Is now the time to change your investing plan?

2022 was a wild investing year. Stocks and bonds both crashed.

This year, so far at least, things are on the upswing with stocks year to date but Mr. Market is always a very fickle guy!

Last year:

• Anyone with “diamond hands” (holding some crypto assets) might have had their hands turned to stone – these assets tanked. (Bitcoin lost about 60% of its value!)
• Stocks got hammered.
• Bonds offered no place to hide.
• Real estate was also correcting.
• Cash was getting eaten alive by rising inflation.

Will 2023 be different? Is now the time to change your investing plan?

Read on to learn our take.

Lessons from market history and Bogle

The late, great John Bogle once wrote:

“To invest with success, you must be a long-term investor.”

We love that quote here.

The facts are, most people do not think nor act long-term.

Think of it this way – most people cannot forecast their grocery list for the week and stick to it, let alone make a sound financial plan some 30-years ahead.

There’s nothing wrong with that per se. We are human afterall and life gets in the way…

In another way, what we’re trying write and say is planning and re-planning is real work – planning is a valuable life skill. That’s worth repeating on this site since with any form of planning and re-planning you’ll get better at managing your cashflow along with your portfolio. 

You might recall up until his death, Bogle was a financial industry pioneer. As the founder of The Vanguard Group, which specializes in low-cost index funds, he had a phenomenal impact in driving down the costs and complexities of market participation for millions of retail investors.

In fact, many of these investing concepts were not popularized until Bogle popularized them.

Here is some inspiration related to market history and theory, the next time you consider selling all your stocks, bonds and/or overturning your portfolio when any Mr. Market unrest hits:

• “In the long run, investing is not about markets at all. Investing is about enjoying the returns earned by businesses.” As such, the long-term investor should be chiefly concerned being invested and earning the cashflows (i.e., dividends) and growth generated by the businesses that he or she owns.
• “Time is your friend; impulse is your enemy”. Bogle urged investors to be patient and to avoid hasty decisions. Further, once said investor has started on a solid long-term investment strategy (with stocks, with bonds, with real estate, or other), the best thing we can do as investors is to let time and compounding work for us. Getting impulsive and changing our minds, frequently, is not an enbler.

Did you know….?

“$81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday.”

Source: The Psychology of Money.

The key point here is that while Warren Buffet is often cited as one of the best investors of our time, it’s actually time that Warren Buffett has invested that has been his ultimate superpower.

• And finally, maybe the best: “Your success in investing will depend in part on your character and guts, and in part on your ability to realize at the height of ebullience and the depth of despair alike that this too shall pass.” So, markets will market. There will be times of market despair but there will also be times of joy in terms of massive returns. It is at these extremes where opportunities are found and risks are avoided.

Some sources for our quotes.

Is now the time to change your investing plan?

Our answer to this simple question, certainly for today’s context, is absolutely “no”.

We believe your answer is always “no” when it comes to changing your investing plan assuming you answer “yes” to our three key questions below:

1. Do you hold a bias of equities over bonds? If yes, don’t worry – carry on. If no, consider that rewards from the stock market, over bonds, and the stock market rewards are far higher than idle cash under your mattress over the long haul.

2. Are you controlling investment fees, keeping them as low as possible? If yes, please continue! If no, consider financial fees as wealth killers – something to manage better.

Our friend Larry Bates who wrote Beat the Bank told investors these principles:

Embrace wealth builders:

1. amount,
2. time, and
3. rate of return.

Added together, more money, more time to compound/grow and higher rates of return are ideal for investors.

Steer far away from wealth killers:

1. fees,
2. taxation, and last but not least,
3. inflation. 

Any one or more of these things are wealth destroyers you will need to fight as you work through your investing journey.

3. Are you controlling investment risk through diversification? If yes, well done. If no, consider that diversification, not just owning different companies, but owning different sectors in different parts of the world, can offer retail investors some “free lunch” – portfolio risk reduction through international diversification. Investment risk is usually lowered in a worldwide portfolio of stocks vs. domestic stocks only.

If you have three “yes” answers above, we believe you are well on your way to wealth-building just by owning lots of equities, managing your financial costs, and controlling your risk through diversification.

So, you do not need to change your investing plan.

When might you need to change your investing plan?

Well, there are instances where this could apply.

The concept of rebalancing is important given some adjustments may be required now and then to help mitigate the volatility you wish to stomach in return for portfolio returns, depending on your risk tolerance that could change over time. That said, you should know we’ve found over the years from many studies (and from practical experiences from many DIY investors) that suggest it makes little difference whether you rebalance annually or quarterly – as long as you keep your money management fees and transaction costs low of course. By rebalancing, generally speaking, you should end up with practically the same returns with minimal impact on portfolio volatility.

But, in our opinion, rebalancing based strictly on any calendar cycle makes no sense. The only reason you should really do it is when you’re off track with your asset allocation target.

Why rebalance?

Rebalancing makes sense when your desired asset allocation (mix of stocks, bonds and cash) deviates considerably from your established targets. This process should help you, practically speaking, sell high and buy low by default.

For example, if your equities are on a bull run and these stocks are now worth more value in your portfolio, you’re essentially selling high. Rebalancing anytime stocks outperform bonds even by a bit is not likely going to help you out – you could be selling stocks too frequently and missing out on further equity gains.

Instead, we believe someone with a traditional 60/40 stock and bond portfolio would only rebalance when assets were about 15-20% away beyond target. This way, using a tolerance band you can avoid rebalancing for the sake of doing so and instead, limit poor timing, limit transaction costs and limit other bad behavioural stuff that could hamper portfolio returns.

If you’ve been told to consider rebalancing any more frequently than once per year, we think you should reconsider that. On top of that consideration, there are now a few great, low-cost, all-in-one ETFs that do all the portfolio rebalancing work for you.

You can check out this pillar post (that we update every year with new data) to learn about some of those ETFs right here:

The Best ETFs in Canada for Building Wealth

As Warren Buffett once famously said:

“Keep all your eggs in one basket, but watch that basket closely.”

Do we rebalance our portfolios?

At Cashflows & Portfolios, the short answer is esssentially “no”.

Both of us have maintained a long-standing, multi-decade bias to owning a basket of stocks from Canada and the U.S., and then we hold some indexed ETFs for extra diversification. We have no bonds in our respective portfolios to rebalance. We do however keep some cash on hand. We use that cash to buy our desired stocks when they go on sale, as much as possible, and/or buy when equities as a whole via a low-cost equity ETF when markets tank – to take advantage of lazy, passive, future total returns.

You can read other posts about some of our stocks and ETFs below:

These are our top-5 stocks (a pillar post we tend to update frequently).

Is Dividend Investing right for you?

Why investing in indexed funds can make great sense for some or most of your portfolio.

Stock market history can be the best teacher – even if this time is different

“The wonderful magic of compounding returns that is reflected in the long-term productivity of American business, then, is translated into equally wonderful returns in the stock market. But those returns are overwhelmed by the powerful tyranny of compounding the costs of investing. For those who choose to play the game, the odds in favour of the successful achievement of superior returns are terrible. Simply playing the game consigns the average investor to a woeful shortfall to the returns generated by the stock market over the long term.” – John Bogle, founder of Vanguard Group.

As an investor, you need to accept market volatility, massive price swings, and potentially prolonged periods of market lulls because as an investor you are getting paid (eventually) to enjoy the ride.

This means investors should try and stay calm (and do nothing at all) even if extreme market movements may occur from time to time.

Is now the time to change your investing plan summary

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