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What Is Rebalancing and Why Is It Important? – Episode 306


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As your portfolio appreciates, it can get out of sync from its original asset allocation and intent. The result could be a portfolio that doesn’t match your risk preference or investment timelines. On this episode of the Dentist Money™ Show, Ryan and Matt explain why portfolios need to be rebalanced. As investments get out of alignment over time, learn how they can be readjusted to meet their initial risk and return targets.

 


 

Podcast Transcript

Ryan Isaac:
Hey, everybody. Welcome back to another episode of the Dentist Money Show brought to you by Dentist Advisors. A no commission fiduciary, fully comprehensive financial advisor, just for dentists like you all over the country. Check us out at dentistadvisors.com. Today on the show, Matt and I are talking about how to rebalance a portfolio. What that means, how to do it, common pitfalls, pros, and cons, common mistakes and common questions.

Ryan Isaac:
Thanks for joining us. This question actually came from the Dentist Advisors discussion group on Facebook. If you have a question that you would like an answer to or would like featured on the Dentist Money Show, hit it up. Post a question, and we would love to answer it on a show. Or if you’d like to chat with us, go to dentistadvisors.com, click on the “book free consultation” link and book a consultation with one of our very friendly, chatty dental-specific financial advisors today. We’d love to hear from you. We’d love to have a conversation with you, and thanks for being with us. Enjoy the show.

Announcer:
Consult an advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor. This is Dentist Money. Now, here’s your host, Ryan Isaac.

Ryan Isaac:
Welcome to the Dentist Money Show where we help dentists make smart financial decisions and avoid the bad ones along the way. I am Ryan Isaac and I am being graced with the presence of the Hollywood Mountain, Matt Mulcock. Matt, what’s up buddy? Thanks for being here.

Matt Mulcock:
[crosstalk 00:01:25] Wow, the old Ryan.

Ryan Isaac:
Here we go again.

Matt Mulcock:
Here we go again, here we go again.

Ryan Isaac:
Feels like I just said that. Thanks for joining us, Matt, on today’s episode. I hear that it might be cold there where you’re at.

Matt Mulcock:
[crosstalk 00:01:38] I’m just going to mention that.

Ryan Isaac:
You were just going to say it.

Matt Mulcock:
I’m just going to say it. I don’t even really want to talk to you right now. You’re in sunny, Southern California. I miss that place so much. I’m sitting here in sweats and a beanie in my basement. It’s 35 degrees outside. It’s mid-October.

Ryan Isaac:
Yeah, and it will be warm later, but here, I’m just thinking about this. I think our smell, I think it’s smell is the sense that’s most closely tied to memory. I think that’s true. It might be sound.

Matt Mulcock:
[crosstalk 00:02:04] I think I’ve read that somewhere.

Ryan Isaac:
I think it’s smell. Someone, we can back this up later, but there’s a smell when you first turn on your furnace in the wintertime, that’s the old dust burning off through the furnace system. Do you know the smell I’m talking [crosstalk 00:02:19] about or that just?

Matt Mulcock:
Oh yeah, chemicals and dust going into your lungs? It’s great, especially in these old houses?

Ryan Isaac:
Yeah, dude, it reminds me of when I was a kid and the furnace would kick on, you just knew that there was, I mean, as a kid you’re not scraping off a windshield and driving to work in this stuff. You’re getting snow days. You’re going sledding, and it’s Christmas.

Matt Mulcock:
[crosstalk 00:02:37] It’s fun.

Ryan Isaac:
So that just reminded me of the heater smell, the furnace smell that kicks on. If anyone knows the smell of a furnace, when it kicks on, you got to just let me know if that is a childhood memory for you. There was something about it. But when you’re four months deep into it and it’s February and the furnace is still going.

Matt Mulcock:
Yeah, and you’re and adult and you have to

Ryan Isaac:
You’re still scraping the windshield.

Matt Mulcock:
And you have to work, although I can’t say that. In COVID world, I mainly work from home.

Ryan Isaac:
Oh that’s true, changed it all. No more scraping anyway. Well, thanks for being here. And without further ado, we’re about to talk about something pretty nuanced. It’s a word that I think people are familiar with, but hard to define. And it’s the concept of rebalancing a portfolio.

