How to Strike a Balance with Portfolio Rebalancing

How to Strike a Balance with Portfolio Rebalancing

SigFig“Not only might overly frequent rebalancing increase investment costs, but it also risks cutting off a cycle before it runs its course.  Whether the cycle is multiple quarters or multiple years, you’ll never catch the upward cycle if you are always shifting away from the downside,” – Michael Brady

How to Strike a Balance with Portfolio Rebalancing

July 20, 2015 – Michael Brady was interviewed for his thoughts on the purpose and techniques for rebalancing by SigFig.

Mid-Year Check-In

While there have been some exciting one day swings in the unmanaged stock market indexes so far this year, it’s actually been relatively calm, without big 5% and 10% weekly and monthly swings that we see periodically in the markets.

As of the end of the 2nd quarter, most major unmanaged indexes were about break even.

In my video, I talk about the impact Greece and China may have on the markets going forward, and how the potential interest rate hike in September may affect things.  I’m not gloom and doom, so if you’re looking for that, than you better  watch something else!

Hi there.  Mike Brady with Generosity Wealth Management, a comprehensive full service wealth management firm headquartered right here in Boulder Colorado.  And I’m actually not in Boulder right now that’s why I’m a little bit more casual than usual.  I usually have a library behind me, a blazer on, but for 4th of July weekend I thought I’d come up to our family cabin in Wyoming and with high speed satellite Internet, cell phones and computers and scanners, my entire office is right here as if I was right there in Boulder.  Technology is wonderful.  I hope you’re enjoying the summer.  I’m enjoying, when I’m not working, the mornings and the evenings, the sunrise and sunsets are absolutely beautiful.  I hope you’re having a wonderful summer as well.

 So this is our second quarter review, sort of a year to date review and a rest of the year preview, kind of a mid year mid report, kind of a halftime check in here.  We’re going to talk about Greece, we’re going to talk about China and interest-rate, but first let’s talk about what’s going on so far right now with the big picture.  Big picture is so far this year the unmanaged indexes are about break even.  They haven’t been really that volatile, although there have been some volatile days.  But in general it’s actually in comparison to historical terms a relatively low volatility.  I’m going to put up on the screen there the last 18 years of the unmanaged stock market index S&P 500.  Why it started in ’97 I have no idea, but the chart starts there.  And you’re going to see some big swings up and down and up and down.  And since March 2009 you’re going to see that we’ve been on a very nice upward mobility on that particular index.

 The stuff that’s happened in the last six months and the last 12 months, and although it’s taking a little bit of a breather, it’s a little bit of a consolidation period.   I mean there’s times where the market goes up, it goes down and times when it goes sideways.  And right now we’ve been going a little bit on the sideways.  I’m going to put another chart up there and you’re going to see this is one of my favorite charts and frankly every video that I seem to do anymore I put this chart up because I like it so much.  But this is since 1980, so that’s a good 35 years of the unmanaged stock market index S&P 500.  The numbers on the top of that X axis are the end of the year returns.  So 27 out of 35 years have actually been positive, some of them are negative, of course, but 27 out of 35 have been positive.  But during the year that’s the number at the bottom that kind of that bar chart underneath the X axis and that’s the entry year decline.  That means that just hypothetically if the market went up ten percent and then it lost four percent down to six percent and then went up and ended the year at eight percent, rebounded back, that would have and enter year decline of four percent because from the top to the bottom throughout that year there was the maximum four percent decline.

 Well, that’s actually what we have so far this year.  The S&P 500 is about to break even as of June 30th and it’s really kind of have been going up a couple percent, lose a couple percent, up a couple percent, lose a couple percent.  And so that entry year decline is relatively minor and mild when you look at it in comparison to previous years of double digit highs to lows.  So that’s been kind of the first six months of this year.  One of the more difficult things to do as an investor is sometimes to do nothing.  And so my video here today will sound an awful lot like some of my videos in the past over the last three/six/12 months because we’ve actually been on a little bit of a holding period now and it’s my analysis that that holding period is not leading till a big crevice that we’re going to fall into and Armageddon before us, but one that will actually creep higher that it is lower.  Our earnings per-share for the market in general are coming in positive and I continue to think this is a good market to invest in, particularly in a well diversified portfolio.

 I’m going to throw a chart up there and what you’re going to see here is this is another one of my charts that I used time and time again, but it’s rolling returns.  That first grouping is one year, the second grouping is five, the third grouping is ten and the last one is 20.  That’s a rolling return going all the way back to 1950.  And that third bar in each one of those groupings is a mixture of 50 percent unmanaged stock market index with 50 percent of an unmanaged bond index kind of shoved together.  And what you can see is that time is our friend.  I mean historically going back 65 years, if you had those two indexes mixed together held like that there’s actually never been a five-year timeframe when you haven’t at least made a little bit on average each year.  Some years it might be negative, negative, negative and then you made up for in the fourth year and the fifth year, et cetera, but when you average it out if you hold it for that timeframe there’s actually never been a timeframe, a rolling five-year holding period where you’ve lost money, and the same thing with ten year and 20 year.  So we’ve got to be in this for the long-term I think as investors and so volatility in the market is a part of the game, even though we hated every time that it happens.  And I think that this is one of those times when the headline is a little bit bigger than what we’re saying right now.

