Rebalancing is overdue for an update

The time has come for planners to claim language that is better suited to personal financial planning than the jargon we scrounged from accounting and finance in our infancy. In this article, we call for a revision the overused and imprecise verbs, “Rebalance” and “Rebalancing” and employ instead, “Age” and “Aging” as language refinements that are better suited to personal financial planning.  Finance people can bang the term, rebalance around as much as they please but henceforth, we suggest that planners use the words rebalance and rebalancing with precision. That is, as the process that periodically buys and sells existing portfolio allocations in a manner that resets each allocation’s proportional value back to where it had originally been established.

It is institutions, with their perpetual longevity, that need to continuously return errant portfolios thought to have been as perfect as Mary Poppins to their original proportions. Personal financial planners, on the other hand, need to manage portfolios in more human terms. That is, they need to think about time.

        Please consider this question. How wise is it to force a portfolio to remain substantially the same despite changes rendered by the passage of time or events occurring in the portfolio owner’s life? We submit that it is generally ill-advised because constancy itself ushers in some human-based risks. Inattention and procrastination are human failings that enable people to ignore accounts becoming too aggressive for the remnant time. Unattended, a planning land-mine forms, hidden and explosive.

        We’re not assigning fault to the woolgathers. Readers know that inattention to changing events and portfolio growth occurs despite regulations aimed at preventing lackluster diligence. The problem with the regulatory solution is that it uses simplistic language and a downright silly notion of what a time horizon is. Together they fall short of the real goal which is quality planning. Here’s a quick example. Your client, D. is retiring in one year at age 65. The question is this: is D’s. time horizon one year or thirty? Experienced planners know that it’s neither. It’s one year for the first month’s distribution, then monthly for distributions forever. It is simultaneously 30 minus 1 year for the next 30 years except for D’s legacy assets which may retain a static “horizon”.

        Portfolio gazing through the lens of the portfolio owner’s risk tolerance is a trap. It isn’t the investor’s risk tolerance that matters. Their attitude toward risk becomes irrelevant with the passage of time and requires the guidance of a good planner who knows that portfolios have to be correlated to due dates, not to their owner’s attitude. By Aging, which is to say, planning in harmony with withdrawal dates, the outcome will never be a matter of luck, it will be a function of skill.

Rebalancing: An Inadequate Palliative:

        A second and wrong-headed use of the word Rebalance occurs when it’s used to suggest a change in allocations during a period of market volatility. Portfolio-gazers frequently offer this rubbish as advice. It’s nonsense because the language is imprecise. Wouldn’t you enjoy knowing exactly how to enact such advice in the face of a falling market when your retired clients who, no longer have salaries, and who are dependent on their assets for future income watch their accounts fall? Does rebalance mean that that they should buy stocks in the teeth of a falling market? Or does it mean that they should sell because the market is falling?

        The traditional answer is to buy and replenish the value of fallen stocks. This is fine and dandy but ask yourself, who among your retired clients is going to do that? We’re confident that your experience has shown that no one but the most seasoned few, or those who have vast reserves beyond what is needed for their income, will do much rebalancing by buying into the teeth of a Bear onslaught. Even if you offered such nonsense as advice, the further question is when should your clients rebalance? Perhaps at a later time; a time when they’re no longer frightened. When will that be? Will their slowly ebbing terror coincide with opportunity, or will their emotional recovery be too late to buy the stocks that will reflate their account? Or worse, too early!

        Armchair advisors do not know when your client’s fears will abate. They do not know if a withdrawal is needed to pay monthly bills or when a client’s daughter starts college and her tuition bill is due.

        Rebalance used in this way is not advice, it’s nonsense. Imagine your piloting storm-tossed ship that is being battered by colossal waves. You’re busy thinking that your precious fuel is being burned too fast in the storm when a monstrous wave crashes onto your deck and drives you into its trough with a sickening thud. Panic is only a breath away then relief comes as a shout from your apprentice, “Break out the Bounty Towels, there’s been a spill!”… Shouting “Rebalance” sounds to us like the equivalent of deploying the Bounty Essentials 2-Ply for a twenty-five thousand pound spill that’s filling the engine compartment.

