Episode 9: "Stay Balanced, Stay Successful" The Power of Portfolio Rebalancing!

60% stock and 40% bounce your bound portfolio is 42,000 and your stock portfolio is 72,000 Bo side don't invest in trampoline so is this always like kind of the golden rule you always want to remain balanced wouldn't you want to sell when it's high and buy when it's low theom [Music] for how are you I'm so excited to see you how you doing B I'm doing great bashem welcome to another beautiful day in hashem's world and let's try to do the right thing one more time okay and uh see how how we can be of service that's what it's all about um yeah I I tell you what I don't like to mix together two conversations because I want people to be able to take out value from each conversation independent if they listen to other episodes or not okay uh but this time I think I'm going to deviate from that because I do want to address we spoke last in the last conversation we spoke about diversification the importance of diversification so the topic that we're going to discuss today is a little bit uh has a little bit of Shas to the topic of of diversification okay so that's why I want to talk about it and it's called rebalancing portfolio rebalance balancing okay so the question becomes let's say that you do a good job in diversification and we're not going to make it complicated for this conversation for this for the sake of this conversation we're going to make it sound as the person has 60% of his portfolio in stock and 40% of his portfolio in bounce okay that's the diversification I'm not saying it's a good diversification I'm just 60 in stock and 40 and what was the other one bounce B bonds got it okay sorry I just didn't hear the N clearly so I heard bonds and I didn't hear bonds you B like Bobs you he I heard like I heard like bounce and I didn't hear BNS I wasn't clear what you're referring to like you thought like bouncing a ball is that what like I thought I thought trampolines or something you know are you are you original from from England or from Canada no no originally from the Midwest in America by the way I don't know if you know my my parents were were raised in Argentina I didn't know that no and I have a lot of times people ask me from where my my my Spanish accent comes they ask me if Spanish is my first language interesting you know goam of course you know my first language is yish but they asked me Spanish and and then I I tell them no they then they asked me where Where Were You Raised I tell them in New York no way how come what's the you you know what the question and I they say because you have a South American accent I hear yes and yeah and you know and it's true I have a South American accent sometimes and it comes because my parents were raised in Argentina wow okay I I have a funny story when I got engaged to my wife and I introduced her to my father and you know my father was from from Europe you know he he was he was the Survivor and uh she spoke to him for a little while and I remember afterwards making a comment to me my wife she says you know he's I'm I'm really looking forward to get to knowing your father better but I have to get used to really being able to understand what he's saying I said what are you talking about she said he's got such a heavy accent I I like I don't understand it when we're communicating we have to realize that what the what what make the way I think I sound not everybody's hearing what I'm saying you know and and I had to be careful to ensure that you know I I I I'm clear that they get what I'm saying so important you know it's such a basic in communication so much world world wars have been fought over misunderstandings if you know and it's just what you're saying is had I misunderstood you and I thought you said trampolines and I go and invest all my money in trampolines in a year from now you'd be say you're Miss suan I didn't say a bond so important and crucial that's why I love to have you as a coost because you're not going to let me finish this conversation by people thinking we talking about trol okay so let's take all trampolines off the table so trampolines is out say don't invest in trampolines unless you have a good company that's very profitable and you know they know what they're doing then we can talk about it so 60% stock and 40% bounce very good now it's clear good and then what happens let's say this is the ideal diversification that you want for your portfolio right so you probably want a few more things but let's say just for the Simplicity this is your AAL diversification your AAL portfolio size your deal portfolio layout okay now you didn't invest any more money the stock market went straight up and but by the way I want to show you something when I tell you straight up like this like for the people who hear it I I I I take my right hand and I move from right to left right what did you see I see you going from down to up but from your because we're doing this on Zoom so you you look you look at me you see it from your left or from your right oh I see you I see you coming from from your I guess left to right yes from left to right right right so when I when I was you know I I took some courses is some professional speaking by the way I don't know if you know and and they they they they taught me that when you present something to the audience you should always present it from right right to left okay why because the audience in their eyes they see you as a miror right so if you if you tell them if you show them from you I I'm showing now my right hand so from my right to left you see it from your left to right right okay so it's very important that when you speak to people you should understand that they see it Opposite than how you demonstrate it so you should always do it you know you know that probably you're doing D and your should you're probably always doing it the opposite way right I don't have that problem because most people fall asleep when I'm giving instuction so they're not seeing anything so I give you a good a good idea they shouldn't fall asleep okay I remember that you should tell them when I'm going to finish my speech I'm gonna ask you all if I demonstrated it from right to left or left to right to right okay F what they're going to tell me okay okay so basically when when the stock market let's say went up and the bound Market is is usually a fixed you know it's not fixed fixed but it could be it's more fixed than the stock market and because the stock market went up so you know so much could be that you all of a sudden all of a sudden see yourself having a portfolio that is let's say 70% stocks and 30% bonds right so let's take an example let's take a $100,000 portfolio you started with 60% $60,000 in stocks which is 60% $440,000 in bounds which is 40% % and let's say the stock market went up 20% so 20 in the first year 20% of $60,000 is $112,000 so all of a sudden you have a stock portfolio instead of $60,000 is $72,000 and the bank portfolio let's say went up 5% okay just to make a straight number so 5% of $40,000 is $2,000 so now okay your bound is 40 your bound portfolio is 42,000 and your stock portfolio is 72,000 now I'm taking a calculator and I'm I'm putting it together so I have $72,000 plus $42,000 I know you can do this by hand but by head but me not it's $114,000 so now your your portfolio of $100,000 is $14 of which 72,000 divided by 114,000 is 63% okay so that means that you your your your your balance that you wanted to be 6040 you're off now you're 63 it's not off by a lot but it's still off but we're going to use that for an example um it could happen in any asset class and especially if something goes up even more then it's going to happen uh it's going to happen more often okay you know if any