Financial Planning Fridays #50: Buy More of Your Worst Investments

At Presilium we love to rebalance. Most people think of rebalancing, as buying or selling stock as the market moves up or down.

However, rebalancing comes in many different forms. This can mean anything from moving money from stocks to bonds, or bonds to stocks, but can also mean moving funds from one type of the stock to another.

A great question we often receive is, why do we diversify the portfolio into so many different kinds of investments? For example, instead of owning two ETFs that include parts of the S&P 500, why not just buy one S&P 500 index ETF?

By breaking these benchmarks down an additional layer, we are afforded many more great opportunities to rebalance throughout the year as one area outperforms and another lags behind for any number of reasons.

Let’s look at the S&P 500, for example, it is made up of Growth stocks and Value stocks. Though historically their performance is very similar, their month to month, and year to year performance can vary greatly. Last year was an excellent example of this.

The Vanguard large cap growth index was down 33% while the Vanguard large cap value index was only down 2%.

Consequently, if you had a $1 Million investment in each of them at the start of 2022 by the end of the year, they would have looked like this:

Your investment in Vanguard Growth would be worth more than $300,000 less than your investment in Vanguard Value! AND your investment allocation that started at 50% in each was now heavily weighted towards Vanguard Value instead of equally weighted.

Now, here is the tough part; Rebalancing these investments meant taking funds away from your Vanguard Value investment that was doing relatively well and adding to the lagging Vanguard growth investment to bring them back to 50/50.

This is one of the reasons that so few investors rebalance, it can be emotionally difficult to sell a winning investment only to then add the funds to a poor performing investment.

But let me show you the huge potential benefit in doing this.

Your $2 million if you had just held both investments exactly as they were and not rebalanced over the past 19 months, would now be worth about $1,959,300. If you had rebalanced the investments at the end of 2022—and made the tough decision to essentially sell part of the winner to buy the underperforming investment—would now be worth $2,008,339. That’s over a $49,000 difference!

This is something that we also do between U.S. and International companies, large companies vs small and medium-size companies, and of course the big one- stocks vs. bonds.

Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.