290 | We're Talking Millions | Paul Merriman

Rebalancing

Rebalancing is a crucial component of investment strategy, particularly when dealing with a two-fund approach like combining a small cap value index fund with a target date fund. Paul Merriman explains that rebalancing helps maintain the desired risk tolerance and return needs by adjusting the portfolio back to its original allocation when one asset class outperforms 1. This process, while challenging, ensures that investors remain true to their strategy and manage risk effectively.

Rebalancing is not about increasing returns but managing the strategy and maintaining risk tolerance.

--- Paul Merriman

Jonathan Mendosa adds that although rebalancing might not boost returns, it is essential for managing the strategy, especially in a two-fund setup 1.

   

Target Date Funds

Target date funds offer a simplified investment approach, particularly for those who prefer not to manage their portfolios actively. Paul Merriman notes that these funds automatically adjust their asset allocation as the target date approaches, making them suitable for investors seeking a hands-off strategy 2. However, not all target date funds are created equal, and it's crucial to select low-cost options with a focus on index funds.

Most people need the target date fund, and it can significantly impact their compound rate of return.

--- Jonathan Mendosa

Jonathan Mendosa emphasizes that while target date funds are beneficial, they may include bonds, which might not be ideal for younger investors seeking higher returns 3.