Portfolio Rebalancing:

Last month, we welcomed a new client to Capital Squared from a well-known investment management firm in Virginia. I will call her Julia in this newsletter. There were multiple reasons why Julia made the decision to transition. One of them was an apparent lack of attention to her investment accounts. As part of the review process, Julia discovered there had been very few trades in her portfolio in 2024. When she looked into this further, she found there was almost no trading activity in her account in 2023 either.

So, when it comes to investment management, how can you tell if your advisor is actually managing your accounts?

In this newsletter, I wanted to share some thoughts that will hopefully help you address these questions. I promise there will be no unnecessary technical details! So keep reading, even if investments and portfolio rebalancing feel a bit like a foreign language to you.

Just to cover the basics, in simple terms, rebalancing means bringing your investment mix back to the percentages agreed upon between you and your financial advisor (e.g., 70% stocks and 30% bonds).

I’ll start with the positives.

Most investment management firms, regardless of their internal procedures, will rebalance your portfolio at least annually.

Depending on market conditions, rebalancing may not result in much trading. So, the fact that there isn’t much trading doesn’t mean the investment strategy isn’t adding value.

The not-so-good part is that many managers make very few adjustments to their internal investment models so that it doesn’t create much work for them.

It may sound overly simplistic, but it’s true.

Here’s an example.

The markets changed dramatically over the past four years since the pandemic, yet many advisors use exactly the same tools and approach to manage their clients’ portfolios.

Need a more recent example?

Interest rates tend to directly impact the performance of most bonds. As interest rates are expected to change, the strategy you use to manage bonds should also change.

I reviewed several portfolios managed by other, usually larger, companies earlier this year. When I compared the bond allocation to what it was 12 or 24 months ago, I found it was almost identical in most cases.

(I promise this was the most technical comment I’ll make!)

So why am I sharing all this with you?

The unfortunate part is that you may be in a situation where your advisor is simply periodically rebalancing your portfolio. They are not truly managing it for you. In other words, they aren’t really adjusting it for changing market conditions.

Why is this important to you?

It’s undeniable that markets have reached rather high levels over the past few years. Sure, it’s entirely possible the market rally will continue.

But what happens if it doesn’t?

Is your portfolio positioned to withstand prolonged market turbulence or even an eventual recession?

Is there an alternative approach?

At Capital Squared, we specialize in crafting “fortress” retirement plans and investment allocations for our clients who are nearing or in retirement.

We carefully structure and manage each portfolio so that there are multiple levels of protection regardless of the market conditions.

The fact that we work with a relatively small group of clients gives us enough time to actually manage their accounts, rather than just rebalancing them every so often.

Is this the right strategy for you?