Loading summary
Transcript28 lines
- [00:00]
Advertisement Narrator
Foreign.
- [00:08]
Robert Brokamp
But how should you do it? That and more on this Saturday personal Finance edition of Motley Fool Money. I'm Robert Brokaim, and this week I speak with financial planner Sean Gates about how to evaluate and perhaps adjust your portfolio as we prepare to enter a new year. But first, let's highlight some insights from some recent publications. You know it's the time of year when many financial services firms issue their 2026 outlooks. Many are available, and I find them all interesting. But I'll just highlight a few takeaways from the recent publication of Schwab's Outlook for Stocks and the Economy, co written by Liz Ann Saunders and Kevin Gordon. One of the themes of the report is the ongoing K shaped economy, so called because the divergence in fortunes between higher income Americans are doing pretty well and lower income Americans who are struggling due to affordability challenges and job uncertainty. The economy next year will continue to be in what Schwab calls a vibe pression a dour consumer sentiment while GDP continues to grow. To illustrate this, the report cited an unprecedented divide between increasing unemployment expectations for the University of Michigan's Consumer Sentiment Survey, which tends to survey more working class respondents with, you know, kitchen table concerns, and the unusually upbeat outlook for the stock market from the Conference Board Consumer Confidence Survey, which tends to have more higher income respondents. As the report stated, the result is a split personality and confidence. Textbook K, end of quote. One reason the economy may continue to grow despite this vibression is the stimulus from the One Big Beautiful Bill passed in July, which is projected to add 0.7% to GDP in 2026 and close to that in 2027, but at the cost of accelerating borrowing from Uncle Sam. The Schwab report estimates that the percentage of Federal debt to GDP will rise to more than 125% over the next decade, whereas it would have been just, and I put that just in air quotes, a bit over 115% without the bill. One other tidbit from the Schwab the second year of a presidential term is usually the weakest for the stock market. Since 1928, the second year is profitable 54% of the time, compared to an average of 67% for all four years, with an average return of 3.3%. For our next item, we'll continue on the theme of inflation with a recent Market Watch article from Alicia Munal of the center for Retirement Research at Boston College. According to Munal, prices have risen 25% in total over the past five years. However, the three biggest items in most household budgets, housing, transportation and food have risen more incomes, meanwhile, have risen 27%. So while wages may have been keeping up with overall prices, Munow writes that standing still is not enough. Most would like to see their standard of living improve over a five year span. Thus they feel like they're falling behind, end of quote. And now the number of the week, which is 67.8. That was the average age of death of Boeing employees who retired at age 65, whereas employees who retired at age 5055 live to 83. In other words, retire sooner, live longer. There's only one problem. It's not true. These stats come from a graphic that has been passed around the Internet for a long time, including recently, but it was debunked more than 20 years ago. Retirement expert Michael Finka recently wrote an article about it for the website ThinkAdvisor and with the help of fellow researcher David Blanchett, looked at the actual relationship between retirement and life expectancy. Using the University of Michigan's Health and Retirement Study. They looked at the retirement status of participants in 2012 and what percentage were still alive a decade later. However, it's important to take health into account because many people retire sooner due to health issues, which can also result in them dying sooner. So Finke and Blanchett also factored in the participants self assessed health status, which is actually a surprisingly good predictor of how long people will live. The results were the complete opposite of that made up graphic about Boeing employees. Finka and Blanchett found that people who continue working lived longer than those of the same age who had retired. The difference was the largest for those in fair or poor health, but even workers in great health were more likely to live longer than healthy retirees. Next up, how to analyze the health of your portfolio when Motley fool money continues.
- [04:33]
GiveWell Sponsor Narrator
You're a details person. You check at least a half dozen reviews before making any big ticket purchase. You read the nutritional information on cereal boxes one time. You even read the terms and conditions for some app you almost downloaded. So when you're giving to charity, check out GiveWell, an independent resource for rigorous, transparent research about great giving opportunities. The recent analysis of the effects of cash transfers in poor regions of Africa contains over 300 footnotes which might satisfy even the most meticulous readers. GiveWell has spent 18 years researching global health and poverty alleviation and only directs funding to the highest impact opportunities. They found over 150,000 donors have already trusted GiveWell to direct more than $2.5 billion. Rigorous evidence suggests that these donations will save over 300,000 lives and improve the lives of millions more. You can find all their research and recommendations on their site for free and thanks to the donors who chose to sponsor their research. GiveWell doesn't take a cut from your tax deductible donation to their recommended funds. To make a tax deductible donation Today, go to givewell.org and pick podcast and enter Motley Fool Money at checkout. Make sure they know you heard about GiveWell for Motley fool money. Again, that's givewall.org to donate or to find out more.