Here, instead, is what we professional planners might suggest:

  • Sell margin purchased stocks
  • Trim discretionary spending and decrease monthly withdrawals.
  • Postpone unnecessary, capital intense purchases like cars, furnishings, lawn equipment, window upgrades and new garage doors.
  • Avoid making expensive repairs unless they are required for safety or would create a problem if not attended to promptly.
  • Once you’ve taken any required minimum distributions, deploy the Bear market reserve account that you had previously established by shifting monthly withdrawals from taxable accounts to this after-tax account. Doing this will save taxes and preserve cash.

Note: A reserve large enough to last for 12-18 months of net budget requirements minus pensions, interest and social security will act like an emergency pump that keeps clients buoyant and free from panic while the threat is being resolved.

An Easy Correction

         It’s easy to correct these two language flaws that were put upon nascent planners by experts in portfolio modeling but who were, non-the-less, armchair planners. This simple language update will convert a portfolio-centric design to a human-centered one. We know that attentive planners already make such corrections but what we suggest is a universal acceptance of the inclusion of time’s effect on portfolios through the addition of Aging language into the planning lexicon. The math needed to periodically reset portfolios is easy enough but let’s save that for another time. It doesn’t matter who applies the algorithm that sets the rate of change, it can be the portfolio manufacturer or the planner. In any case, once the demand for an array of algorithms is perceived, the market will fill the need. We also acknowledge that glidepath funds presently exist but the point here is not to dust off some set and forget fund. It is to add language that planners learn and apply that acknowledges changes wrought by the passage of time. Our intent is simple and primary. We intend to imbed a nearly universal need for personal financial planners to expect portfolios to evolve and by doing so, remain congruent with life’s exigencies, not their owner’s risk tolerance. The language and the process is, in a word called “Aging”.

A Simple Metaphor:

        Aging attenuates risk in the same way a captain of a great vessel tempers a ship’s speed at the conclusion of an ocean voyage. Speed is reduced at the coast in order to navigate coastal prominences, reduced a second time at the entrance of a busy harbor, again as it approached the pier and a final time to dock. The immense weight of a ship colliding at too high a rate of speed with the dock’s infrastructure would risk the loss of the pier and both cargo and crew. Portfolios traveling with too much risk in a curtailed time environment entertain the same risk and should similarly, “reduce speed” at critical times. 

A Final Thought

Ultimately, Aging highlights the benefit of employing a good planner. Great planners recognize that portfolio-centric portfolio and fund managers concern themselves with many risks but are generally unaware of time’s influence on people using their portfolios. Nor are they professionally aware of the effort and sacrifice required from people to catch up on their tuition and retirement funding from an ever-increasing time deficit. It’s the role of the personal financial planner to manage time on behalf of their clients. We hold that a simple language update from Rebalancing to Aging will support that effort and further distinguish the planning profession. Planners who step into the vacuum left by portfolio and fund managers and take control of their profession’s language will be ever-more valuable.

        As for people managing their own money, the problem is a toxic combination of procrastination and ignorance. How are they supposed to know that a static portfolio gathers risk unless we teach them? In doing so we further distinguish our profession.

        We suggest one additional language upgrade as part of this new convention to help parties to keep focused. Since goals are always measured in dollars then portfolio gains and losses should be similarly measured. Measuring losses in percentages is an incongruency easily avoided. In human terms, the ever-growing asset reaches its size apex at the moment it resolves itself into a tuition payment or other bill and measuring loss as a percentage of assets fails to be a usable measurement as the portfolio gets bigger even as the percentage of loss is constant. A percentage loss is same whether a portfolio is $1,000 or $500,000 but the dollar loss or gain is more comprehensible when compared to the goal.

And another thing:

The word goal is stupid. Due dates are a lot more like mandates than they are like goals.

Mike Helgesen, Director of Development
Real Intelligence LLC


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