balance of my portfolio.  Like most investors, my fixed-income savings haven’t done much, but my stocks have been jumping around crazily.  So far, I’ve stuck to my plan to rebalance my portfolio to fixed percentages of stocks and fixed income whenever they get out of range.  This has worked out surprisingly well, but I’m not feeling particularly good about it.

When I was working, I had an all-stock portfolio invested in a few broadly-diversified Vanguard index funds.  I didn’t have to rebalance my portfolio much, because my stock ETFs tended not to get wildly different returns.  Now that I’m retired, I have an allocation to fixed income (cash, GICs, and short-term government bonds). My fixed income definitely gets different returns from stocks, particularly during the recent stock crash.  I’ve had to rebalance a few times.

The thing about rebalancing is that it has you buying whatever has gone down and selling whatever has gone up, so you rarely feel good about it while you’re doing it.  I took a look at my recent rebalancing trades and discovered that they’ve produced a profit large enough to buy a modest car. 

To be clear, this didn’t happen because I made some brilliant market moves, and it didn’t happen because there is anything special about my investment plan.  My simple strategy is broadly similar to what dozens of investment books recommend.

These profits should be cause for celebrating, but where did this extra money come from?  When we make money on short-term stock trades, we haven’t contributed anything to society; the money had to come from some other traders who lost money. 

So, I’ve made some money from people who panicked, or who had to sell after a job loss. No doubt some were “readjusting their asset allocation” or “reducing their portfolio volatility.” This sounds smart, but it still amounts to selling low. The other side of my profits came from selling to those buying back in after stocks rose again.  I’m happy to have the money, but I’m not celebrating.


  1. When you stick to a consistent plan over time and show that it works, others may learn from that example and do it themselves so they can avoid the losses. Maybe that is a cause for celebration?

    1. Richard: I'd like to think that others will control their emotions better.

  2. The following exchange is reproduced to remove broken links.

    ----- BHCh April 9, 2020 at 12:45 PM

    Early days, so probably too early to draw lessons from this crisis.

    ----- Michael James April 9, 2020 at 12:56 PM

    BHCh: Since I've traded in both directions now, the rebalancing profits are locked in (not just paper gains). So, regardless of what happens with the rest of my portfolio going forward, the rebalancing part has been profitable.

    ----- BHCh April 9, 2020 at 2:47 PM

    What is your threshold for rebalancing? 5% deviation?

    ----- Michael James April 9, 2020 at 3:31 PM

    BHCh: My fixed income target is close to 20%, and the rebalancing range is a little tighter than 18% to 22%. So, rebalancing has been triggered a few times.