- [06:01]
Robert Brokamp
It's almost 2026 and soon you'll be receiving your year end statements from all your investment accounts. You'll also hear a lot of advice about reviewing and rebalancing your portfolio in January. But how should you do it? And how much rearranging is actually necessary? Here to give his take is certified financial planner Sean Gates. Welcome back to the show. Xiang who.
- [06:21]
Sean Gates
Hello. This is an easy podcast. Just put everything in gold and go away for a while.
- [06:27]
Robert Brokamp
Well, we may get to that. So you know, you and I have been friends and colleagues for over a decade. So I know you're a successful investor yourself, right? You're a fellow in your 40s. You're financial independent. You only work because you want to, not because you have to. But you've also been in the financial services industry for almost 20 years. So how do you go about reviewing portfolios for yourself and for your clients?
- [06:49]
Sean Gates
Yeah, this is a fun topic. It's tricky because you get investors of all walks of life who don't really know what they're trying to accomplish. And I would say that's the foundation of rebalancing.
- [07:00]
Robert Brokamp
Right.
- [07:01]
Sean Gates
What is your target allocation? Because if you don't have a target, you don't know what to rebalance towards. The target allocation is usually a function. In the old school world, we'd call it the investment policy statement, but really it's just a document or a guiding ethos on where you want to go. So a financial plan could be a decent investment policy statement. And it's to say a combination of what is your risk capacity and risk tolerance back into that target allocation. Is it 60, 40 like a traditional mix, 100% equity, you know, all cash. Those are how you would back into your target allocation and then you get into the rebalancing effort.
- [07:40]
Robert Brokamp
When you talk about risk tolerance, you know, we are at a point now where the market is at all time high. The market has done very well over the last five or 10 years. There have certainly been some speed bumps, but I think people are feeling pretty good about portfolios. Do you take that into consideration when you talk to a client and you're like, you know, maybe, maybe you should dial it back? You may feel pretty good right now, but you may be feeling good because the market is doing well?
- [08:03]
Sean Gates
Yes, I would say, you know, valuations is something to consider when you're thinking about rebalancing. Right. If we take a step back on the overall rebalancing process. Right. There's typically two ways to do it. One based on time and one based on certain measurable metrics, usually a percentage drift. But it could also be one of valuations. It could also be one of overall market sentiment, like Fed cutting interest rates, like unique market events. And so I do think you should take those into consideration. But you have to go through a lot of education for someone to help guide them on where they're rebalancing or target allocation should be. One chart that I think you and I are very fond of, I know me and Megan are very fond of, is the quilt chart. So the quilt chart is a very common chart that shows which asset classes have done the best on a year by year basis stacked over one another. So you could look at 20, 24 and see that gold did very well that year, you know, up 20%, but then bonds were negative 5%. And a well diversified portfolio is usually going to fit somewhere in the middle of that quilt chart. And that ties back to the risk tolerance.
- [09:12]
Robert Brokamp
Right.
- [09:12]
Sean Gates
Or as an investor, do you want that sort of smooth return profile with less magnitude of drawdown or less volatility, or do you want to target some of those asset classes that can give you a juiced rate of return but higher amount of volatility? And then you could always tie that to your point around certain market events, certain valuations. Maybe you're paring back the aggressive stuff when valuations get high, and you could incorporate that in your yearly rebalancing or semiannual rebalancing conversation.
- [09:44]
Robert Brokamp
You mentioned Megan. I'll just clarify that. Megan is one of our colleagues at Motley Fool Wealth Management who was on our guest on last week's episode. We had a great discussion about Roth advice gone wrong. So make sure you listen to that. Yeah. And that quilt, I think, is always instructive because I call asset allocation sort of like the hokey pokey. Whereas one year one type of investment is in, and the next year it's out. Whereas a well diversified portfolio just kind of rides along in the middle, it's never the number one, it's never the bottom, but it's a nice smooth ride.
- [10:15]
Sean Gates
Yeah. And I think that's important because especially from a foolish philosophy perspective, right. You can almost rob yourself of this concept of asset allocation because a lot of foolish investors are diving into individual stocks. So I know several folks that I've run into who have upwards of 50% of their portfolio in a single stock. Right. I know some people who have 100% in Apple and they've had that for a decade and that served them very well. And so you have to kind of attune what does rebalancing mean for that person. Because if you looked at a quilt chart for Apple, it's like, how do you proxy that against broad asset classes? And so it's just a really interesting conversation on how you evolve your rebalancing process.
- [11:00]
Robert Brokamp
As people begin to receive their year end statements, there's always, you know, how their portfolio or that specific account performed. And there's usually a benchmark in there somewhere. It might be the s and P500, it might be some MSCI index. And it always occurs to me that in many ways those benchmarks aren't appropriate. Right. This portfolio may have cash and bonds and international stocks. Why are you comparing it to the S&P 500? Do you think benchmarking is all that important, like to compare yourself relative to some index? Or is it more important just to make sure you have enough money to accomplish your financial goals?
