Jack Bogle: “Never” Rebalance Your Investment Portfolio (and how to do it if you must) Join the newsletter:
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Jack Bogle, the founder of Vanguard, argued that one should not rebalance their investment portfolio. He believed that doing so lowered long-term results. In this video we’ll understand why he believed rebalancing was unnecessary, along with good reasons to rebalance a portfolio. I’ll also cover how I use what’s called Opportunistic Rebalancing in my investment portfolio.
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“Never” Rebalance Your Investment Portfolio: Jack Bogle’s Approach and How to Do It if You Must
When it comes to managing investment portfolios, there are various strategies and philosophies that investors adopt. However, one legendary figure in the investment world, Jack Bogle, challenged conventional wisdom and offered a thought-provoking perspective on asset allocation – the act of rebalancing an investment portfolio.
Jack Bogle, the late founder of Vanguard Group, was a strong advocate for a passive investment approach. He believed in the long-term power of the market and emphasized the importance of keeping investment costs low. While many investment advisors suggest rebalancing portfolios periodically, Bogle famously stated, “Never” rebalance your investment portfolio.
His reasoning was quite simple: frequent rebalancing leads to higher costs and potentially lower returns. Bogle believed that investors could benefit from maintaining a steady allocation that aligns with their long-term objectives without the need for regular adjustments. He argued that trying to time the market and consistently rebalance portfolios was more likely to harm investors in the long run.
Bogle’s philosophy stemmed from his deep belief in the principles of passive investing. Instead of constantly buying and selling stocks or other assets to adjust portfolio allocations, Bogle advised investors to build a diversified portfolio of low-cost index funds and hold onto them for the long term. This approach reduced unnecessary trading fees, minimized taxes, and provided investors with a broad exposure to various market segments.
However, Bogle also acknowledged that there may be occasions where investors find themselves with a portfolio out of balance due to market fluctuations or individual circumstances. In such cases, he suggested a more conservative method of rebalancing.
Here are a few guiding principles on how to rebalance your investment portfolio, should the need arise:
1. Set a threshold: Rather than rebalancing on a strict schedule, establish a threshold for when you will intervene. For example, if an asset allocation shifts by more than 5% from your target allocation, it could trigger a rebalancing action.
2. Rebalance through contributions: Instead of selling and buying assets to rebalance, consider adjusting your future contributions. Allocate new investments into the underweighted assets to bring them back in line with your desired allocation.
3. Consider tax implications: Be mindful of tax consequences when rebalancing taxable accounts. Selling appreciated assets may result in capital gains taxes, so it’s essential to weigh these costs against the benefits of rebalancing.
4. Take a long-term view: Remember that rebalancing is not about chasing short-term market trends but rather ensuring your portfolio aligns with your long-term investment goals. Resist the temptation to make frequent changes based on market noise.
While Jack Bogle’s steadfast advice of “never” rebalancing your investment portfolio may seem counterintuitive to some, it is reflective of his belief in low-cost, passive investing. While some investors may find value in periodic rebalancing, it is crucial to evaluate the costs and potential benefits associated with the strategy.
Ultimately, whether you choose to follow Bogle’s approach or prefer a more active investment style, it is essential to be disciplined, well-informed, and align your investment strategy with your long-term financial goals.
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Cagr increase by few decimal but drawdown goes up significantly
if you keep your "buckets" you should not have to worry about to much stock.
Good one thank you
I finally understand the mindset behind rebalancing. Thanks Rob.
You are so clear and helpful. Thank you!
Enjoy your videos.
What is the approach if one's portfolio is breaching the rebalancing bands but most of the assets are down? Do I want to sell and lock in my losses? Do I sell what lost least? Or do I just ride it out until some assets start to show a Total Gain? My back story is I emigrated here, cashed out of where I was living and lump sum invested into the market just before it took the hit last year. I am well diversified but with the exception of Gold all my assets are currently down on a Total Gain/Loss basis. Thanks.
So if both stock and bonds are in bear market, you should sell one at a loss to rebalance?
Rebalancing is least burdensome if you are 100% in a single asset class.
Vanguard have research paper showing rebalancing annual all the way to daily doesn’t have material difference, so annual rebalance ain’t no “end of the world” in fact it’s most efficient.
Right! You couldn't have put it more eloquently!
After experiencing my fair share of the market's negative aspects, I can vouch for the importance of expert assistance when entering the stock market, especially for those with little to no fundamental understanding of how things operate. Following Yvonne andette lively's advice, I was able to passively grow my portfolio to roughly $122,000. She was able to explain the importance of time, money, vision, entry points, and departure points while entering the market.
I agree with Jack, right into retirement. As far as risk is concerned, do not look at %. Rather, consider how much you need to live on for around 2years, to minimize stock withdrawals when stock market tanks.
59 planning on retiring within 6 months. My thinking currently is that I won't reinvest dividends, Fidelity will just drop them in my cash account, then every quarter I'll use that money to rebalance (to whatever extent I can with that money). Maybe I won't get 100% back to my ideal asset allocation but it will be good enough.