Ryan Isaac:
The question was basically, what does that mean? Which I thought was really honest and how do you do it? And I thought it was really honest because I don’t know, it’s one of those investing terms that maybe a lot of people don’t know about. But I think there’s a lot of investing terms, even basic ones, that people don’t quite understand the definition. Because, it’s not really taught anywhere. So I just like the honest, straight forward question, what is it? It’s very important, insanely important, to rebalance a portfolio.

Ryan Isaac:
So, what is rebalancing a portfolio? It’s, funny because it’s exactly what it sounds like. Although, it doesn’t happen that often or correctly enough for most people managing their own money. It’s kind of like if you get on a bike and one of your back tires is flat, what are you going to do before you ride that thing?

Matt Mulcock:
I guess, I mean, what am I going to do? I’m probably just going to put the bike up somewhere and go home and call an Uber. Because, I’m not fixing that thing. There is no way.

Ryan Isaac:
Well, you can put air in it and get it back to a full tire.

Matt Mulcock:
I could try, I could try.

Ryan Isaac:
This is on my mind because I was just doing this for my kids last night, putting air in their tires. And I was thinking about rebalancing things back to their original state where they’re safe. Because that’s what I’m doing when I’m putting air in my kid’s bike tires. I’m well, it seems to be safe. I don’t want you to break the bike or yourself.

Matt Mulcock:
Gosh, you’re so [inaudible 00:04:38] with the analogies.

Ryan Isaac:
And we need to get back to the original planned state of things, which was that there’s air in the tires. They’re both equally balanced. And then we can drive safely in a fairly straight line, over long periods of time and enjoy ourselves. Is that a good analogy?

Matt Mulcock:
That’s a fantastic analogy, I love it.

Ryan Isaac:
[crosstalk 00:04:59] All right. So, in a portfolio, there’s a lot of things that you can rebalance. We’ll start in the beginning. When you build a portfolio, hopefully, many times this is not happening for sure. Because again, this stuff isn’t taught. This, isn’t a knock on people, it’s just not taught. Hopefully you’re beginning your portfolio strategy with some kind of philosophy in mind. You’ve determined, hey, do I believe people can predict the direction of economies and markets?

Matt Mulcock:
Of course, I mean, I listen to the Dentist Money Show.

Ryan Isaac:
If I do believe that you, probably don’t listen to this show, or you might, which is a diverse opinion and we appreciate that. That’s really cool. But if you, I’m just saying that would take you one way, right? If you believe people can predict through software or knowledge, or insider trading, which you shouldn’t be a part of, if that’s what you choose, then you’re going to pick a money manager, investment advisor that’s going to have the strategy to probably constantly buy and sell things, right? If you’re a person that says, you know what, I don’t believe that people can predict that the short term direction of markets, therefore I’m going to build, maybe a low cost diversified portfolio. And I’m just trying to capture what the world’s markets are going to give me or any market is going to give me over a long period of time.

Ryan Isaac:
That would be two different paths. But you’ve got to start with a philosophy when you build your portfolio. After that, you’ll do things, you’ll ask questions. Well, you should ask questions like this. You should ask questions,

Matt Mulcock:
You should.

Ryan Isaac:
Hey, out of all my stocks, how much of my stocks are going to be just U.S. stocks? How much are going to be emerging markets in smaller countries whose societies and markets aren’t quite as open and democratic and free yet, right, or transparent, how much is going to be in developed market countries? You know, our friends to the north, Oh Canada, Oh Canada, as they say, as they sing.

Matt Mulcock:
Oh Canada.

Ryan Isaac:
So you should start with that question too. How much of my stock portfolio is going to be in different parts of the world, which is a whole other subject of allocations. What most people do in their own home country is they just pick the index that most popularly, that’s probably not a word, represents their home country and just put all their money in there.

Matt Mulcock:
It’s a word.

Ryan Isaac:
So, North Americans would go, I’m just going to buy the S&P 500 and then put all my money in that and call that diversification.

Matt Mulcock:
And you know what? Over the last 10, 12 years you’re doing all right.

Ryan Isaac:
Crushed, actually since 2010, you’re crushed. You were sad during 2000 to 2010.

