Rebalancing For the Future

March 26, 2020

Tax Loss Harvesting

As both the news and market continue to be volatile, trading opportunities can present themselves.  One area is tax-loss harvesting.  This creates a tax asset that is there going forward by selling out of an investment at a taxable loss while reinvesting the proceeds at the same time to capture future market performance.  This helps create something good in a down market.  Beyond that, we also thought it helpful to revisit another type of trade, rebalancing.

Rebalancing

In its simplest form, rebalancing moves money from bonds to stocks.  This is something that feels very hard at the time because dollars move from something more secure (bonds) and goes into something that feels like a lot of risk (stocks).  However, at some unknown point the market will rebound (maybe it already did!), and with this conviction, the prices the market is giving on stocks now will be attractive over time.  Rebalancing can set you up to recover even faster.  Even if this rebalance doesn’t catch the bottom, the 2008 decline alone, which was larger than we’ve seen this year, shows this type of trade can still work even if stocks fall more from here.

The above models three versions of a 60/40 stock/bond portfolio starting 10/1/2007 before the Great Financial Crisis:

  • No Rebalance – start at 60/40 and just hold on the whole time without trading.
  • Rebalance at the bottom – this is if you got lucky and traded back to 60/40 on 3/1/2009 right before the market bounced back.
  • Rebalance Too Soon – this is if you traded back to 60/40 three months too soon.

In both rebalancing scenarios, you wind up ahead.  That’s even if you go too soon.  Looking at what that actually meant, this too soon of a rebalance to buy stock meant you took on a -8.4% loss in January and -10.6% loss on top of that in February before things started to turn.  That hurts.  However, the math plays out to still be beneficial.

The road to recovery is ahead for anyone.  It’s ahead for those that choose to hold onto the stocks they already own.  And that recovery may be even closer with those that rebalance.

 

Notes:

1- Represents 60% invested in the S&P 500 Index and 40% invested in Barclays Capital US Aggregate Index (60/40).  No rebalance has no trading.  Rebalance at bottom is changing proportions back to 60/40 as of 3/1/2009 and Rebalance Too Soon is changing proportions back to 60/40 on 12/1/2008.

The S&P 500 Index includes a representative sample of the largest 500 companies in the U.S.

The Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

Disclosures

Past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk.  Future performance of any investment or wealth management strategy, including those recommended by Balasa Dinverno Foltz LLC (BDF), may not be profitable, suitable for you, prove successful or equal historical indices.  Historical indices do not reflect the deduction of transaction, custodial or investment management fees, which would diminish results.  Any historical index performance figures are for comparison purposes only and client account holdings will not directly correspond to any such data.  BDF clients must, in writing, advise BDF of personal, financial or investment objective changes and any restrictions desired on BDF’s services so that BDF may re-evaluate its previous recommendations and adjust its investment advisory services.  BDF’s current written disclosure statement discussing advisory services and fees is available for review at www.BDFLLC.com or upon request.

Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from BDF.