The Optometrist’s Guide to Investing 101

Chapter 3: How to Rebalance your Asset Allocation & Other Additional Classes

Step 3) Rebalance your asset allocation each year

Let’s assume you've chosen to invest 70% of your portfolio in stock mutual funds and 30% in bonds at the beginning of 2019. Then, as the prices of stocks and bonds change with the market toward the end of the year, your portfolio might result in 75% stocks and 25% bonds. Therefore, re-balancing is simply correcting the imbalance by returning to the original 70% to 30% allocation.


 A lot of investors re-balance more frequently (like every month, which is extremely excessive) or when their portfolio reaches a certain threshold (like 40% stock).  We recommend keeping it simple, so re-balancing ONCE A YEAR is good enough. 


Many 401K or IRA accounts will have options to allow investors to set the % of their mutual funds to the desired stock/bond asset allocation, thus making re-balancing easy and done within 5 minutes. 


Obviously, the more asset classes you have (like commodities, REITS) or multiple IRA accounts, then the more difficult it will be. 

"Re-balancing your portfolio is simply correcting the imbalance by returning to the original stock to bonds. We recommend keeping it simple, so re-balancing ONCE A YEAR is good enough." 

What are other Additional Asset Classes?


Let’s quickly go over some of the other types of investments that you can include within your portfolio.  Do you need any of these Asset classes to be successful? Absolutely NOT!


 As you become more experienced with your investing knowledge and want to diversify into other fields, then feel free to. We usually recommend only allocating 5-10% of your total portfolio to these smaller investments:


 (1) Emerging Markets Mutual Funds:  

These stock mutual funds focus on companies that are in developing or emerging countries like Brazil and surprisingly China. These countries are not under-developed, but not yet fully developed; So they tend to have a much faster rate of growth (thus, higher returns) compared to developed US Domestic companies’ stock. 

The catch? - They are very volatile with extreme losses or gains as much as 50-90% within a few months (I am talking to you Latin America!).  A lot of investors like to have 10% max devoted to emerging markets funds to help balance risk and reward.


Recommended: Vanguard Emerging Markets Index  ETF Shares (VWO)

 

2) REIT (Real Estate Investment Trust) Funds:


If you have an interest in real estate, but don’t have the necessary funds (or interest) to buy properties to start Real estate investing, then REITs are a great way to get your hands dirty without taking on the risk of being a landlord.


REITS basically invest in companies that buy up or invest in all different types of real estate properties, from commercial to personal.  Again, REITS are not necessary, but offer another way to diversify your portfolio.


They are extremely tax inefficient because they are forced to pay a dividend payout each earning period, so these should strictly be in a tax-deferred retirement account, like a Roth IRA or 401K.


Recommended: Vanguard Real Estate Index ETF (VNQ)


(3) Commodities Fund:


These funds basically invest in items like agricultural goods, natural resources and/or precious metal such as gold and silver.  They have an extremely low rate of return and are considered a poor long-term investment. We recommend NOT investing in simple commodities like gold or weed since they are an awful investment and don’t produce anything (unlike stock in a company).


From 1836 to 2011 (accounting for inflation), the long-term return on gold is a ridiculously low 1.1%.  If you want to invest in precious metals, do so in a commodity index fund or better yet, invest in the stock of a company that uses commodities like Starbucks (Coffee) or Exxon Mobil (gas). Many companies use commodities as their material, thus giving you an indirect exposure to commodities.


Recommended: Vanguard Materials Index Fund ETF (VAW)


(4) Sector Funds


A sector fund is a fund that invests only in businesses that operate in a particular industry or sector of the economy like technology or healthcare.  Sector funds are commonly structured as mutual funds or exchange-traded funds (ETF).  If you have a particular interest or knowledge in an area (like healthcare since we are doctors)  but don’t want to deal with the hassles of individual stocks, then a sector index fund which invests in all healthcare companies is a great to have!  Keep in mind that management fees tend to be higher for these funds.


Recommended:

"REITs are extremely tax inefficient because they are forced to pay a dividend payout each earning period, therefore these should strictly be in a tax-deferred retirement account, like a Roth IRA or 401K"

What about Individual Stocks?


You might be asking yourself right now. What about individual stocks?  Investing in a specific company like Apple or Tesla is basically like gambling to some degree and often requires extensive research into the financial background, earning reports and future analysis of that company. 


To be a successful individual stock investor, you have to be able to critically assess the value of how much the company is worth and keep up with current events and quarterly earning reports of that company. This often causes significant stress for beginning investors. But if one can correctly invest in the right company, like the next Google or Apple, then obviously the earning potential investment will be significantly great!


 Over time, as you become a more experienced investor and want to dabble in individual stocks, by all means, do!  It is a great way to diversify your portfolio and increase earning potential.  However, with all of that being said, investing in individual stocks is not for everyone and it is NOT EVEN NEEDED to be a successful investor.  For the majority of investors, we recommend sticking with low-cost, passive stock index funds, as the core of your portfolio and you will do great!

 

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