A different kind of rebalancing

Semi-retirees need to give themselves permission to spend

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It’s a rare financial planner who doesn’t counsel clients to rebalance their portfolios at least once a year. In the kind of bull market we’ve experienced in recent years, this is only prudent.

You know the drill. If your long-term strategic asset allocation is 60% stocks, 35% bonds and 5% cash and a year’s gains takes your stocks allocation up to 70% stocks, you should sell some stock winners: enough to take the equity allocation back to 60%. Proceeds can be redeployed into bonds, assuming that’s the asset class that has languished.

Over the five years since the financial crisis bottomed, pundits have warned interest rates must rise soon, and with it declines in bond prices. So far they have been premature. But you don’t have to put your stock profits into more financial assets. Consider instead a “different” kind of rebalancing I’ve dubbed “lifestyle rebalancing.” This resembles the above but takes into consideration your total lifestyle and physical possessions as well as financial assets.

Money is just a way of deferring the eventual purchase of goods, services and experiences. The realm of financial assets with which MoneySense readers are so comfortable is merely what I call “blips in a computer somewhere.” Anyone with an investment account can relate to this: when you scan your statement of stocks, bonds, ETFs and other securities they are just digital representations of assets one or more steps removed from the real world. Brokerage statements represent tiny fractional ownership of real businesses and the earnings streams associated with them, plus a similar right to the interest generated by debt instruments. You could argue pensions and insurance policies are similar beasts.

We have little choice but to have faith in these electronic representations of money. But should all our wealth be held in mere “blips” in a computer? Perhaps not. The first way to diversify outside financial assets is real estate, starting with a principal residence: the foundation of financial independence. After that, 10 or 15% could be deployed in investment real estate. If being a landlord isn’t your thing, the fallback is REITs (Real Estate Investment Trusts), or an ETF that gives you a basket of them. That’s my preferred route, but notice that by so doing we’ve again fallen into the trap of switching from “tangible” goods to more computer blips.

What other hard assets could you acquire as you take partial profits in this protracted bull market? With the Dow north of 17,000, I found it difficult to buy broad indexes at those levels, however much I am attracted to indexing and ETFs in theory.

In the spring, I finally bit the bullet and traded my old Volvo in for an almost-new hybrid Camry. It was a cash deal funded with partial profits taken from the sale of a Nasdaq-based Internet stock ETF (PNQI for the curious). A few years earlier, I had written a column on how I resisted buying a new car, only to regret it when the market subsequently fell. This time, I was emboldened to act.

I confess this otherwise frugal writer is enjoying his new tangible good and is not concerned about the resulting dent to his portfolio: the amount is well below the “safe” 4% annual withdrawal rate I’ve blogged about.

You could argue anything that enhances your career is a tangible asset also worth acquiring: new clothes, or the latest productivity-enhancing gadgets (I’ve also bought an iPhone 4S.)

In semi-retirement, I find it makes sense to “rebalance” not just from financial assets into physical “stuff,” but also into less tangible life experiences. I have in the past derided travel as “expensive and over-rated” but by the time you read this, will be in Turkey. This isn’t the full “mini-retirement” described in a blog this summer but it beats the usual one-week getaway employees often settle for. I’m learning that semi-retirees need to give themselves permission to spend, albeit without breaking unduly into capital.

Experiences can also generate later wealth. You could upgrade your skills to take job-related courses or use the Lifelong Learning program to convert some of your RRSP’s computer blips into an executive MBA program. That will generate higher income down the road, though you will have to repay your RRSP within ten years.

Finally, there’s a related strategy I call “lifestyle hedging.” If you’re worried about the rising cost of energy (whether to fill your non-hybrid vehicle or to heat your home), you could own energy stocks like EnCana or Enbridge. Ideally, you’d own enough that the dividends paid equal your expenditure on their product. If prices in those commodities spike, you may benefit through capital gains or rising dividends, providing an inflation hedge against your higher gas or heating bills. You could do the same with cable TV or telecommunications stocks.

Jonathan Chevreau is editor-at-large at MoneySense. He blogs at findependenceday.com and here.

One comment on “A different kind of rebalancing

  1. I agree. We spend our whole life saving and glorying in seeing the amount grow. It is hard to bite into our hard earned savings, yet that was why we sacrificed- so we would be able to enjoy our semi – retirement and ultimately retirement. I think we have made progress in our spending, though I notice that we then dig in harder to earn more money from our part time jobs so we don’t actually have to tap our retirement funds. It is so hard to let go of frugality.


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