John Bogle Doesn’t Rebalance His Portfolio

When John Bogle ran his regular “Ask Jack” column, he addressed a reader question about portfolio rebalancing and mentioned that he didn’t engage in the practice himself, and offered this data to readers:

Hi, Mr. M,

Sorry it’s taken me so long to respond to your thoughtful note.  Busy!

We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind.  Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually.  That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary.

We also did an earlier study of all 25-year periods beginning in 1826 (!), using a 50/50 US stock/bond portfolio, and found that annual rebalancing won in 52% of the 179 periods.  Also, it seems to me, noise.  Interestingly, failing to rebalance never cost more than about 50 basis points, but when that failure added return, the gains were often in the 200-300 basis point range; i.e., doing nothing has lost small but it has won big.  (I’m asking my good right arm, Kevin, to send the detailed data to you.)

My personal conclusion.  Rebalancing is a personal choice, not a choice that statistics can validate.  There’s certainly nothing the matter with doing it (although I don’t do it myself), but also no reason to slavishly worry about small changes in the equity ratio.  Maybe, for example, if your 50% equity position grew to, say, 55% or 60%.

In candor, I should add that I see no circumstance under which rebalancing through an adviser charging 1% could possibly add value.

Use your own judgment, but perhaps these comments will help.

Best,
Jack

I can relate to Bogle’s logic. If your investment in Coca-Cola, Nestle, or ExxonMobil triples in twelve years, it’s hard for me to appreciate the logic that selling 20% of the stock and putting it into a second-tier holding is some kind of victory that merits applause for intelligent risk management.

The Pareto Principle seems to apply to all areas of life—if you own 25 stocks for twenty-five years—you’ll probably be able to pinpoint five or so investments you made that advanced you towards your goals a whole lot more than the others. And if a particular investment does well from 2014 through 2039, then it shouldn’t be terribly shocking if it had appreciated significantly by 2019, 2024, 2029, and so on.

Maybe I’m biased because of the anecdotal stories I hear from readers who say “Man, I wish I didn’t sell that Altria and Conoco back in the day” or “I once sold Disney stock because I thought VHS movies would get replaced, can you believe that?”

Take a look at this list of the original “Nifty Fifty” stocks. Those blue-chip companies held up much better than someone would realize just by taking a cursory look at the names and guesstimating about whether they still exist (e.g. Lubrizol got purchased for a lot of money by Berkshire Hathaway, Schlitz Brewing got purchased for a lot of money by the Stroh Brewing family, Sears Roebuck had all these spinoffs like Discover and Allstate that built wealth on their own, etc.).

Unless you’re old and have like 50% of your wealth in one stock or something extreme that suggests that you wouldn’t be able to diversify away from relying on 2-3 stocks just by deploying the dividends elsewhere and making fresh cash investments from your job elsewhere, I think the best way to rebalance is to divert dividends elsewhere.

If you are middle-aged and have 25% of your portfolio in Chevron, you can dilute the effect of your Chevron holding by letting the other 75% of your portfolio automatically reinvest and grow, and then taking your Chevron dividends to put elsewhere. And boy, will Chevron give you a chance to make new investments elsewhere: the company has paid out $17.55 in cash dividends for every share that you held from 2010 through 2014. If you were sitting on 2,000 shares of Chevron, you got $35,100 in cash that you could deploy elsewhere to gradually make new investments.

The reason why I came to this conclusion is this: (1) I do like the general principle that diversification seeks to promote. You don’t want failure at two or three businesses to have an outsized negative influence on your quality of life. But I have a competing interest to satisfy: (2) I want to keep solid investments intact. If I own a superior business, I don’t want to relinquish it just because, well, it’s been so successful. Diverting dividends is a gradual process to rebalancing (which can be sped up if you have a high savings rate from your job of new cash to add to your portfolio) that lets you increase your revenue streams without ever having to actually give something up that you might be kicking yourself for later.