If I didnt rebalance daily Id be down 30%-33%..i went from down about 30-33% in Sept to maintaining 15-20% down since. Starting to hedge with inverse etfs and bullish dollar etfs
Hey rob, I’ve got a question for you regarding rebalancing (stocks only) by buying only. For example, purchasing more of the loser and less of the winner to get them back to normal weight without having to sell. My question is this: would you recommend this strategy or should I just let them “drift?” I think it might be good that I am buying up more of the cheaper stocks and less of the expensive ones, but then again I think it would be good to be naturally buying more of the winner because I want to starve the flame. Thoughts?
I love your videos. Leaning a lot from them.
Why not just purchase more bonds to balance and not sell stocks?
I don't think Jack Bogle in the interview stated that you shouldn't rebalance your portfolio nor did he himself claim to rebalance his portfolio. He merely stated it isn't necessary. He also didn't state not to rebalance. Bogle: "…Anybody that feels they should rebalance, I think they should rebalance. I wouldn't tell them not to. But I'd say, do it in a little more sensible way than it's done." I know that when you're starting out, the portfolio is so small relative to what you're adding to it each paycheck that you can keep the portfolio balanced within reason on buy side only and never actively selling anything. It only becomes an issue when the portfolio gets to be bigger and passive balancing is not sufficient to keep it rebalanced that people need to consider active rebalancing. Presumably, because your cashflow isn't sufficient to rebalance it, the ratio between the size of your portfolio and your cashflow is very high. This implies, if something goes wrong with the over weighted asset class, it will become more difficult to recover from. So as you approach retirement or are already in retirement, rebalancing becomes more important unless you were fortunate enough that you have so much assets built up that you can bought laddered CD's and Treasuries and that covers way more than your lifetime expense.
This year both stocks and bonds are down significantly, but my long term treasuries are down the most, so they are the most off target. I don't want to sell my small cap value, which have lost the least, to rebalance my treasuries. I'd rather wait until I can sell small cap value at a profit to rebalance treasuries. Otherwise, I would be selling stocks at a loss to rebalance bonds that don't have as much long term reward as stocks. So it seems to me that 2022 is an outlier when it comes to rebalancing according to rebalancing and tolerance bands, because such band strategies assume that both stocks and bonds have not suffered significant losses at the same time and that treasuries have not lost the most.
I think you also need to consider what the two markets are doing. If bonds were paying a decent yield it may make sense but the government has bent over backwards to reduce bond interest rates by their easy money policies. The investor needs to understand what their government is doing to mess with investments.
This discussion is why I like what M1 does. Set your target allocation and as you make contributions they are directed toward assets that are below the target percentage. This of course is not helpful once you are no longer contributing, but for those of us still accumulating, it is a huge help if you care about your asset allocation.
Hey Rob: You really need to "Rebalance" that lamp shade of yours. It's crooked as all get out and it's driving me absolutely bonkers! 🙂 It's screaming for help. Please help the little guy and get him straightened out. 🙂
Sounds simple stupid in an IRA if you don,t need the money. I have Wellington down now 11% but, I can weather the storm.
Re-balancing is the one thing I disagreed with Bogle on, since I personally only invest in diversified stock funds and a little in cash, no bonds. I want to maintain the same level of stock diversification in my portfolio over time. However, if you have a bond allocation, Bogle's view is probably correct, until you near/enter retirement. At that point, you need to manage your risk more closely. I automate re-balancing in my 403b and HSA accounts, but my Roth and brokerage accounts (at Vanguard) don't offer any re-balancing feature at all, so I have to do it manually by actually selling and buying shares, which is ridiculous, so I rarely do it. I love the fact that Vanguard is an investor owned company, which is why I chose them in the first place, but their pitiful outdated website and lack of features occasionally make me consider switching to Fidelity.
As wise as Bogle was, we cannot just follow him blindly, his situation was different from most of us. He never needed to withdraw any money from his portfolio because he already had a very high income, so he didn't think too much about risk and volatility, but people thinking on retirement will actually need to withdraw, so wee need to consider those factors.
I think this is a disingenuous backtest, is anyone surprised that buying into more bonds is going to decrease returns? I think a true test would be a portfolio with Large cap US and international funds with rebalancing
When I rebalance, I get charged over and over for balance adjustments (rebalancing) plus before I watched this, I always said, "why punish my winners and reward my losers?!!" yuck!
I like winners and low fees, thanks.
I only rebalance 2-3 times per day.
Never rebalancing will increase returns. But only by increasing risk and there's already a thousand ways to do that.
Hi great video! like to know if the both stock and bond together move lower and hit the band, lowering overall porfolio, do we still rebalance?
What about just putting it in a balance index fund.
Can I get the link to the spreadsheet? I can't find it in the website 🙁
I don't have a head for business or numbers, yet I find myself learning from Rob in a way that surprises me.
But isn't the point of rebalancing to mitigate risk and be properly diversified rather than to maximize returns?
