The importance of rebalancing your portfolio to meet your changing financial needs and goals: A journey of FIRE (financial independence retire early)…
Dave Ramsey: “You must gain control over your money or the lack of it will forever control you.”
In my early days of investing, way back in 1996, I honestly didn’t know squat about investing. That is fact. I didn’t know how 401k’s or IRA’s worked, nor did I understand what all different types of mutual funds did.
Back then, it was just too much to take all that new information in. I mean, I was barely 25 years old. I knew retirement was probably 40 years away and besides, why worry about the future when you need to enjoy life right then and there?
I didn’t care to learn about investing. I just took the advice of my colleagues and selected the mutual funds that they themselves chose. It was investing on cruise control. I didn’t want to know and I didn’t really want to spend the time to learn about any of this complicated stuff.
After putting away portions of my paycheck every two weeks, I found out my 401k account was growing. Keep in mind, this was just before the infamous “Dot com bubble”, which would come in the year 2000.
Anything I bought, went up in value. It seemed I could do no wrong. I thought I was pretty good & lucky at seeing 13-17% growth per year.
Besides my 401k account, I also opened up a brokerage account and bought some mutual funds. Those would also go up 25+% a year later. I thought I was a genius.
Of course, like life in general, nothing lasts forever. When the “dot com bubble” finally burst in 2000, I lost close to half of my portfolio’s value.
What seemed so easy, was no longer easy. The market kept going down, down, and further down.
The famous periodical “Time” wrote an article just a year prior that covered how every American seemed to be all in on the stock market. It was just like the “Roaring Twenties”. Everyone invested, including those like myself, who had no business investing, until reality finally hit at 100 mph.
Boy, when that reality came crashing down, it got ugly in a hurry. I watched news after news proclaiming the end of the world as the tech sector that was driving all those crazy gains, finally got its comeuppance then crashed, hard.
I got my first taste of a market downturn, and this would not be my last. After this came “the Great Recession”, “Covid-19”, “Russia-Ukraine War”, followed by the most recent “Trump Tariffs”.
I’ve learned some valuable lessons about the stock market along the way including the cyclical nature of markets, how volatility is a natural part of a healthy market, and of needing to weather the storms along the way.
Besides these lessons above, there are other lessons that I still live by to this day some 30 years later, including:
- Keep invested at all times
Do not sell when markets crash. Do not panic. Understand that this is a normal part of investing. Keep in mind that some of the best gains happen right after a major crash. If you miss these particular days, your gains will ultimately suffer.
By doing nothing when markets crash, you’ll ensure that you are able to recover your losses eventually. Historically, every market crash has created a bull market which has seen markets reach new heights.
Do not follow the herd, and panic sell when markets crash. Instead, grow a backbone and keep investing. Keep buying. When you do, you’ll be buying more shares of stocks at a discount. That’s the mindset that you need to practice!
- Investment goals change, adapt as needed
In my early days of investing, I was interested in seeing the most aggressive growth possible out of my investments. This meant lots of technology related mutual funds.
In my middle age, I’ve come to realize the importance of diversifying my investments to include some bonds, target date funds, and international mutual funds.
Now that I’ve retired (it’s been 5+ years since my early retirement), I’m again adapting to my surroundings. *More about this topic to come shortly.
- Dividends are wonderful!
In my early days of investing, I didn’t care much for dividends from my investments. Why? Well, because on a small amount invested (under $20,000), whatever dividends I did get, wasn’t much to write home about. Back then, I was just looking for the highest rate of return on my investments.
This mindset changed when I got my first real taste of dividends/capital gains back in 2018. I got something like few thousand dollars that year which was awesome. Ever since then, end of the year is a time I look forward to, wondering what the dividends/capital gains would be.