Matt Mulcock:
You’re sad for the decade before that, but the last decade you killed it.

Ryan Isaac:
That’s one question we hope you’re asking. That’s a question we ask ourselves when we build a portfolio for people. Another question would be, do I want to hold only really big companies? Or do I want to also include some middle-sized companies or some really tiny ones or some really, really tiny companies? You’ll ask, what size of company do I want? Because, why would you want to ask that question? If you’re not asking that question, you’d want to ask that question because different sizes of companies get different returns over long periods of time. And studies show,

Matt Mulcock:
our favorite phrase,

Ryan Isaac:
Studies do show this.

Matt Mulcock:
It’s actually dated shows, it’s boring, it’s real

Ryan Isaac:
It’s history shows. Smaller companies will tend to get higher returns than bigger companies over long periods of time. So that’s another question you might want to ask, and to back up, why would you be asking the question? How much of my portfolio should be in different parts of the world? Because different parts of the world, although they get fairly similar returns over long periods of time, they get their returns in different sequences of time. So what you were saying, Matt, the United States got pretty bad returns from the entire decade, from 2000 to 2010.

Matt Mulcock:
0% over ten years.

Ryan Isaac:
By pretty bad. We mean zero.

Matt Mulcock:
You can literally, it’s literally called the lost decade because there was nothing.

Ryan Isaac:
Although it is more nuanced than that, but it didn’t grow while the rest of the world grew. Since 2010, the United States has just absolutely crushed and the world has lagged behind the United States performance. But it’ll switch at some time. And if you looked at a pattern, what you would call a pattern over a hundred years of history? You would see that different parts of the world, there is no discernible pattern about which one’s going to outperform next, which part of the world. So that’s why you would ask that question.

Ryan Isaac:
A third question you’d want to ask because of data and history is, do I want to only own what are called growth stocks? So those are the big name companies. They’re kind of expensive stocks. It’s like buying a dental practice that’s selling at 110% of collections, right? That’s a growth stock. It’s successful, it’s profitable.

Matt Mulcock:
And why would you do that?

Ryan Isaac:
[crosstalk 00:09:30] And why would you do that? Because, you know what you’re getting.

Matt Mulcock:
Because, that’s the question people would ask.

Ryan Isaac:
You would buy a growth stock because you’re familiar with it. It’s big name and you know what you’re getting. The dental practice, that would be a growth stock. It’s selling for 110 of collections. And the buildings new, the facilities new, the equipment’s new, great marketing, great presence, good parking, good signage, good overhead, good technology. It’s expensive because it’s nice and it’s predictable, right?

Ryan Isaac:
However, if you go by, what’s called a value stock. So, in the dental world, that would be like buying the cheap practice down the street that has tons of potential, but the owner has just let it slip, right? A little ugly inside, team’s a little sad. They might have paper records.

Matt Mulcock:
They’re chairs are breaking down.

Ryan Isaac:
They need some TLC. But your potential for very high percentage returns on a cheap practice could be a lot higher. And so data and history also show that cheaper stocks, what are called value stocks, will outperform over long period of time, expensive for growth stocks.

Ryan Isaac:
So another question you’d be asking yourself when building a portfolio is, how should I include cheap stocks in this thing? So when you back out of all those things, you’re first, what’s my philosophy? Do I predict the market, or no? What parts of the world should I add? Big companies, small ones, value stocks, growth stocks? Once you choose those things, which by the way, people don’t do well on their own, frequently. I know it seems easy. We will build portfolios for people that are literally six funds, four funds. My own portfolio has three. Okay.

Ryan Isaac:
But when you arrive at that conclusion, you’ve hopefully already asked quite a big series of questions that matter a lot. And we find that people will oversimplify the act of choosing funds as this hard thing. Because, it used to be hard. Choosing which funds used to be a hard thing because there was a lack of information, right? Now, there’s not. And there’re apps that will choose your funds for you. But people will still choose funds that do not give them this kind of broad diversification. When it, had they known what questions to ask, they would have wanted it. They just didn’t know what they didn’t know.

