Rebalancing investments - when, how, should I even bother? (1 Viewer)


4 of a Kind
Nov 9, 2014
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Outlet Mall in San Marcos
My investments have changed in value enough that I wonder if I should do something about it. The general plan was 1/3 in liquid equity indexes, 1/3 in liquid mid-risk fixed income securities and a third in illiquid higher risk assets. This mix has served me well overall though in short time frames it was a bit painful. High risk sometimes means you lose your ass.

The third category is made up of rental real-estate and mineral interests. These are intended to be an inflation hedge, a major source of cash flow ( except when it isn't ). Valuation is arbitrary and volatile.

The simple part - as excess cashflow comes in, it goes to money markets. Normally this goes to equities or bonds when I think about it. maybe once or twice a year. This is where I try to keep the balance, by investing in bonds or stocks as needed to keep them roughly equal values. Not super disciplined, but enough so that the asset classes stay very roughly equal. Normally.

What I don't do is sell one asset class to buy the other. The tax consequences are enough deterrence to me that I feel the risk mitigation of rebalancing doesn't cover the tax costs. 2022/2023 has been quite different. High interest rates crippled my bonds while my equities are hitting new highs. I have gotten rather unbalanced maybe 60 - 40 even after directing most of the free cash to bonds.

Question - - should I do something more about this? Someday, bonds will recover - well maybe. Whenever the Fed cuts rates and the economy is acceptable. Sell stocks to buy bonds?

Next, the thorny parts - the values of my third class of investments have gone bonkers in a good way. more so because I was pseudo forced to participate in a series of oil & gas projects that have been exceptionally successful. Enough so that this bucket of investments is worth well over half my total, perhaps as much has two-thirds.

Several issues, it's hard to value. How much is an interest in an oil well "worth"? An appraisal is very costly, becomes inaccurate sometimes overnight.

Just because my appraiser says the property is worth $X doesn't mean anyone will actually pay that much for the property. There isn't a regular market for this stuff. Buyers are looking for suckers - I often get offers to buy my stuff for 5% to 50% of its value. Sometimes the offers are more serious. But even then, The buyers know far more than I do about new developments. I could be "that sucker" and never even know.

Even real-estate has valuation problems. The tax assessor says the house is worth $600,000. My appraiser says it is worth $475,000. If put on the market, their aren't buyers due to high mortgage rates. And the tax rates for gains on depreciated real estate can be punishing. Sure, I have big gains on paper but actually making that into fungible cash isn't easy and currently not likely to match the appraised values. ( and what does that mean, when the appraised values substantially exceed what a buyer is willing to pay? )

These are all volatile, especially the mineral interests. Valuations change +/- 50% in a year easily. Sometimes even more. 2020, oil sold for 20 a barrel. Natural gas sold for $0.75 when, if you had any buyers at all. By 2023 oil sold for $120 per BBL, natural gas was over $4. +600% change in value 2020 to start of 2023 But its down 200% 2023-2024.

Question - Should I even bother trying to rebalance this out? Historically I have taken the "diamond hands" approach - never sell. Mineral interests slowly become cash as the asset is extracted and sold for cash. It will take 12 -18 months to get an appraisal done and then find a capable buyer paying that price. Historically, I ignore this asset bucket. But last year I invested a lot of cash into new projects. Cash that isn't going to fully pay out until the 2030's The transaction costs to sell are huge, maybe 20%? Do nothing and let the process naturally play out? Or go to the time, effort, expense to sell in hopes rebalancing pays off.

We don't need to convert investments to cash. This is all decisions about risk mitigating rebalancing. I would appreciate hearing other people's thoughts

first world problems -=- DrStrange

PS I disregard social security eventually kicking in, even though it is a significant flow of funds. Similarly, i don't include our retirement accounts as part of these decisions. We are still too young to be targets of the RMD rules. the retirement accounts are a relatively small class - less than 10% of net worth. Enough good fortune to think we might never tap these except as required for the annual minimum distributions.
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My approach is be safe with the stuff my family might need, to the point of some pain/costs with diversification. If the premium to execute this seems high, i wonder if there is a way you could get creative and build a cheaper hedge that offloads some of the risk without the transaction costs. No tangible suggestion here, just an idea that came to mind. You know the options better than me.

But the stuff my family might not need, stewardship is important, that’s going to probably end up as philanthropy, but I’m not going through as much lengths to dodge risk. Yolo, as they say. Diversification is basically a tiebreaker

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