With many of these investing lessons learned throughout the years, I’ve realized the importance of both rebalancing my portfolio and of dividends/capital gains. These two are the topics I want to focus on:
- Rebalancing the portfolio
During the accumulation phase of my FIRE (financial independence retire early) journey, the way I would tweak my portfolio was to buy more of a particular mutual fund while simultaneously buy less of another mutual fund.
Within a company sponsored retirement plan, like the 401k, you tweak your portfolio by doing this:
- Change as needed, the percentage of your paycheck you put away towards your 401k account. As a rule of thumb, 10% is the absolute minimum you should save per paycheck to reach financial independence. I encourage everyone to raise that percentage each year. The more, the merrier.
- You then decide what investment gets what percentage of that money as long as the total equals 100%
Here is an example.
Let’s say you make $50000 per year and you put away 10% of your salary, which is $5000. If you have 4 different investments, then you could choose to buy 25% of each, meaning $1250 per investment. (And 25% on 4 different investments equals 100% total). *Tip: If you need help with this, you can ask your HR department.
As years pass, you may change this by deciding to invest 50% towards your favorite investment ($2500), 25% on your second favorite investment ($1250), then divide evenly between the remaining 2 investments ($625 each). If you add these all up, it equals $5000.
The goal is to adapt to your particular situation and needs as the years pass. What looked like a winner, may no longer be one, many years later.
Without going crazy trying to figure out the “perfect” portfolio, you should try to rebalance once or twice a year. Here are some examples of that in action:
- Scenario One
You bought 4 different mutual funds A,B,C, and D. After few years, you realize your top fund is actually fund D, with per year returns of 15%, while fund A, the one you thought should’ve been the best fund, wasn’t, with per year returns of 9%. Meanwhile, funds B and C are keeping up with the market with each returning 10% per year.
What should you do?
You would try to allocate more of your money into fund D while simultaneously decreasing the amount of money going into fund A. With funds B and C, you can keep them as they are, as they’re both keeping up with the market.
If fund D’s percentage was 25% while fund A’s percentage was also 25%, then you would tweak these numbers to something like this: Fund D now gets 35% while fund A now gets 15%. As long as the total percentage equals 100%, you’re all set.
- Scenario Two
You bought 9 different funds over the years, in the hopes that you are well diversified. Most investors would recommend buying a good mix of funds, representing the broad market (S&P 500), the technology sector (NASDAQ), mid-cap market, small-cap market, international market, as well as some bonds/income funds.
Let’s say over the years you clearly see winners and laggards. You find out the S&P 500, NASDAQ, and international market funds have been doing great, while the target date funds, bonds, mid-cap, and small-cap market funds have not been doing very well.
What should you do?
You can keep everything as they are, and hope for the best. Or, you can make things a bit easier (while trying to eke out a higher rate of return), by streamlining your portfolio by rebalancing.
In this scenario, you could decide to sell your laggards (bonds, target date funds, mid and small cap funds) then buy your winners (S&P500, NASDAQ, international funds).
The act of rebalancing is totally up to each individual. You don’t have to do anything if you don’t want to. If you’re getting close to market rate of return, and you’re satisfied with that, then stay put.
However, if you want to see a bit higher returns, you can choose to rebalance.
Most experts would recommend doing this once or twice a year and I generally agree. You don’t want to constantly rebalance depending on how the stock market is doing at the time. There will always be fluctuations in the market as well as some nasty volatility. Changing your investments based on this will ruin your chances of success.
Stick to most experts’ recommendations! Pay attention to your account, and do rebalance, but don’t overdo it. Like most things in life, moderation and balance is key. More is not always good for you, but so is not doing something at all…
- The beauty of dividends/capital gains!
As I mentioned above, the idea of dividends/capital gains didn’t really matter much when it was just few hundred dollars per year. However, as my portfolio grew, so did my dividends/capital gains.
When I started to see real dividends/capital gains hit my account at the end of the year, I realized that I really, really liked dividends/capital gains. I mean, how could you not like getting paid, to see your investments pay you for holding on to these investments???