Ryan Isaac:
So, I digress. Once you’ve chosen this stuff, the second you implement it and the 24 hours goes by, it’s out of balance. So let’s put some numbers to it. Let’s say you chose a portfolio that was a 60% United States, 40, 30% developed markets and 10% emerging markets. Well, the next day, those are going to be slightly out of range, depending on what grew or shrunk.

Matt Mulcock:
This, this seems appropriate to use a Mike Tyson quote right now. This is kind of when Mike Tyson said, everyone’s got a game plan till they get punched in the face. So, it’s you’ve got this game plan, you set it in place and then you get punched in the face within a day or two or a week, or whatever. And all of a sudden, your face is out of whack. Your portfolio is out of whack. Your nose is bleeding.

Ryan Isaac:
And it can happen quickly, or it can happen gradually.

Matt Mulcock:
Oh yeah. Mike Tyson would knock you out real quick.

Ryan Isaac:
[crosstalk 00:12:30] You’d be dead. Even at his age right now. [crosstalk 00:12:31] You’d be dead.

Matt Mulcock:
Not you Ryan. The you, general term.

Ryan Isaac:
The human race. He would kill everybody at his current age.

Matt Mulcock:
Yes, he would. Even now, he’s 60.

Ryan Isaac:
I saw him fight in that exhibition fight he did a year ago, and he still looked deadly.

Matt Mulcock:
Oh, don’t even get me started.

Ryan Isaac:
Still looks scary. A scary human being

Matt Mulcock:
He won that fight.

Ryan Isaac:
He won the fight.

Matt Mulcock:
He won that fight.

Ryan Isaac:
So even after you’ve, hopefully, asked those questions and you’ve gone through that process of selecting what you’re going to do. And you’ve picked the right funds that give you access to the things that you wanted access to, within a day they’re out of balance. Probably not a lot, but they could be. This isn’t even, you know what the other side of this is? I didn’t even mention this, risk in a portfolio. You might say, hey, I don’t want a portfolio with a 100 % stocks in it. I want it to be a little less aggressive because I don’t want quite the same up and down experience.

Ryan Isaac:
Therefore, I’m going to add some bonds and cash. Maybe 20% of my portfolio is going to be bonds and cash or some other thing that’s more conservative than stocks. Well, guess what? The next day your bond and stock ratio is out of balance too. Started at 80/20, and now it’s 81/19. So this happens on a daily basis. So what is rebalancing? Rebalancing is going back and deflating the things, if these are tires, bike tires, we’re going to take a little air out.

Matt Mulcock:
Yeah, if you have a bike with 15 tires on it.

Ryan Isaac:
Crazy, actually I rode one of those in New York once, a party bike, where everyone peddles.

Matt Mulcock:
It’s got like all these tires everywhere.

Ryan Isaac:
Around times square once.

Matt Mulcock:
Your investment portfolio is your party bike.

Ryan Isaac:
Yeah, it’s a party bike. So your party bike, look, some of your tire is going to be overinflated, about to pop. You’re taking too much risk there. But some of them are way under inflated. And you’re also taking too much risk because there.

Matt Mulcock:
You need to pump some air, you got to take it out of the tight over-inflated wheel. And you’ve got to go put it into the deflated wheel.

Ryan Isaac:
The process of rebalancing is just getting everything back into the thing you originally chose. And hopefully, you’re rebalancing to something you originally chose that had some thought into it, right?

Ryan Isaac:
And I think this is why people don’t rebalance because they just think, I don’t know. I didn’t really think much about the portfolio to begin with. So what are we getting back to? Here’s another thing too. This stuff occurs on a daily basis. Things probably aren’t going dramatically out of balance on a daily basis. If there’s a wild swing in one day, you probably wouldn’t go, during crazy volatility over a few days, or even a couple of weeks. You wouldn’t necessarily go back and rebalance immediately. Because if it’s really above average, crazy volatility, you might let it play out a little bit. But over months and certainly years, and I’ve met more people than I could ever remember who tried to best implement a portfolio but just never rebalanced the thing. And it was wildly different than they thought, and not what they wanted.

