I find it interesting that through this Coronacrash, a significantly higher percentage of clients are looking to rebalance versus what I experienced in 2008-2009. I believe this is partly due to repetition. A short version of our frequently repeated policy is “always expect volatility from stocks and when (not if) stock markets get ugly, expect us to rebalance.” Some clients are downright enthusiastic about buying now.
A couple of years ago I wondered, "If holding is good and buying is better during a bear market, would buying even more be even better?" My business partner Mike Salmon and I looked at the question and wrote a paper, “Analyzing the Effects of Aggressive Rebalancing During Bear Markets,” which was accepted in mid-2019 and published in the January issue of the Journal of Financial Planning. We wanted to see what would happen if instead of rebalancing back to a 50/50 target, we increased the equity target to 60/40 as soon as a decline in stocks reached the down 20% “bear” threshold.
Historically, it turns out that getting more aggressive usually helps but only a little. In most past bear markets, the portfolio recovered a month or two earlier. However, when we looked at more severe downturns and set the trigger at down 40%, the improvements were substantial.
Keep Calm And Carry On
We don’t advocate “aggressive rebalancing” as we dubbed it to be any advisor’s standing policy. More research needs to be applied to the concept. More importantly, actually making the shift we illustrated when markets decline 40% is something few clients can or would do. In the 2008 period, the shift to a 60/40 target required selling 40% the bond position and increasing equities by 78% of its pre-rebalance value.
Nonetheless, in a time when clients want to “do something,” our study suggests that rebalancing during a bear market is not likely to result in an inferior outcome versus not rebalancing at all. Moreover, it suggests advisors can’t fix a bad situation through portfolio adjustments. Other actions financial planners recommend to clients—such as saving more, spending less, managing taxation or working longer—should be more impactful.
The point of having financial planning policies is to define and encourage needed actions that can be tough to execute. If you didn’t have a rebalancing policy before this, it is not too late to establish one and communicate it to clients. You will surely need it at some point. This bear may not be done and another one will surely come.
Dan Moisand, CFP® has been featured as one of America’s top independent financial advisors by Financial Advisor, Financial Planning, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, FL. You can reach him at [email protected]