We’re sitting down with our financial planner on Monday for our annual portfolio checkup. The key issue we need to think through is the relative balance of our portfolio between safe/less safe investments and those which are liquid/illiquid.
When we bought our condominium in Celebration FL in February, I was a bit concerned our portfolio would be getting a bit heavy in real estate. In addition to this new property, we have our house in MN, a rental townhouse for our son, and half-interest in a MN lake cabin, which my wife inherited last year.
I even looked at taking out a mortgage on the new condo, so that we could keep more money in faster-growing, more liquid investments. We were pretty far along that path when we decided to just pay cash. We reversed course when we found how much of a hassle the mortgage paperwork was going to be, how high interest rates are right now, and that there were more mortgage closing costs that I first imagined.
Since the stock market has done so well over the last year – since we last rebalanced (April 2023) – I’m hopeful that we are still actually pretty well balanced. That is, the growth in the stock market offset the cash we spent on our condo. After all, the S&P 500 is up 25.8% versus 1 year ago; and +7.1% since the start of 2024.
Have you done a significant rebalancing over the last year?
Image: (c) MrFireStation.com
MrFireStation 
Perfect timing. I’m in the process of buying a house for cash and was thinking through similar problems. I have a target allocation for real estate and I am using Vanguard’s VNQ to cover. Do you think I should reduce my REIT investments dollar for dollar based on the house purchase? I know one is a concentrated investment and the other is a broad index. However, I can’t think of another way to bucket my house purchase. As for other rebalancing, I’m just withdrawing from the assets that are currently overweighted. I realize that is a very slow way to rebalance but I don’t want to pay taxes just to rebalance. Your thoughts on my strategy would be much appreciated. Thanks
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I typically review once a quarter and rebalance individual dividend paying stocks based on two scenarios.
Scenario 1: A stock has become popular and had a run up in its price which lowers the current yield. I sell for a capital gain and redeploy the cash into another stock that has a higher current yield. I have been in, then out and am now in Oil and Gas Majors that thrive with the adverse actions BiDUMB has made against oil and gas production. These actions limit the major’s competition and yet you could pick them up with historically high yields.
Scenario 2: A stock has had a material change in the outlook of its business. These can happen at any time. The last three stocks that I sold because of a material change in their business were a hospital REIT which had a problem with one of its largest hospital operators not paying 100% of their rent. BestBuy because consumers are starting to be tapped out. I was able to swap to a safer and higher current yield utility. The other recent sell was a commercial REIT that had too much exposure to Office Buildings. Office Buildings are a bad business to be in these days because COVID-19 caused companies to build out telecommuting infrastructure and workers are not returning to the office. I redeployed into Electric Utilities, Pharma and Apartment REITS.
I redeploy for higher value with reasonable high current yield and safety.
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Wow – quarterly! That’s much more frequent than we rebalance. They do seem like the right moves. I do it 1x or 2x at most in a year.
That said, with your dividend focus & individual stocks, your portfolio is a lot more hands on than ours. Our equity & bond index funds try to take bad with the good in the market.
Maybe as I do less board work, I’ll become a more active investor. Or, maybe I’ll just goof off more! 🙂
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I really enjoy it. It is like a treasure hunt and it really doesn’t take that my time. Not compared to working.
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I’m sure you find some treasures, too! I thought of you yesterday. Saw a report that my former MegaCorp (MMM) might cut their dividend as a new CEO comes in and tries to straighten things out after a big spinoff & lawsuit settlements. They’ve increased the dividend every year for 64 years.
https://stocks.apple.com/A5OBnZw8GSyGwn8VbbHuqCg
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One other comment, I really like the 2.65% 30 Year Fixed Mortgage I have on my house. It is an inflation hedge and Washington D.C. is inflating the value down by a lot.
On the other side, my oldest son is buying his first house and interest rates are in excess of 7%. Hopefully, Washington D.C. gets massively restructured to stop the deficit spending. My son’s financial game is he can keep his mortgage that he can afford. If Washington D.C. cleans up their act, his house payment could easily be halved.
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I typically rebalance during January each year. My investing plan also triggers a rebalance anytime any area exceeds a +- 5% change. We have naturally been heavy in real estate given that’s been a significant growth focus for the past 17 years to enable and achieve an early retirement. Now, after 7 years of early retirement, the market winds have convinced me it was time to “down shift” a portion out of real estate because it had exceeded 60% of our portfolio. So we sold 28 units (roughly half of or rental properties) in late 2023. We have invested a portion of that money back in the stock market, and we are putting a portion back into newer real estate. My current objectives are 33%/33%/33% (stocks/bonds and cash equivalents/real estate).
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Wow – selling 28 units has to be a big project! We continue to have our one lowly rental townhouse, but I think that’s coming an end soon as he might move out. That said, with interest rates now high and housing affordability at a several-decades low, I’m sure it’s good to have rental properties right now. I would guess market rents are continuing to go up. Has that been the case for you?
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Absolutely. Rents have steadily increased throughout my investing career in RE. It has certainly accelerated since COVID. Rents drive sale prices in rental property, so it was time to realize some of those profits. I will likely reload with newer properties in the coming years. It’s still a great divesture.
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