Matt Mulcock:
Yeah. You mentioned one of the reasons why this doesn’t happen. I think number one, to your point, is laziness. But number two, there’s like a psychological behavioral kind of barrier to this, which is really, if you break, if you boil this down, what you are required to do here if you’re rebalancing a portfolio. Basically, sell your winners and buy your losers. So people psychologically just can’t even fathom. Why would I sell my U.S. growth stocks when they are just completely destroying everything else? On this normal cadence or, when they get to a certain, and we’ll talk more about the different strategies, how to do this. But why would I ever sell those things when they’re going to the moon? They’re going to the moon like the little dog coin and you’re going to have the buy all of these airline stocks that are getting crushed during COVID. That’s the requirement. That’s what rebalancing is at its core. You’re selling your winners. You’re buying your losers. And psychologically, people just cannot get themselves to do that if they have [inaudible 00:16:22]

Ryan Isaac:
And the thing about that. Most people, if they’re doing it manually, aren’t rebalancing frequently. So if you’re going a year, or a couple of years before you go back and look at rebalancing, let’s say your U.S. position that was originally 60% of your stocks is now 85% of your stocks. Which, over the last 10 years could have happened easily, in any given two year period, easily.

Ryan Isaac:
So, we just ran the numbers. This is very, not Evergreen. It just applies to this time in the last Q3 of 2021, when we’re recording this, we just saw our U.S. stocks were down. Everything was down in Q3, slightly. But emerging markets was down 10%, while the U.S. was down 0.8, right?

Matt Mulcock:
I got them for your Q3, 2021 U.S. was down basically flat. International was basically flat, down 0.1-0.66, global real estate down about 0.08, emerging markets down.

Ryan Isaac:
So imagine your portfolio is out of balance now and you have to go buy more emerging markets that tanked. Now what if that was over two year periods of time. And it was really out of balance. And you have to do what you just said. You have to sell your winners and buy some losers. That’s psychologically really, really hard to do.

Ryan Isaac:
Another thing too, is I found, was doing this for a family member and helping them allocate their portfolio on a pretty common, it was Vanguard. And which is.

Matt Mulcock:
You said that kind of sheepish.

Ryan Isaac:
Well, do I want to name, it’s Vanguard. And I mean, they’re great, right? It’s fine.

Matt Mulcock:
You covered your mouth.

Ryan Isaac:
Anyway, we were like building the portfolio and the rebalancing tool was not user-friendly. And I do this for a living. I should be able to intuitively figure out how, and it wasn’t very intuitive. And we found three months later, even after checking the boxes and pushing all the buttons, it still wasn’t rebalancing new contributions.

Matt Mulcock:
Moving forward.

Ryan Isaac:
So what I’m saying is even the best systems, that’s what I was naming it. So it makes sense. Even the best systems out there, some of the best companies, there’s not a lot of great options for rebalancing. When you set up a 401k, a lot of times it’ll be, would you like to rebalance once a year, twice a year, maybe quarterly? I don’t know if, sometimes they offer that option, but it’s not that frequently. To go back to the question, the way that we do it at Dentist Advisors, is we actually run rebalancing trades every single day.

Ryan Isaac:
We scan every account that we have and, which is thousands of accounts, and we look for any account that just has enough money in it to buy something. Money can be in there from a savings draft, which is really common. Most of our clients are saving monthly, sometimes multiple times per month. Or it can be if the account’s big enough, it’s kicking off dividends or interest. You know, from some of the stocks and bonds, and piling up as cash to be reinvested in the portfolio.

Matt Mulcock:
Like your account.

Ryan Isaac:
Like mine, just ticking off hundreds of thousands of dollars a month.

Matt Mulcock:
Yeah, six figs, yeah, six figs of dibs.

Ryan Isaac:
That’s the new t-shirt. If you made it,

Matt Mulcock:
Just kick it off six figs of dibs.

Ryan Isaac:
Once you made it, it’s six figs of dibs.

Matt Mulcock:
Yeah, you can only say that if you actually have an account, that’s kicking off six figs of dibs.

Ryan Isaac:
I know people

Matt Mulcock:
It’s not mine, but I do know people.