 One thing that you’re going to hear an awful lot about in the next three months is interest rates.  In September the Federal Reserve is going to get together and it is highly expected that they will start to increase the interest rate.  And you’re going to hear all kinds of Armageddon stories about it.  And all I can say is that we’ve been anticipating this for a very long time and I believe that it’s priced into the market.  When we look at the last three interest rate increases, which was ’94 and ’95, ’99 and 2000 and then 2004 – 2006, initially there might have been a decline, I put that graph up on the screen, there might have been a decline but while the interest rates were increasing the unmanaged stock market index has continued to rise.  And so it wasn’t this huge horrible thing that you might have been led to believe in the last two/three years while we’re looking at historical.  Now of course, future this time it could be different.  Maybe the interest rates increase and the market goes on the downside.  I don’t think so.  Possible.  But the last three rate increases that hasn’t happened, I mean the market has continued to increase over a two-year timeframe even while the interest rates were increasing.  So there’s not a perfect correlation that when interest rates increase then the stock market decreases.  That’s just not true, even though you might have been led to believe that by some kind of watching something on TV.

 Something that’s really big in the news right now is Greece.  If I had to explain Greece I feel for all of the Greek people.  They’re in a world of hurt and I’m not exactly sure where this is going, but it’s relatively small.  They have an economy about the size of Detroit.  They have an area, physically geographically the size of Louisiana.  They’re really, really small but they are part of the European Monetary Union.  And so therefore the question is how is that exit, you know, what’s the moral hazard if they get bailed out?  Now I’m recording this on a Tuesday, they’ve already had their vote on Sunday and they’ve rejected by a pretty substantial amount, 61 percent, of negotiating and taking the first deal, well not really the first but the most recent deal that the European Union was giving them.  So I feel for the Greek people.  I have to tell you that it’s a little bit like having that family member who always has a big story about why they need money but no matter what they do, whether it’s a sibling or a child or a cousin, but they always spend more than what they bring in for whatever reason and their habits don’t change, their behavior doesn’t change so after a certain point you stop loaning them money.  You stop giving them money.  Everyone everybody in the family knows don’t give uncle Joe this money or don’t give Susie that.  And so it’s a little bit like kind of that ugly sibling in the European Union right now, which is Grace.  And there’s a few others that are looking to see what happens, Spain and Portugal, et cetera.

 And I don’t want to minimize this in anyway because it could be a bigger deal than it is, although I don’t believe it is at this point, but it could.  But when we look at history sometimes there are small events that turn out to be big events.  I mean when Ferdinand was assassinated in 1914 it led to World War I.  Well it wasn’t that small event of the assassination, it was all the alliances.  There was a bigger picture than just that one small event.  And so this could turn out to be the same thing, although I don’t believe that’s going to be the case at this point right now.

 I think a bigger deal is China.  I mean you’ve been hearing me for years now talk about China and how I don’t necessarily trust all of their numbers.  Well, their stock market, which has just been on an absolute tear this year, just lost 30 percent of its value in the last three weeks.  And so I think that those who were invested, that bubble there are also realizing that what is reported is not always the full information and so therefore it might have been priced in inappropriately before and now it’s being corrected.  And so if that’s showing a slow down in the Chinese economy, that’s a huge economy, that’s something that could affect all of us.  So I think that that’s something that we ought to watch as closely, if not more closely than Greece, even though Greece is a spectacular problem at this point right now.

 That’s what I’ve got.  I’m still optimistic going forward for the rest of the year and so I’m not making any major changes.  We’re kind of in this holding period right now.  There’s nothing that I’m seeing that leads me to change my beliefs from the last quarter or frankly the last year/year and a half that having a well balanced portfolio makes sense and that we’re not going to have, I don’t believe that we’re going to have this huge decline.  And so I think we ought to just stay with where we are right now without any major panic.  So anyway, like Brady Generosity Well Management, 303–747–6455.  You have a great day.  Give me a call.  Give me an email.  I’m always here.  Thanks.  Bye bye.

Mike Brady in the News

Mike Brady in the News

I’ve had a great time this year being interviewed by many journalists, allowing me to share my thoughts with others.Forbes-Magazine-Logo-Fontbetter

I was going to post or email each time I was quoted, but there have been so many (Wall Street Journal, Forbes, DailyFinance, US News and World Report), that I was afraid you’d think I was some media hound and it’d get boring.

So, I’ve added a new page to my webpage that will keep a running tally of all my mentions in the general press. You’ll notice the advice I give is far ranging, which is what you’ve come to expect from me.

Here’s my new page on the webpage.

Mike Brady — In the News