• Zach

Investing Philosophy: Stock/Bond Allocation and Rebalancing

Updated: Feb 22, 2019



Want to figure out how many stocks and how many bonds to buy? How about when you should buy them? In this post I will detail my own investing philosophy and give my answers to that question. This is not the only answer, and it's OK if you disagree, but I want to show my own thinking. 


I have spent mountains of time since I started investing figuring out what percentage of stocks and bonds I wanted to have, I'm just cool like that.  I've wandered through so many different blogs and books and videos trying to find the right answer, and I want to save you that same time.


There are good arguments for a wide variety of ratios. Andrew Hallam is a big believer in a 60/40 stock to bond ratio. Of course, he's also already retired. One classic rule of thumb is to subtract your age from 100 and that's your optimum percentage of bonds. So I'm 34 so I should have 34% of my portfolio in bonds. The updated version of that, which takes into account longer lifespans, is subtract from 120, so there I would have 16% bonds.  Another Financial Independence classic, "The Simple Path to Wealth" by JL Collins recommends 100% in stocks until you're very close to retirement. 


So many choices! For me, I'm probably 20 years from retirement, so I have a while. I found my answer in "The Simple Path to Wealth" by JL Collins when he referenced a study that showed that mathematically, an 80/20 stock to bond ratio does the best, even if the benefit is fairly minimal (that link is from his blog, but it's the same information) . I figure I might as well do what the math shows is the best, so I decided to go this route. 


This can also be a scary ratio because the higher the percentage of stocks, the more volatility your portfolio experiences. Volatility is how much your portfolio's value goes up and down on a short time frame. The more volatility, the greater the percentage of how much it will swing up and down, and oh boy, can those swings down be scary! They often cause people to sell low and "lock in their losses" which makes them make A LOT LESS MONEY!


Chart from The Only Guide You'll Ever Need for the Right Financial Plan: Managing Your Wealth, Risk, and Investments by Larry E. Swedroe 


This chart shows how much of your money you need to be able to see "disappear" without panicking. If you can't handle seeing your wealth temporarily vaporize without selling and locking in your losses, stay with a high percentage of bonds, as they usually help keep your portfolio stable. 

For me, my plan is to only look at my portfolio once every three months and not pay attention to the shrieking howler monkeys that make up the financial news, so I'm going with a higher allocation of stocks. I think I will be able to avoid panic with this plan and using the strategy of quarterly rebalancing, which is my next point. 


Rebalancing is when you correct your portfolio to your ideal ratio of stocks to bonds. Basically, if your stocks did really well in the previous time period, they will be worth more, so for me, instead of 80/20 it could be 85/15 and I need to either sell 5% of my stocks and buy 5% more of bonds, or if I am just buying, I can buy more bonds than stocks so that it goes back to 80/20. 

The benefit of rebalancing is that it forces you to buy low and sell high. You sell the thing that's doing well, and you buy what is at a discount.  


And again, just like the question of "the right ratio" of stocks to bonds, there are a lot of different philosophies for how often you should rebalancing your portfolio. 


Some people say you should do it once a year on your birthday. Others that you should do it every month along with buying every month as well.  The third, "Goldilocks" style, is every three months, quarterly. I found this analysis by Bret Arends of "Market Watch" very persuasive in terms of what the mathematical answer to this question is. It seems clear to me that quarterly will give me the best returns, so that's what I'm going to go for. 


This also works great for me because I don't like dealing with my bank, so it makes me have to transfer money home (which then goes in my brokerage account) 4 times a year instead of 12, and that makes me very happy! Also, when you buy stocks quarterly you only have 4 purchases a year, and every purchase costs money, so that also reduces my trading bill by 2/3. Definitely a win/win over monthly rebalancing.


So, in summary, for me, the answer to these two questions was to

1. Have an 80/20 stock/bond ratio. 

2. Rebalance quarterly. 


Your answers may vary. You may be in a very different place in your life or have a different risk tolerance. But what you definitely should do is subscribe to this blog for more information and comment below to let me know what you think. Thanks so much for reading and stay happy! 


If you liked this post, come join the discussion over at The Happiest Teacher Facebook Group! I would love to have your voice added to the discussion! Also, if you're into that Twitter life, come follow me!


Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.

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