Which rebalancing strategy is best or should we even bother rebalancing? Should we just exit stocks completely, especially given how overvalued the U.S. stock market is? And why do companies split their stocks. This week we answer these and other listener questions.
In this episode you’ll learn:
- What are the benefits and challenges of rebalancing.
- What U.S. stock market valuation indicators have been most accurate at predicting future performance.
- Does a simple strategy of moving out of the stock market when it falls 10% work?
- Does sector neutral investing outperform a capitalization weighted strategy?
- Why do companies split their stocks.
Show Notes
Best Practices For Portfolio Rebalancing – Vanguard
Opportunistic Rebalancing: A New Paradigm for Wealth Managers – Gobind Daryanani
The Eight Best Predictors of the Long-Term Market – Mark Hulbert – Wall Street Journal
The Only Reason Jeff Bezos Would Let Amazon Split Its Stock – Motley Fool
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Episode Summary
Listener questions on rebalancing portfolios, market valuations, and stock splits are all discussed on this episode of Money For the Rest of Us. David takes time to respond to new questions from listeners and also shares premium content that’s typically only released to Money For the Rest of Us Plus members.
Question #1 – Is rebalancing your portfolio really necessary?
David explains portfolio rebalancing as “the practice of periodically restoring the allocation among the asset classes back to its target.” Many investors suggest taking portfolio rebalancing actions because they believe it will increase performance or reduce tracking error relative to the target portfolio. Methods for rebalancing including based on a schedule timeframe (i.e. annually or quarterly) or on when a specific threshold is breached, say a given asset class is more than 20% from its target.
However, as individual investors, most people don’t actually need to rebalance their targets on a strict schedule. It works for financial advisors who manage hundreds of accounts, but far too many investors worry too much about rebalancing, when it should be done, and which method to use. David explains that investors should stay flexible when possible and check in on your portfolio for rebalancing efforts when it works best for YOU.
Question #2 – Can you use valuations for timing the market?
When evaluating the article, “Eight Best Predictors of the Long-Term Market,” David found that you simply cannot use strictly valuation figures as a timing vehicle in the market. However, they can be used to set expectations for reasonable reasonable returns. David says, “These valuation measures are good for context, so understanding where we are now. They’re not good for timing the market. We can’t predict when exactly a specific storm will hit, but we can be aware of this season.”
Question #3 – Is it possible to exit stocks as an investment strategy?
A listener submitted a question regarding Chris Cook, CEO of Beacon Capital Management, and his investment strategy. This strategy, called, “New ROI,” focuses on investing a portfolio equally across all 11 investment sectors, with the entire goal being to minimize losses. Using his strategy, this is achieved by exiting the stock market based on 10% market decline and reentering after a 15% recovery.
Unfortunately, when you enter and exit stocks this frequently, it’s much easier to “miss out on the rally” than it is to see significantly increased performance. David encourages his listeners to understand that investing in the stock market, unfortunately, isn’t that black and white. It simply cannot be boiled down into a basic mechanical strategy. Rather, reducing your exposure based on market conditions rather than a mechanical rule can be a much better avenue to pursue.
Question #4 – What factors do companies consider when doing stock splits?
There are many pros and cons a company evaluates when considering stock splits. Essentially, stock splits reduce the price of the stock and increase the total number of shares outstanding. The price of stock A would go down from 50 to 25 and the number of shares would double. This does not change the market value at all, and it technically should not affect the price per stock. But historical records illuminate a different story. By splitting the stock, the price actually does increase.
David believes that one of the biggest factors companies consider when contemplating stock splits is the image and story the company tells about itself. Consider Berkshire Hathaway and their stocks at $312,000 per share. It’s a luxury stock, and the company’s leaders would like to ensure that status does not change. Amazon is also an expensive stock, at $1,660. Companies also consider the impact stock splits may have on any indexes they would like to be a part of. Essentially, stock splits and whether they occur or not all comes down to how a company would like to project itself out to investors.
Episode Chronology
[0:30] Why this episode of Money For the Rest of Us is a bit different than previous ones[2:15] Is rebalancing your portfolio really necessary?
[12:43] Can you use valuations for timing the market?
[23:17] Is it possible to use exiting stocks as a way to increase revenue?
[33:39] The idea behind doing investing on a sector neutral basis rather than a capitalization-weighted basis.
[36:20] What factors do companies consider when doing stock splits?
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Transcript
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