Ryan Isaac:
Spoiler alert, it’s not mine, but I do rebalance their accounts monthly. So anyway, we will see these in our system, says, Hey, here’s enough money to buy something and we will go and we will do the painful thing. And we will buy whatever’s the cheapest in the portfolio that needs the most air in the tire. Now here’s the other kicker that’s actually really unique about doing it this way. You can do it this way on your own. I’m sure other firms do it this way. But, I know for a fact that it is way more time consuming for a firm to do it this way, because it’s hours of manual, in firm. You have to pay a team or people to do this job, and it’s totally outsource able and you can do it the other way.

Ryan Isaac:
So what I’m saying is, one way of rebalancing is you just let the computer sell stuff off and then buy stuff that needs to be bought. What’s the problem with that? Well, outside of an IRA or 401k, like in a brokerage account, you will incur tax consequences buying and selling that much. Not to mention cap gains or fees, right?

Ryan Isaac:
So what we do, and it works well because we only work with dentists, and dentists tend to be savers, is rebalance with new cash. Which means we’re instead of buying things by selling something else and then buying something else, we just take new cash and we rebalance with new cash and wait for new cash to come in and put it on the stuff that’s cheapest.

Ryan Isaac:
Now it does get more nuanced and more technical when there’s $10 million in an account and needs to be rebalanced a little bit. But another episode of another time. What I’m saying though

Matt Mulcock:
You’re talking about your friends account and not mine,

Ryan Isaac:
Not mine folks.

Matt Mulcock:
Oh, just like the $10 million, it seemed oddly specific there Ryan.

Ryan Isaac:
$10,167,493 and five cents.

Matt Mulcock:
Oh, that changed 8 cents. So this monthly rebalancing process, just to get specific from that question, this is how we do it. Now, what does rebalancing do over long periods of time? It keeps you with the amount of risk that you hopefully consciously wanted to take when you built the account.

Matt Mulcock:
It prevents you from getting too risky, too aggressive, or prevents you from being not risky, not taking enough risk, which is a huge problem. Dentists have. It also statistically lowers the amount of risk for the comparable amount of future return that you can get because it keeps things diversified. But that’s what diversification does. So, that’s the process of rebalancing. If you’re managing your own account, the first thing I would invite you to do, but before you go see if you’re rebalancing enough, is I would go back to step one and say, what is my philosophy around investing?

Matt Mulcock:
And do my actions speak for the things I think I want to be happening? If I don’t believe that someone can predict the markets and economies, does my portfolio reflect that? Meaning, am I buying and selling things? Do I own funds that a money manager is constantly trading in and out of? Do I purposely not invest for a while when I hear bad news, and then only invest when I hear good news, which is totally like counter-intuitive of what you should do. But it’s how we behave with stocks or, well basically start with your philosophy and then go through the questions, parts of the world, expensive versus inexpensive.

Matt Mulcock:
Stocks versus bonds.

Ryan Isaac:
Stocks and bonds, that’s the first one, right? What’s my philosophy? Then risks, stocks, and bonds. And then the other list of, so start there. If you haven’t begun there or just hire someone to think through that for you and keep it. But even if it’s a simple portfolio, there’s still just a lot that goes into making sure that it’s done well in the beginning and maintained. And then also, maintain, okay, so let me give you some example. I just do this on like a weekly basis. Someone emails and said, oh, I need some money. Tax bill wasn’t expected. Or a building that came up for sale, been wanting for 10 years, and I needed a down payment and any number of things, right? And so we, as advisors, have to go into the account and you’ve probably done this, if you manage your own money, you go in there and you’re well, crap, what do I sell? Do I sell stuff? How do I do it? Here’s your options.

Ryan Isaac:
Especially the longer the account’s been open, the bigger it is. Do you sell something that’s going to incur the most capital gains? Do you sell something that’s going to take the least amount of capital gains, or maybe in some losses? Do you keep your taxes low, your capital gains low when you sell something, but let the account go out of balance? And the reason that might happen is you might go to your account and say, I want to keep my taxes as low as possible because I need to take 100 grand out of this thing. But you might find that taking out a 100 grand in the most tax efficient way takes you from 70% stocks up to 90% stocks. Now you’re way out of balance from what you originally chose. Or do you pay the taxes and keep it in balance? Or do you have a plan to let it go out of balance and then replenish it quickly? I mean there’s

Matt Mulcock:
Or, do you decide that the bike’s not worth it?

