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Sunday, December 29, 2013

A Simple Rebalancing Example

It is that time of the year where many investors look to rebalance their portfolio to a specific asset allocation. Here is a simple example, using Schwab online resources.

Schwab has 6 different asset allocation models to choose from, to fit an investor's risk tolerance, ranging from 0% stocks to 95% stocks.

This client is close to retirement and, thus, has chosen the model with 60% stocks/40% Fixed Income + Cash Investments.

Source: Charles Schwab
The table shows the difference for each asset class relative to the target percentage.  Each time you buy or sell a security or a fund, Schwab automatically adjusts the percentages and enables you to see how you are positioned relative to your targeted allocation.

The investor has a choice on when to rebalance.  He or she can choose a percentage difference - for example, rebalance when the difference is 2% or more or once or twice a year on a given date.

It is important to note that, if you are paying a commission, you want to buy or sell enough shares to make it economical.  Here I use Schwab shares which have zero commission and don't have to worry about the number of shares.

Note also the link "View Table in $."  Let's click on this and make our life easy:
Source: Charles Schwab

This shows we need to sell $4,593 in the "Large Cap Equity" sector.

 If you don't invest frequently, you might not recall the ticker symbol for the Schwab ETF that tracks the large cap sector.  Not a problem.  In the quote box at the bottom left on any Schwab page, put in SCH and look what you get:

Here you have a list of Schwab ETFs, and you can see that SCHX is the ticker symbol for large cap.  Note also the ticker symbols for small cap and international (you'll need these to complete the homework assignment).

Here we have the quote for SCHX at 43.92.  To figure out the number of shares to sell, just divide 4593 by 43.92 and get 104.  Thus, selling 100 shares of SCHX will get the large cap position pretty close to the target.

With some sectors over-allocated, there is another sector or sectors under-allocated.  In this case, it happens to be "Fixed Income."  To take care of this, you'll have to google Schwab bond ETFs or use other ETFs.  Again, if you use other ETFs, like AGG or HYS, etc., there will be a small commission.  To find Schwab bond ETFs or other fixed ETFS, just google the relevant phrase or look at the last post on this site.

All in all, the whole process takes less than 30 minutes.  And, THE BEST PART has historically outperformed most market timers and stock pickers over the long term after all expenses.



  1. I don't have a CS account, but I love how well thought out their site is! If all brokers provided such a clean interface, re-balancing would be a breeze!

  2. I have looked at most of the major online brokers and I think CS has by far the best technology for the serious long term buy-and-hold investor. What interests me is that when you see sites rated by various publications they seemingly don't take into account these tools and compare them among those they are rating.