Keeping Your Balance
The biggest roadblocks to financial independence are behavioral. We know that overspending and debt will lead us to the poorhouse (Dickens anyone?). But if we live below our means and build a well-thought our financial plan, are we home free? Have we overcome the behaviors that block our road to financial freedom? Not necessarily!
Building enough wealth to reach financial independence is for most a decades-long process. Saving and investing are only a start. Once we are on the path, it is critical to STAY on the right path. Easier said than done. Especially difficult since the medial bombards us with conflicting messages of what to do NOW.
Some of those conflicting messages are about bonds. “Interest rates MUST go up so sell bonds now!” the headlines screech. Before we hyperventilate and plow all of our money into stocks or high yield bonds, let’s remember why we hold high-quality bonds in a diversified portfolio. As Vanguard's Fran Kinniry recently stated, “High-quality U.S. bonds still still remain among the best diversifiers of equity risk”. This is the main reason to invest in bonds and stay invested in bonds. To maintain the proper balance between risk and return in your portfolio.
How do we do this? By selling stocks and buying bonds when our stock allocation is too high, and selling bonds and buying stocks when our stock allocation is too low. When does our stock allocation exceed the target? Usually after years like 2013 when the stocks gain 20% or more. When does our stock allocation fall well below our target? Usually after years like 2008 when stocks lose 30% or more. That means selling stocks in early 2014 and buying bonds or selling bonds in early 2009 and buying stocks. Show of hands how many did that on their own? I didn’t think so. This is where a capable financial advisor can add value to your financial life.
Rebalance to stay balanced….it’s just another way to ignore the media and stay on the road to financial freedom.