Long-term investing works, but it’s time for buy-and-hold investors to rebalance

Steven Spielberg

If you long ago adopted a buy-and-hold strategy, you did your retirement the biggest of favors.

In the 20 years through 2020, $10,000 invested in the S&P 500 stock index grew to more than $42,000.

Aspiring market-timers beware: If the 10 best days for the index are subtracted — just 10 days out of 20 years of trading — the $10,000 doesn’t even double. Remove the 20 best days and the $10,000 was worth just shy of $11,500.

As smart as it is to take a patient, long-term perspective that doesn’t try to time market swings, buy-and-hold investors might be taking on too much risk right now.

If you haven’t checked your overall mix of stocks and bonds, chances are you currently have more riding on stocks than you intended. That’s because stocks have been on a crazy-strong rally, and bonds have been plodding along, as designed.

For example, let’s say that your goal is to have 60% invested in stocks and 40% in a core U.S. bond fund. If you started with 60/40 a year ago, in late September that mix had shifted to 68% stocks and 32% bonds.

If you haven’t touched a thing for five years, a 60/40 mix is now around 75% stocks and 25% bonds.

A portfolio that 10 years ago started with a 60/40 mix would now be 85% invested in stocks and 15% in bonds, as during that stretch U.S. stocks gained more than 375% and core bonds gained 34%.

Without debating which stock market gauge is best, there is little debate that U.S. stocks aren’t exactly cheap right now. There’s no telling when a correction (loss of 10% to 20%) or bear market (loss of 20%+) might strike, but a retreat wouldn’t exactly be surprising given the recent tear.

Since the March 2020 low in the COVID bear market, U.S. stocks have more than doubled.

That makes it extra timely to consider checking your investment portfolios to make sure they have the appropriate mix of stocks and bonds.

Moreover, take a step back and think through if your long-term asset allocation strategy still makes sense. Maybe you settled on a 70/30 or 80/20 mix when you were 35. But now you’re 55 or 60. Do you still want to own as much in stocks? Maybe the 80/20 mix is ratcheted to 70/30. Or the 70/30 to 60/40.

To be clear, there’s no single right answer. If you have a pension, and all your living costs can be covered by that and your Social Security benefits, you might want to keep a hefty chunk in stocks as part of legacy planning. That can make sense given you aren’t depending on your stock portfolio to cover basic living costs.

If you find your current mix of stocks and bonds is a bit out of whack, you have a few options for getting things back to your preferred asset allocation mix of stocks and bonds.

If your money is invested in a workplace retirement fund or an individual retirement account (IRA) you can easily – with a few clicks in your online account – move money out of your stock fund(s) and into bonds.

Exchanging shares within a retirement account does not trigger any tax bill. Side note for 401(k) investors: Check if your plan offers a free service that automatically does this rebalancing for you, based on your target mix. Plenty do.

If your investments are in a regular taxable account, you need to consider the taxes you will owe with rebalancing. When you move money from one fund or exchange-traded fund to another, that is considered a sale, even if you immediately reinvest the money in another fund. Gains on that sale are subject to tax.

Rate.com covers the worlds of personal finance and residential real estate.


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