Investment Help

If you are seeking investment help, look at the video here on my services. If you are seeking a different approach to managing your assets, you have landed at the right spot. I am a fee-only advisor registered in the State of Maryland, charge less than half the going rate for investment management, and seek to teach individuals how to manage their own assets using low-cost indexed exchange traded funds. Please call or email me if interested in further details. My website is at If you are new to investing, take a look at the "DIY Investor Newbie" posts here by typing "newbie" in the search box above to the left. These take you through the basics of what you need to know in getting started on doing your own investing.

Tuesday, August 21, 2012

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.'re ahead of a lot of investors.

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

SPY/S&P 500
VEU/Global Stks. Ex. U.S.
AGG/U.S. Bonds

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:
SPY/S&P 500
VEU/Global Stks. Ex. U.S.
AGG/U.S. Bonds

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.

No comments:

Post a Comment