part of your portfolio let's say you want to be 10% in China stocks and China goes up a lot you know whatever you know it could be could happen in any asset class that you should be off with your portfolio Okay so what do you do we're going to talk about rebalancing but before we talk about rebalancing it's also important to know to talk about most of the time when something goes up dramatically something else goes down down it's like a ciso you know especially when you talk about the bound market usually when the bound Market when the bound interest goes up bound prices go down in vice versa okay we can have a different episode to discuss that why that is and how that works now because of that what happens is that all the other asset classes that did not go up so much is much cheaper now right so if the other athet lasses went down it's much cheaper right so it's an it could be a good opportunity now to go take 3% of your stock portfolio to reduce it to 60% and add it to your bound portfolio to increase B so now you rebalanced you're back to 6040 you're taking advantage of the bonds being cheaper now you're taking advant of the balance being being cheaper you're taking advantage of the stock increasing in value that much right but you sell for a profit and you buy for sale so is this always like kind of the golden rule you always want to remain balanced or in the situation you describe where the stocks have gone up maybe it's worthwhile to invest even more in the stocks because they're doing so well I mean how do you kind of decide when you have to is there you always have to remain or so so you remind me you remind me of a good L from Warr Warren Buffett Warren Buffett you know lately we talk a lot about Warren Buffett I don't know what MIT he did that we that he has War Warren Buffett says that the stock market is the only place in the world that he knows that people buy high and sell low when when when you were a buyer of something wouldn't you want it to be cheaper right and when you're a seller of something wouldn't you want it to be more expensive right so for whatever reason when people invest they get so emotionally attached and it's usually because they don't know what they're doing and they just they just they just have foro oh I'm going to go and it's going to blah blah but you see something is going up more and more and more and more okay should I add more could be if that's part of your strategy but if your strategy is long-term finan financial success long long-term Financial stabil and the focus is on being stable and and have a good foundation have a good on it if that's your focus then wouldn't you want to sell when it's high and buy when it's low presumably yeah and if you make if you made a decision that you want to be balanced in a certain way of 6040 stocks and bonds and you see that the stocks you out of balance and you decided that in order for you to have final stability it's important for you to have the right blend the right diversification why shouldn't you stay with the diversification that doesn't mean that you would not have succeeded more if you would have been 100% in Star right in hindsight that would be the case but my job as an investor is not to be correct only in hindsight my job as an investor is to make sure that I'm stable regardless of what the what the world throws at me I should I should should be stable right I think that's a huge that's worth just just reviewing for a moment but but what you're saying is that remaining balanced is really something that has to be a constant throughout you have to you have to initially come up with a plan a balanced plan but but that plan has to really be consistent and you have to stay true to your balance no matter what's being thrown at you because like you said there's a lot of short-term opportunities that may seem to be very lucrative but at the end of the day if you throw that that balance off you may end up losing in the long run absolutely and I tell you one of the this is one of the focuses we have in our with our members we always talk about that the the the that doesn't mean that you should do it every day because if you do it every day that means that you're GNA pay a lot of trading costs you're going to pay a lot of commissions um and and it's going to become an emotional game for most people long-term investors for most people it's you know once a year is enough you don't have to be do more than once a year when you do your review your end your review you know maybe beginning of the year end of the year you know what whatever you decide for most people once a year should be enough if if if something you know extraordinary happen during a certain quarter you might look at at a quarter but usually once a year should be more than enough and and the example I gave you 63 stocks that you know it went up and it became 63 stock and and 37 bouns I didn't give it to you because you should think that you know it's out of balance and I have to rebalance no right it's just I gave you the example to understand what I mean I wanted to give you simple numbers and I also did it only with two things stocks and bonds but you can do it with many more things you know if you diversify a portfolio like you should then a lot of other asset classes come into picture also you want it to be such and a such percent and and and and exposure to this market and now you are much higher than that maybe it's time to rebalance the point is that your financial picture doesn't have to be set in stone this is what I decided this is what I do and I close my eyes I get into I don't want to look at it anymore this is not how you should operate your fin your finances you should have an active role in managing right but not active daily active from time to time maybe once a year as we discussed right listen I mean I think I think what you're touching on is really a you say in general and and everything in the world is is is is balanced and the world doesn't function if it's not unbalance and and you know and listen we we're par braci is always about is all about the balance of kinus so I think I thought you're going to talk about tan with the with I say that's exactly well the the were an example of Cl emerging in the world with balance you know and and and and that balance is is constant you see throughout history of clell how how you know when there was an imbalance it had you know it rectified itself you know theat had to work out between themselves how to how to how to address it all I'm getting at is is that balance is a yid in what you're touching on is it's a yid in life it's the exite in how we maintain our own health in our bodies we have to keep a a balanced you know healthy body and and I think you're just you're you're sharing with the same ideas with finances you have to be intentional yeah about it you know you know I'm embarrassed to tell you I'm very embarrassed to tell you that somebody left me a message sent me actually a text and I forgot to tell it to you somebody sent me a text actually I got very good feedback about the podcast in general but somebody sent me a text specifically that he wants to know how I got FMA for a host yeah he told me that you chose the best H that you could possibly choose and uh he's making so I I don't know I I know I I have a little bit of Envy but uh but uh I just I just wanted to share this with you to you before the answer is because you pick your friends well people attract people that they are like I've always told you that I I've always considered you a a friend now for few decades okay let's leave it with this and next week we'll pick it up from there looking forward gal y yes okay up great job thank you the wisdom for your will [Music] get down the wisdom for your wealth