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In the investing world, it's considered best practice to “rebalance” your portfolio regularly.
That is, once you’ve decided on the right asset mix for your portfolio (one that suits your risk profile and financial goals), it’s important to rebalance your portfolio when it starts deviating from its target allocation. Doing so ensures (1) your portfolio accords with your risk appetite and (2) you maximize the odds of achieving your financial goals.
It’s a shame “rebalancing” isn’t also standard practice in life more broadly. Because whether we realize it or not, we’re all investors. Our time, energy, and attention are finite assets and how we allocate these resources (across relationships, experiences, education, etc.) make up our “life portfolios”.
How often do you stop, reflect, and “rebalance” your life?
Most people never do. Most don’t view their life as something that needs “rebalancing”. Rather than consciously allocate resources to manifest a world they desire, most let the world’s desires allocate their resources for them. Such are the dangers of distracting technologies, herd-like behavior, and corporate ladders.
In a noisy world, it’s hard to think for yourself.
In the investment industry, portfolio mismanagement can happen in opposing environments: during great tumult and during great quiet.
At the onset of COVID, in February and March of 2020, when the S&P500 lost over thirty percent of its value, the portfolios of the clients my team advised lost hundreds of millions of dollars. For my inexperienced 23-year old self, it was a rare learning opportunity.
Following periods of great disruption, as occurs in life more generally, a portfolio lacking attention and corrective action can quickly find itself in disarray.
But portfolio mismanagement can happen in calmer times too. In the investing profession, they call it portfolio “drift”. When small changes in asset returns persist over time and slowly pull a portfolio away from its target allocation. These deviations, that sneak up slowly, can be the most deadly because there is no clear catalyst, no obvious alarm for concern. Passive inaction is too easy, until it’s too late.
This also happens in life. Social inertia, corrosive relationships, and professional pressures can, over time, inch one down a life path they never wanted.
To prevent crucial mistakes, most portfolio managers are held accountable to a formal document called an Investment Policy Statement (IPS). The IPS is used to enforce good behavior and, with respect to rebalancing, there’s often a time component (monthly, quarterly, annually, etc.) and a variance component (e.g., if equities fall outside the 30%-40% range, rebalancing is required).
Developing an IPS can be a time-intensive process but for good reason. After all, you’re attempting to articulate your risk profile and also approximate your future desires (what the 60, 70, and 80-year old “you” would want). But, when done thoughtfully, this document can serve as an invaluable guide-post.
It’s unfortunate that we, in the 21st century, don’t stress the importance of developing something akin to an IPS for our own lives. These days reflection is at an all-time low and distraction at an all time high.
In recent months, however, I have been intrigued to find many twenty-somethings taking multi-month sabbaticals. While not exactly a quest for developing a personal IPS, it is often a starting point for reflection. How do I want to spend my time, money, and attention? Is my life progressing in a way my future self would be proud of?
Pascal wrote in the 1600s that, “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
We would all do well with a bit more reflection and life “rebalancing”.