The trick to avoid rebalancing taxes is to keep some of everything in your tax sheltered account, and rebalance there. But that takes some planning.
You are just taking more risk by not re balancing. I'd say do re balancing 1/year, but bump up your target stock allocation. Not re balancing seems like just a way to trick yourself into using a higher stock percentage. Then you thought.
I feel that a lot of people are being mislead about this and other products by fund managers, a 60/40 globally diversified portfolio doesn't need 14 funds, just two global stock and bond funds at half the yearly cost, the same for rebalancing, if it costs or creates a tax event it isn't being done for your benefit.
Bogle must've been an idiot…now I see why most "asset manager" never beat the s and p 500..you must rebalance according to market conditions..just ask the "buy and hold crowd" ..
This makes boring and endless useless vedeo. I call him rambling old man. Oy vey.
Rob, excellent vid and advice but is way too long.
I see why "Never" is in quotes in the title. It's more what you would call a 'guideline' than an actual rule.
Question: say you have 4 different allocations, if one of those funds becomes necessary to rebalance, how do you determine which of the other funds to move it to?
Why would you sell stock when they're low, that locks in the loss? I don't understand why thats good for a long game? Makes sense to rebalance on top threshold..
Maybe I'm slightly incorrect but I think JB has talked out of both sides of his mouth for many years, including when he defended a new actively managed Vanguard mutual fund. Before then he was "index only". A broken record. I don't remember what he said his new precise reasoning was but I do remember how surprised and let down I was. Wall Street never changes. Never x 100
LET YOUR WINNERS WIN
It would be interesting to back test large vs small cap and value vs growth. Just stocks vs bonds seems like a poor comparison given the performance of bonds over the long term.
For a Roth IRA would the opportunistic strategy be optimal, considering that withdrawal ( on time) are tax free?
Gimme a break.. this guy has too much to say
Mr. Berger, I’m new to stock investing however, I have 401k of over $200k, and I’m in the mid 50s. What do you recommend for me to “balance” my account. Should I put 80% in Large Cap? Your suggestions are appreciated. Thanks
Rob: I think the core mind-shifting that Jack and a few others have shown is akin to the FIRE movement's mindset change from "how much do you make (read: assets)" to "how much do you spend". This talk about percentages of assets in bonds vs stocks does not really make sense — the amount of bonds should be relative to spending to help you get through hard times — a longer-term emergency fund of sorts. For simple math, assume $2.5 million assets and spending $100k per year (4%). Having 40% tied up in bonds ($1 mil) does not make a ton of sense — that will last ~10 years. I believe from prior videos that's why you find the 60/40 split non-ideal and favor a 90/10 — I agree.
I think the conversation should change to "how many multiples of your spending do you have in bonds". The using the 4% rule as starting place, it works out to be: 10x for 60/40 stock bonds; 5x for 80/20; 2.5x for 90/10. The choice of 2.5x, 5x, or ?? is highly personal, but for rebalancing discussions it does not matter which you pick.
Now if stocks go from $1.5 to $2.5 million (now ~71% of portfolio) with no change in bonds. Do you really need $400k (40% of stock gain) shifted to bonds if you are spending nominally the same each year and have not touched bonds (eg remain at $1 mil)? And this only gets more important as the stocks take off. I believe that's what Jack and a few others I've heard arguing, and the math supports, that it does not makes sense to keep the initial 60/40 split anymore, and force bonds go from 10x (1 mil) to 14x (1.4mil) spending.
This works if stocks (and thus the portfolio) perform well initially — for example the past decade — and they take off to never approach 60/40 again even with a future downturn. Data has shown that if there is a major downturn tomorrow after several good stock years, you are probably are still better off with a 50% loss on a concentrated amount of stocks than a 50% loss on a 60/40 split, namely because the stocks have appreciated significantly creating a higher basis and net win. Eventually when your stocks become high enough, you can increase your *spending*, which rebalances bond needs. The key here is weathering any storms until the first stock run up and rebalancing based on spending.
Setting spending amounts can be made using existing strategies similar to guard rails — thus allowing some run up/down depending on how the overall portfolio is performing. This comes at a cost of being more conservative — instead of 3% & 5% guard rails, as your portfolio increases, it will become more akin to 3 to 4% as there is higher risk (less bond percentage), but the basis number will be higher for an overall win — particularly in 15-30 years.
That said, I do not think this approach applies to everyone. If you retire with 10x spending in assets, you probably want to err more conservatively even though the math suggests otherwise — the low probability crash is high impact. For Jack and others with both the means of greater than 25x rule in assets, some safety nets such as using SS as a non-risky income to help cover baseline expenses, and ability to easily modify spending down if needed in poor years allows for not rebalancing other than to maintain a baseline long-term emergency fund in bonds of say 4x annual spending. Percentage-wise, this means starting with 10 or 20 or 40% bonds, but allowing them to decrease over time — theoretically to nothing in Jacks/others calculations, but I personally cannot subscribe to that extreme measure.