Ryan Isaac:
You don’t take money out.

Matt Mulcock:
You don’t take the money out, or you take it marginally.

Matt Mulcock:
On the Dentist Money Show, we teach dentists how to make smart financial decisions.

Ryan Isaac:
You’re correct.

Matt Mulcock:
I mean, is that all it takes Ryan, to make smart financial decisions, listening to our show?

Ryan Isaac:
Matt, it’s a good first step, but to put your financial future on the fast track, the next smart decision is to go to dentistadvisors.com. What you do there is click on the “book free consultation button” right in the middle of the home screen. And then you schedule a time to talk with one of our very friendly, dental-specific financial advisors today. The process of rebalancing is just, it’s pretty complicated. It’s extremely important. It will, for sure, make a long-term impact to your longterm returns if you don’t do it. And if you don’t do it, it will impact your returns it will impact your risk. And anyway, that’s all. That was a lot to say about rebalancing.

Matt Mulcock:
And that’s all we have to say about that.

Ryan Isaac:
It’s 20 minutes about rebalancing.

Ryan Isaac:
But it’s really important.

Matt Mulcock:
But it was very well done.

Ryan Isaac:
Anything else you’d want to say about rebalancing Matt? Any, geez, I feel like we said it all.

Matt Mulcock:
I just think that the emphasis here is what you said about, this isn’t necessarily just diversification, right? We talk about spreading your money across different, the global regions of the world. Different types of stocks, all these different things, different types of companies, that’s not a return enhancer. Right? That’s not going to be something that’s going to maximize return because what maximizes return is going out and finding the next Amazon. Concentration is really a return enhancer. The problem with that is, the flip side of that is also something that could blow you up, possibly you lose all your money. So same thing with rebalancing. This is, think of this more as a risk mitigation tool than it is a return enhancer.

Matt Mulcock:
So if you think of it like this, right before 2008-2009, right before 2001, what was going on with those portfolios that were not rebalanced? They were in the riskiest possible position because what blew up were things that had run up preceding to that point. So if you’re not rebalancing and you’re just letting things run, like you said, you probably find on a short period of time, but if you let it go too long, you’re basically putting yourself in a position to be at its riskiest point right before the market. And it will people, this is not a prediction. I guess it is a prediction.

Ryan Isaac:
But it’s saying Christmas is coming.

Matt Mulcock:
It’s going to happen, but it’s going to rain tomorrow at some point.

Ryan Isaac:
At some point, cause it’s not a specific date, but it’s going to happen. It’s going to snow in Utah.

Matt Mulcock:
Exactly, it’s going to happen at some point. And when it does, if you’re not rebalancing, you’re going to be out of whack. Your portfolio is not going to be in line with, you were saying, the risk allocation with the philosophy, with the approach you wanted to take to reach your goals. You set it up initially and you’re going to be in, again the worst possible position, at the worst possible time when that happens. So again, think of it as a risk mitigation tool. I’ve actually heard this a lot out there over the last couple of years, that rebalancing is stupid. That’s, why would you do that? Actually, you’re better off just letting the winners win and continue to, and you’re right for a period of time. But again, you’re setting yourself up for a bigger fall. So again, think of it as a risk mitigation, kind of putting bumpers on at the bowling alley, right? It’s not as fun, but you’re going to make sure that you hit some pins.

Ryan Isaac:
I’m just thinking too, maybe on the other side of that a little bit is some return enhancement in the way. I’m trying to think of the other side of that coin, which is, it goes out of balance. Too, conservative. Let’s say you have a mix of stocks and bonds, right? For sure, you end up not rebalancing and you hold too many bonds. Your bonds grow and your stocks shrink. And not only that, when you rebalance frequently, without having to try to predict the market, you are constantly, especially if you do it frequently, you’re constantly buying whatever’s cheapest in the whole world. And especially, if you have a portfolio that’s globally diversified across sizes of companies and prices of companies, value and growth, big and small and all over the world. When you rebalance frequently and you save frequently, you are just giving yourself the best shot to buy whatever is the cheapest in the world at the time, without having to predict what that’s going to be.

