The advice says keep 25%, but it also says to rebalance every year. In a year when stocks are down, cash becomes a larger fraction of your portfolio and you would use it to buy stocks precisely when they are at their lows! On the flip side, when stocks are great, then cash becomes a smaller part of the portfolio and rebalancing implies selling stock when it is high.
I do agree overall that these transitions happen infrequently enough that the opportunity cost of not being in the market is likely to outweigh the potential upside of being ready to buy at a dip
The issue with rebalancing is that it often has tax implications if you aren't careful. You have to weigh the benefits of rebalancing with the tax loss. It works in tax deferred accounts but, at least in the US, a significant percentage of people do not have material access to such accounts.
This is why the first order move when "rebalancing" is to just adjust your allocations of new investment money from your post tax income.
e.g. if your stocks and bonds are doing very well and have inflated beyond their allocation, stop buying them and divert all of your savings to cash and gold/bitcoin.
Yes, and also you can sometimes select tax lots that minimize or completely eliminate the net tax exposure. This does have practical limits though e.g. if the portfolio greatly exceeds income or all of your tax lots of consequence are deep into positive territory.
Superficially that makes sense, but on reflection you may observe that logic will apply to any assets as the relative prices change. Rebalancing from any asset to shares when shares are cheap will net good results.
If you have enough assets not to simply invest in the general market. Then there is also an opportunity cost to not having the funds to buy into "unique" opportunities. Whether they be distressed assets, innovative ideas - or simply buying Nvidia when ChatGPT came out. While the optimal strategy for an uninformed investor is diversification and buying the market... There are different strategies for informed well to do investors.
Rebalancing according to risk is recommended, not doing it because you think you know what the market is going to do. For instance, let's say right now, the market is headed up. When is the right time to "re-balance" to more cash? This is just assuming that the market is going to go lower than it currently is, which is just as much a gamble as thinking it'll go up for the next year.
In short, don't try to guess the market and keep some magical percent of cash/investments unless you have the means to gamble that money. Talk to a financial advisor and choose a risk-based investment strategy that makes sense for your point in life.
It's simple and doesn't involve guessing what the market will do. Just as Browne recommended, you pick a percentage to hold for each asset, and rebalance on a fixed schedule that's long enough to avoid short-term tax rates. If percentages aren't off by much, don't bother.
It's not gambling, and it's not original with Browne. The percentages aren't magic, they're just anything that has worked reasonably well historically over many different economic conditions. Most fee-based financial advisors will give you a strategy like this. It's probably the most widely-accepted strategy in finance.
> When is the right time to "re-balance" to more cash?
When you look at your balance at the end of the year and your cash proportion happens to be below 20% instead of 25%.
Rebalancing is pretty much standard practice nowadays, nothing magical there. Any financial advisor will tell you to rebalance your portfolio from time to time.
> For instance, let's say right now, the market is headed up. When is the right time to "re-balance" to more cash? This is just assuming that the market is going to go lower than it currently is, which is just as much a gamble as thinking it'll go up for the next year.
It's the other way round, if the market has gone up then you rebalance to hold more cash. You're betting on mean reversion, not just making a random directional bet; in the long term that works, and since you're not leveraging there's no "remain irrational longer than you remain solvent" problem.
> When is the right time to "re-balance" to more cash?
In theory if you wanted to invest "perfectly" you'd do it continuously. In practice trading costs, tax concerns, and the cost of your own time mean you want to set a schedule that's not too inconvenient.
> Talk to a financial advisor and choose a risk-based investment strategy that makes sense for your point in life.
I know this is the standard advice, but these days it's pretty outdated IMO. A financial advisor will rarely tell you anything more than the basic middle-of-the-road advice you find on the internet or elsewhere, and they'll charge you a substantial amount for the privilege.
I do agree overall that these transitions happen infrequently enough that the opportunity cost of not being in the market is likely to outweigh the potential upside of being ready to buy at a dip