- [11:35]
Sean Gates
I would say it's a little bit of both. I would say the most important thing is are you achieving the rate of return for the level of volatility that you're comfortable with towards your goal achievement? That's going to be the most important thing and should be the North Star for most people. At the same time, if you're investing, you have to have some measurable guide on the underlying performance of the component parts. Right. And so then benchmarks become relevant if you're in, you know, a target date fund in your 401k and that target date fund is a stinker compared to all other target date funds. That matters on a micro level and you should be able to adjust with that informed decision. But to your point, most people have gotten accustomed to benchmarking everything against the S&P 500. And that gets really dangerous because people are getting over their ski tips in terms of risk taking because everyone thinks you can just put everything in the S&P 500. Look, it's done 10% every year. And that's not appropriate for your level of risk or your goal set. Right. And a lot of people are better off if they ride that smooth middle of the road quilt chart because they might make bad investor decisions on their wealth if they see volatility in the future.
- [12:52]
Robert Brokamp
Particularly at this time. I think it's challenging to benchmark your portfolio against the S&P 500 because it has basically been the asset class of choice over the last five, ten years, right. US large cap stocks have outperformed just about everything. So if you had international, if you had small caps, if you had value, and of course, if you had cash and bonds, that was a drag on your portfolio. But that doesn't mean it was inappropriate for your situation. So I think that's important context because if you do benchmark to the S&P 500, you're probably going to not look so great if you had a well diversified portfolio, but it still might have been the right choice for you, correct? Yeah.
- [13:29]
Sean Gates
And you know, it gets very tricky, especially if you are paying someone to manage your money because you can blame them for not competing against the S&P 500. And then you get in this place where a version of rebalancing that you do is shopping money managers. So you fire one money manager who has failed, failed to meet their benchmark and you go put it with someone else. And it's a version of chasing performance and you can trap yourself in that way. I would argue that the S&P 500, while it's done very well, if you look at this year, international stocks have crushed it and gold has crushed it. So finally we are starting to see where people who have just hitched their wagon to The S&P 500 are finally recognizing that other asset classes can help their portfolio. Is this a unicorn year? You know, an outlier for one year perhaps. But again, it just shows you in that quilt chart or stacked ranking asset class visual that sometimes you have to have other component parts to power your portfolio.
- [14:33]
Robert Brokamp
You mentioned having a stinker of a target date fund. So let's move on to how you look at your individual investments and decide whether to keep them or not. Obviously with any form of mutual fund or etf, you want to benchmark it against others within that category. Want to do the apples to apples comparison, ideally over three to five years, maybe longer, just to make sure that you are outperforming that category or not. Just you probably should just go with an index version. But how else do you look at all your investments, your funds, your stocks, Your things like that, you go line by line.
- [15:09]
Sean Gates
Yeah, I mean, I think it depends on the construction of your portfolio. So if you take the, you know, the buy and hold index investor, if you go line by line, you might only have four for investments. Right. You might have voo, bnd, so there you could go line by line. But you really don't have to worry about comparisons because you're just getting the index rate of return. If like traditional Motley fool investors, you're trying to outperform, you're seeking outperformance with skilled stock selection, then to your point, yes, I think, you know, a typical three to five year evaluation of those underlying money managers. And if you have individual stocks, you give leeway to those individual stocks to work for you. Right. So again, this client who had 100% of their portfolio in Apple certain years, if Apple underperforms, you could be inclined to rebalance out of Apple. But you give leeway or a leash to Apple to recover and do well. And so those would be the types of things that you would look for. You would also take into context the asset location. So if you have certain positions in a taxable account, you might be more inclined to let those work for you or strategically harvest losers or winners, tax loss harvesting or tax gain harvesting. And then you might have a different rebalancing structure in a tax deferred account or a tax free account because you can let winners run in those accounts for longer or you can purposely sell big winners over a short period of time because there's no tax implications. That's another way to do things.
- [16:38]
Robert Brokamp
Let's move a little bit more into rebalancing. And you mentioned that there are a few ways to do it. Some people, people do it annually, once a year. Some people do it as a target. You know, if a certain allocation has moved 5 percentage points 1 way or the other, do you think it's important to do it every year or is it one of those things that, you know, you could probably get away with doing it every two to three years and be okay?