Ryan Isaac:
You know, at the beginning of Q3, someone out there, all right. So just whatever, let me know. But, beginning of Q3, no one knew that we would be down 10% of emerging markets and flat and developed in U.S. Someone on Twitter knows. Someone on Twitter knew or I’m sure there’s a Facebook group, but what I’m saying is those things are hard to predict.

Ryan Isaac:
But along Q3, if you were rebalancing and saving frequently, you would be adding money to the thing that’s the cheapest. That’s probably going to bounce back to its average and it’s long-term mean, its long-term average. And you’re having a chance to buy it at the cheapest without having to spend any time scouring news, going to your Facebook groups or going to seminars with the next guru that’s talking really loud and really fancy about predicting markets and economies, what’s going to happen next week.

Matt Mulcock:
I’ve got one next week.

Ryan Isaac:
You’re leading one next week.

Matt Mulcock:
So I’m actually leading one out [inaudible 00:29:53] keynote speaker.

Ryan Isaac:
Mitigates risk. Probably, that’s probably the highest thing it does. And it allows you to always constantly buy whatever’s cheapest in the world at all times. And on the flip side, in some cases, it can make sure that you’re not being too conservative with your portfolio if it goes out of balance the other way too. So

Matt Mulcock:
Yeah. It’s a good point, yeah. You’re right. I mean, if you’re a constant saver, cashflow coming in on a regular basis, then you’re right. I mean, there’s the flip side of what I was saying, as far as it’s setting yourself up for a big fall on the other side of it. It’s also, you said, buying the cheapest stuff, which over time can, for sure, enhance returns.

Ryan Isaac:
That’s what we want to do as humans, we just want to buy the cheap stuff. Want to buy the cheap stuff that’s on sale. That’s what we like. We like sales. Except in stocks.

Matt Mulcock:
[crosstalk 00:30:35] And to your point, kind of like

Ryan Isaac:
We like sales everywhere except stocks.

Matt Mulcock:
That’s the thing. Yeah. We love Costco, we love all the cheap stuff

Ryan Isaac:
We like cheap real estate. We like when real estate gets cheap.

Matt Mulcock:
We love Amazon Prime day and Cyber Monday and all that.

Ryan Isaac:
Cheap practices. Not stocks.

Matt Mulcock:
Cheap practices. We like getting the deals, but we don’t like getting [inaudible 00:30:51] stocks, weird how that works.

Ryan Isaac:
We only like expensive stocks.

Matt Mulcock:
Weird how that works. I know, It’s so true. I don’t know where we’re going with that. But I think the point here is, systematize this as much as you possibly can. Like you said, it can be complicated. It doesn’t have to be, if you have a solid system behind it, you’ve got someone, obviously an accountant buddy or somebody that’s helping you with this. And you’re putting a system in place to make this automatic, make it proactive. Something you don’t have to think about on a regular basis.

Ryan Isaac:
Thanks for tuning in. Thanks for listening everybody. If you have questions like this, go to the Dentist Advisors discussion group on Facebook, post a question. We’ll answer it. Lengthily, which isn’t a word, but we’ll do it.

Matt Mulcock:
We’ll tread wisely while we answer your questions.

Ryan Isaac:
What was the theme? Dibs on P

Matt Mulcock:
It’s six figs kicking off six dibs. Or, I can’t remember.

Ryan Isaac:
Six figs of dibs. If you got them shout out to you, great job for getting there.

Matt Mulcock:
Dude, we should start a club. If you’re a six figs of dibs

Ryan Isaac:
We’ll invite you to the private Facebook group. Yes.

Matt Mulcock:
If you are a six figs of dibs like Ryan and I, because we totally are obviously, [inaudible 00:32:02].

Ryan Isaac:
We’ll let you, we’ll let you

Matt Mulcock:
We should start a club.

Ryan Isaac:
For some reason you’d like to chat with one of us, which we would actually love. Yeah, no, we’d love it. Yeah. We like talking to you and you know, seeing where you’re at. If we, if we’re a good mutual fit to work together. Go to dentistadvisors.com, click the “book free consultation” link and we’ll have a chat. And Matt, thanks for being here. Thanks for joining me.

Matt Mulcock:
Thanks Ryan.

Ryan Isaac:
And thank you all for listening and we’ll catch you next time. Take care.

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