Investing Strategy

Investing Strategy: Set it and Forget It (Except Once Annually for Rebalancing)

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Last updated on December 4, 2018 Comments: 20

It’s very tempting to quickly peek at your investments to see if they’ve gone up or down in the past twenty-four hours. The same technology that makes our lives so much easier, computer software, can drive us insane. It takes almost no effort to log into my company’s 401(k) website. When I’m at home, Quicken is only one Quick Launch icon away. At any given time, morning or night, it can take me less than 30 seconds to determine whether my tune for the day is The Gold Diggers’ Song (We’re In the Money) or Stormy Weather.

This is not necessarily a good thing. While I can usually control myself, I’ve occasionally pulled the trigger and rebalanced my 401(k) asset allocation when I shouldn’t have. These days I pay less attention to detail but I haven’t solidified my asset allocation strategy.

Susan Byrne recently shared with Money Magazine the best investment advice she ever received. Susan, the founder, chairman and chief investment officer of Westwood Management, learned while she was managing other people’s money but doing a poor job with her own assets, to keep her hands off her 401(k) except for once a year.

It’s often best to keep your eyes and hands off. Stick to your asset allocation strategy and rebalance the portfolio annually, automatically if possible.

Perhaps this is true for more than just investments, but I’m often tempted to touch things I can see. I’ve stopped looking at my investments daily, but the next step is to determine an asset allocation and stick with it. Are you tempted to change your strategy, particularly when you see your balance declining from day to day?

The smartest advice I ever got, Money Magazine

Article comments

Anonymous says:

Probably the worst advice I have seen from you Flexo. You are digging a grave for your readers and frankly I am not sure why with all of the clear notice and information in front of you that you would just stand by while you are being ripped off.

Did you not notice that something is wrong out there? Did you not see that the lies and thievery that is taking place is causing an erosion to capital?

Set it and forget it is for Turkeys, not money. Bury your head and bury your retirement. Hedging, sector rotation and some timing, while curse words for the industry, are so because they want you to keep out of your investments. If they told you otherwise, how would they keep your money? Come on, you are smarter than that….

Don’t just sit by and believe that just because it was one way in the past that it will be the same in the future. This is a completely different situation, just look around…


Anonymous says:

When you have volatile markets, your asset allocation can get out of line quickly. If you rebalance within your regular rebalancing periods due to volatile markets, you get to allocate more assets to the class that has underperformed on a relative basis. That way you can take advantage of the volatility. This strategy also upholds the idea of rebalancing which is to keep a consistent asset allocation over time, even if that allocation also gets tweaked a little over time. But for the most part you want to keep it stable.

I agree with you. It would be an interesting study to see what the performance difference is between potentially more frequent rebalancing due to market volatility and regular rebalancing based only on calendar dates. I wonder if this was already done though.

I like your comparison with the oil change. I think there are a bunch of things that we are lead to believe and that we actually believe then. It’s called “common wisdom” which sounds a contradiction to me.

Anonymous says:

Vilkri, Interesting theory that you should only rebalance more often when there are major market upheavals. Why do you say that? As an extension to that, if there is a volatile market like we have today, then that opens up the possibility that rebalancing should be done a little more often as well.

Have there been any Monte Carlo simulations showing the difference in returns from rebalancing once a year versus more often? Those would be great to see. I’m sure there could be market condition cases where rebalancing once a year works better than many times a year, but intuitively, I’m thinking that rebalancing more often returns more. This would be a great subject of study for a thesis by some grad student.

Sometimes I think the reason we’re told to “set it and forget it” is because that’s the message the financial companies want us to believe so that we don’t cost them extra money with more transactions. It reminds me of the 3 month / 3,000 mile oil change.

Anonymous says:

You are right. I also agree with most financial experts who suggest that you rebalance only once a year. But I would like to add that in case of major market upheavals rebalancing more than once a year is ok especially if it is done consistently with the same idea in mind.

Anonymous says:

I re-balance yearly but do not change asset allocation unless there is a serious inflation threat. In that case, I up my allocation in inflation protected bonds/ bond funds. Thus, I did this earlier this year when the Fed started dropping rates. It was the right move.

Anonymous says:

There’s really nothing wrong with re-balancing more frequently as long as you’re consistent. I’ve toyed around with re-balancing after our holdings move a certain percentage away from our targets, which could be more or less frequently than once a year.

Anonymous says:

Clearly you listen to Marketplace on NPR.

I’m a lazy rebalancer. When I started with my new company I was slightly overwhelmed by their offerings (over 50 funds) so I freaked out and told myself I’d research them more later, which I did.

At the same time, I altered some other investments from an old 401k plan I rolled over. And since I change jobs a lot, I probably have traded too much, but I rarely make major rebalance moves. Usually I just change the contributions that come in till it gets where I want it to be.

It’s not good to stare at balances and panic. You always have to look at how far you’ve come on an investment and where you think it’s going to go. But I do agree, it’s not good to check all the time and execute lots of trades.

Anonymous says:

I don’t agree with the set it and forget it strategy for 401K’s. I’ll reiterate and add to what I’ve mentioned before. If rebalancing once a year is good, why isn’t rebalancing 4 times a year better? Why not 16? I do mini rebalancing about 15 to 20 times a year and it seems to work well. Over the last three and a half years, I’ve averaged about 6% better than the average of the DOW, S&P, and NASDAQ. Also, I have built up to 23.6% of my 401K in bonds, so my portfolio has some stability to it.

My technique is to look at funds and trends individually. I rebalance from one that’s gone up a lot to one that’s gone significantly lower or to bonds if I’m below where I want to be with the percentage of my portfolio that’s in bonds. Then my bonds are available to buy with when a particular stock mutual fund goes lower. I rarely buy or sell more than $1,500 of any one fund at a time and I have enough different mutual funds, (21 over 3 different IRA/40K plans from different employers), to prevent me from getting dinged with penalties for trading too often. There’s usually one available that hasn’t been traded in a while and that has swung to an extreme. If there isn’t, then I just wait.

I do stick to a strategy, but my plan involves active trading and linearly ramping up the percentage of my 401K in bonds as I get older.

Anonymous says:

I wrote about this same subject a couple of months ago. I agree with you. I try to only look at my investments about once a year. Sometimes not for a couple of years. I look to see if I could do better with other options and make any necessary changes then forget about it for another year or two.

Link to my article:

Anonymous says:

I haven’t changed anything due to the market conditions, but I certainly rebalance more often than annually! One reason is the 401k I’m in right now only deposits my contributions to a cash account, then I have to tell them where to apply it. I do that quarterly, and achieve a balancing right there since I can under-fund and over-fund to achieve the desired balance (which for me is ~80% stocks (25% of that int’l index fund, 75% domestic index fund) and 20% bond. While I’m at that, I rebalance my older/other accounts at the same time.