- [16:59]
Sean Gates
I think my view on this has changed over time. I am comfortable letting it ride longer. I have grown an affinity to the foolish philosophy of watering your flowers, not your weeds. And so from that perspective, things that are doing well tend to do well. There's a bit of momentum there. And so if you said every two years I'm going to rebalance, I think that's perfectly fine. You can go through the mental exercise of evaluating things on a shorter timeframe, but you don't have to do anything. Right. There's no forced mechanism of rebalancing. But you could say every six months we're going to review how things are doing. If certain elements of my portfolio are doing very well, I don't have to do this at a six month regimen. I'm just checking in with it. And then we'll do it again in the next six months and you actually pull the trigger when you feel comfortable. And then again, timing isn't the only component, right? So if you have an outsized position, if something has grown to a very large position, that should be a determinant. And again, it's always tied back to your level of volatility adherence. But if something gets to like a 20% weight of your overall portfolio and everyone kind of has different measures of what that percentage allocation should be, that's probably a good time. Regardless of if you have a two year rebalance evaluation or a six month evaluation, you should probably consider rebalancing when something gets too big in your portfolio.
- [18:20]
Robert Brokamp
I'll just point out there's some simple ways to just do rebalancing on the edges with cash flow, right? If you're still saving for retirement, all your contributions to your 401s and IRAs go into the underweighted assets. If you're retired and you need to sell a little bit every year to pay your bills, you sell your overweighted assets. If you do have an overweighted position and you're reinvesting the dividends, you can just stop reinvesting the dividends you probably shouldn't be building up. And then you use that cash to buy something that you need a little bit more of. Any other tips and tricks involved in rebalancing your portfolio?
- [18:52]
Sean Gates
Yeah, I mean, I think the thing I would mention is just in financial planning world, there's always this notion of what is the investor rate of return, right? Because you can quote the S&P 500 and say it gets 10% per year, but the actual investor in The S&P 500 never achieves that rate of return because they're tinkering with their portfolio too much. Hence me saying I'm actually cool with a slower rebalancing process. Because by and large, the people who just don't mess with their account very much tend to do better than the people who are over tinkering with their portfolio. The only caveat that I will mention with respect to that is when you're constructing your portfolio or your target allocation to rebalance around it helps to have a conservative portion of any kind, even cash, to temper bad behavior. So April is a great example where I was fielding calls this year in April from large accounts who went all to cash. And this has happened to me many times. And my job in that moment is to convince them not to do it. Say I have a 50 success rate, right? So some people I'll talk off the ledge and some people I won't. The people I can talk off the ledge better is usually someone who has a conservative element in their portfolio that I can say, hey, let's use this moment in time to make a positive action. A temporary moment of rebalance where we say you're 50, 50 stocks and bonds. Let's sell some of the bonds, lower your bond allocation and buy into the madness that gives them something to do in that moment of pain and avoided the worst outcome. It's hard to quantify the worst outcome. Nobody cares about the person who didn't sell to cash in a panic because no one reports it. That's a very critical component. You should always have some amount of conservatism in your portfolio to make a positive movement.
- [20:51]
Robert Brokamp
Well, this has been great, Sean, thanks so much for joining us.
- [20:54]
Advertisement Narrator
It's the time of year for coordinating flights, Airbnbs, hosting dinners in laws, must have kid gifts, you name it. It's easy to lose sight of your money and financial responsibility amid all the stressfully happy chaos, but there is hope out there. Feel organized and confident in your finances with Monarch, an all in one personal finance tool that brings your entire financial life together in one clean interface on your laptop or your phone. You know, I've got my stocks in order with a massive spreadsheet, but I need the most help with credit cards. My family and I seem to have a different card to optimize our cash back at every store, website or airline we frequent. Monarch allows for a holistic look at all our spending. Meanwhile, it's Forbes best app for couples. Don't let financial opportunities slip through the cracks. Use code mfmonarch.com in your browser for half off of your your first year. That's 50% off your first year. @monarch.com with code MFM.
- [21:59]
Robert Brokamp
It's time to get it done, fools. And I'll just highlight a couple of year end financial planning tips that I haven't mentioned in previous episodes, starting with spending money in a flexible spending account that can't be rolled over to next year. If you're saving for college, there's no deadline for contributions to 529 accounts, but many states allow residents to deduct contributions on the state income tax return and to take advantage of that, the contribution generally must be made by December 31st. If you have a 529 and a kid in college, take money out to reimburse yourself for qualified 2025 expenses because withdrawals have to be made in the calendar year the expenses were incurred and the list of qualified expenses is pretty long, including textbooks, equipment, technology, food, dorms, off campus housing and school loans up to a limit. And if you have unused money in a 529, it can be transferred to a Roth IRA for the beneficiary if you qualify. And there are a lot of qualifications, so make sure you research the rules. And that is the show. I wish you all a very merry Christmas. And if you're looking for an eclectic and offbeat holiday music playlist, check out my Bro Ho Ho playlist on Spotify. Thank you as always to Bart Shannon, the engineer for this episode. People on this program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show Notes. I'm Robert Brokamp. Full on everybody.