David Grant
Contributing Writer
instructor@mywealth.com
In one of my previous articles “The Art of Rebalancing”, I wrote all about the reasons why you should be rebalancing your portfolio on a regular basis. I wrote about what rebalancing is and when it should be done. The “how” is a little bit of a more complicated process to explain, but once you get the hang of it, it is an easy process.
I will be working with some assumptions throughout this article, but know that they might not completely apply to your portfolio. Feel free to email me with any questions you may have with how to adjust the scenarios below to your portfolio.
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Assumptions: Portfolio $100,000; asset allocation 50% bonds / 50% stocks; all trades made in a retirement account so taxes are not a consideration; trading fees are negligible.
Firstly, you’ll be setting up a spreadsheet with your various columns. (To see how this looks – if you’re a visual learner like me – use the image below). Firstly list out your target portfolio by funds – you shouldn’t really need many funds to build a diversified portfolio, just try to keep each fund under 10% of your total portfolio. I have used generic titles for mine, but put the actual titles in for yours, and maybe an indication of what type of fund they are (Small Cap, Large Cap, Intermediate term bond, etc.)
In the blue box should be the total amount of your portfolio, and for this example it is $100,000. In the boxes next to each fund, there is a formula multiplying the $100,000 by the target percentage (in this case, we’re keeping every fund at 10%). At this point, when you go to update your portfolio total, the fund target values should change to what they should ideally be.
In the column next to this are the actual values of the fund positions (blue text). Notice how these are different to the targets – and they most always will be. Your next column is the value of the individual funds (blue text) divided by the total of your portfolio (total of blue text). This will give you actual weight of each fund in your portfolio. Notice in the image how some are very “over-weighted’ (20%) and others are “under-weighted” (2.5%). Your final column shows you how many dollars need to be added or subtracted to the fund to make it match its weight.
Now this is a simplified version of how rebalancing could be done by the everyday investor with a spreadsheet. It bears repeating that this process should be done on a frequent basis (e.g. quarterly) so your portfolio does not get so out of balance, like our example.
When your portfolio becomes larger and you need to add more funds to add diversification to your portfolio, then this process can become challenging. Lots of financial advisors use sophisticated software programs to work through the process for them, and as long as they are reviewing your portfolio with your goals in mind while the program is doing this, then it may be worthwhile paying them to do this for you.
Finally, it is wise to stay on top on top of the markets and the economy, due to the fact that relationships between investments can change, and we will see more and more of this as economies becomes more and more integrated in the global economy.
The currency course is a excellent place to start in understanding the global economy better.
