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Military Finances 201: Executing a Plan versus Reacting: Portfolio Rebalancing Thumbnail

Military Finances 201: Executing a Plan versus Reacting: Portfolio Rebalancing

Managing Your Finances

I once heard something to the effect of, "Nothing focuses you like a jab to the nose." Well, the effect of COVID-19 on the markets has definitely been a "jab to the nose." But what to do about your new found focus? You may be tempted to react. I think you'd be better off executing a plan. Let's face it, military operations throw a lot of unexpected challenges at you. And you do have to react to them, but you've probably thought through branches and sequels and are ready to execute a planned reaction to events.

The same it true when it comes to investments. Just like military operations, we have a plan for investments. We recommend that clients allocate to up to 12 different asset classes with a target percentage in each asset class. We put guardrails around those targets and those guardrails direct our reactions to events like the market losses caused by COVID-19.

Here is how it works. Let's say we decide that 10% of your portfolio should be allocated to US Large-Cap stocks. We'll put guardrails around it of plus or minus 2%. So if the Large-Cap stock position exceeds 12% of our portfolio, we'll get rid of some. If it goes below 8%, we'll look to move assets around to get more.

In a stock market crisis, we don't wonder, "What should we do?" We look at our targets and guardrails and say, "Our stock positions are under our limits, we need to increase them." We're reacting by executing a plan. And, executing a plan is always better than reacting based on fear or anxiety.

Beyond helping with our mental state, balancing to target keeps the portfolio risk level consistent with what was planned and actually forces us to buy low and sell high.

The things that make you an effective military officer, discipline and having a plan, will serve you well in managing investments in turbulent times.

If you found this article useful, you might like the following blog posts:

Military Finances 101: Using the OODA Loop to Get Your Finances in Order

Military Finances 101: An Investment Primer for Beginners

Military Finances 101: What is the Time Value of Money (TVM)?

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