Even though I had a real taste of a dividends/capital gains hit my account in 2018, I didn’t rebalance my portfolio until last year (2025). Why?
Well, it was two things:
1) I was stubborn about my investment strategy, and I honestly thought all of my decisions were the correct ones. I kept very patient, hoping my investments that weren’t doing so well, would eventually do well.
2) After retiring early in August 2020, I was busy enjoying my retirement. I was a bit lazy on top of that.
So, why the change last year?
Well, it takes a confident man to admit to his mistakes, and with that realization, I finally manned up!
These were the changes I made to rebalance my portfolio:
- Remember the Scenario Two above? Well, those were my actual investments
I had 9 investments, some of which carried over from my old 401k from my car sales position way back in 2001. I had small positions on two different mid-cap funds (one index, the other a mutual fund), two different target date funds, a small-cap index fund, and a bond fund.
I came to a conclusion that all these funds were underperforming compared to my winners. Not by a huge margin, but certainly by 2% point or more. For example, the mid-cap funds did roughly 9-10% rate of returns, the small cap fund did about the same, while the two target date funds were lagging behind by even more.
*Note: the first target date fund had a retirement year of 2005 while the other had the year 2035. I had bought these incorrectly assuming that I would get dividends each year, as these funds were under the category of “income & capital preservation”.
Sure. I preserved my capital, but I didn’t get any income (dividends/capital gains) from these two so called “income & capital preservation” type funds. I felt a change was needed.
As for my bond fund, I knew it was there as a hedge against market volatility, but after seeing it hadn’t gone up in value the past 10 years by much at all, it needed to go.
In the end, these are the changes I made to maximize my dividends/capital gains, while hoping to eke out a bit more returns.
- More streamlined, with better dividend potential!
I liked the idea of streamlining my portfolio to hopefully give it a better chance to grow it even faster, while gunning for higher dividend/capital gains each year. Here are those changes:
- Sold both mid cap funds, bought S&P 500 index fund that I already own
- Sold the 2035 target date fund, bought international mutual fund with consistent dividend payout history which I already own
- Sold the 2005 target date fund, bought a new large cap mutual fund with consistent dividend payout history
- Sold the bond fund, bought S&P 500 fund that I already own
- Sold some of my best performing investment (a NASDAQ heavy fund) to buy the safer large cap mutual fund mentioned in Number 3
- I now own 4 investments, and not 9.
*Note: the rate of return difference between my best performing investment and the new safer large cap mutual fund was roughly 1% per year going back roughly 10 years. The large cap fund pays out dividends while the growth fund hasn’t in awhile. I chose bit more safety and the lure of dividends. Sometimes, a little peace of mind is worthwhile, even at the expense of that 1% difference in rate of return.
In conclusion:
Sometimes, pride gets in the way of maximizing your potential results. It was certainly that way for me, during my early retirement journey. I just thought all my investment decisions were the right ones, when they actually weren’t…
By owning up to my mistakes, I finally made a decision to tweak, to finally rebalance my portfolio.
I’m happy to report that these changes have proved successful, so far. I’ve gotten couple of percentage point gains compared to my previous portfolio’s rate of return, and I’ve gotten more dividends/capital gains. I can’t ask for more at this point.
Mission accomplished! My portfolio has gotten arguably safer, has proved to be higher performing, all while giving me more dividend/capital gains income. Nice!
I recommend everyone to consider rebalancing your portfolio at least once in a while. You’ll easily see your winners and losers when taking the time to analyze your portfolio.
Remember that your needs will change as you go through your own financial independence journey. You may not have cared about dividends when you were young, but maybe as you get older, that may change, like me.
Adapting to change is one of my greatest strengths. It should be for everyone as well. Life is a journey of constant change, and we all should adapt as best we possibly can…
Thank you for reading and good luck on your journey of financial independence!
Jake
Wandering Money Pig
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