Do You Need to Rebalance?

Serious Rebalancing

If you're asking the question on whether you need to rebalance your portfolio, it's probably a good thing.  Admittedly it's a free country and we can ask any question we want, but just asking the question probably presupposes your investments are in order.  You have an asset allocation plan, you  are diversified among different asset classes, and you know what percentage you have invested in each asset class.  You may have technology calculating the percentages for you or you may be doing the calculations the old-fashioned way using spread sheets.  Hopefully, you aren't so old-fashioned you're using pencil and paper.  Anyways...you're ahead of a lot of investors.

Let's look at a simple rebalancing situation.  Assume we started the year with the following allocation:

ETF/SECTOR	%	Amount
SPY/S&P 500	50	$50,000
VEU/Global Stks. Ex. U.S.	10	10,000
AGG/U.S. Bonds	40	40,000

If we go to Yahoo! Finance, we can easily find performance for the ETFs through 7/30.  This is what you get putting VEU in the quote box:

Source: Yahoo Finance

Doing this, we find the following performance data:  SPY +8.90%, VEU +3.85% (shown in graphic at left), and +3.50% AGG.  Multiplying $50,000 by 1.089 gives us $54,450.  This produces the numbers in the table below.


You get these numbers for your situation by going to your account online.

Using the performance data, we calculate that our $100,000 portfolio is now:
 

ETF/SECTOR	%	Amount
SPY/S&P 500	51.3	$54,450
VEU/Global Stks. Ex. U.S.	9.8	10,386
AGG/U.S. Bonds	39.0	41,400

If we chose, we would rebalance by selling SPY to get the percentage down to 50% and spreading the proceeds to the international sector and the bond sector.  For most people, this would be overkill.  For one thing, if you are using ETFs, as indicated here, there may be a commission charge.  Most studies indicate rebalancing once a year is sufficient unless there is a huge change in the market.

Hopefully you see that the rebalancing process automatically gets you to sell the sectors that have done the best and buying into the sectors that have underperformed, i.e. buying low and selling here.  In this example, it would reduce exposure to U.S. stocks and increase exposure to international stocks.  Not easy to do for emotional investors being swayed by news out of Europe!

Disclosure:  This post is for educational purposes.  Individuals should do their own research or consult  a professional before making investment decisions.  My clients and I own ETFs mentioned here.