Simple Steps To Rebalancing An Investment Portfolio


Just like keeping that good ole’ car running on the road, a good investment portfolio needs tender, love and care.  Despite the buy and hold mantra, a good investment portfolio needs to be rebalanced every so often to achieve the returns that the original portfolio was set up to achieve.  It’s just like tuning up a car so that it still runs smoothly.  Some people might find it tedious and arduous, but think of it on the bright side.  It’s a great learning experience and investing can be fun!

Rebalancing a portfolio shouldn’t take more than an hour at most.  The goal is to make the portfolio have the exact same ratios for each of the asset classes that were invested when the portfolio was first created.  Keep in mind that everyone’s portfolio can be different.  People with varying levels of risk will allocate their money towards different percentages for bonds and stocks.  One of my favourite portfolios to model is the one provided by Canadian Couch Potato.  The Global Couch Potato portfolio comprising of TD e-Series mutual funds are a great way for a beginner to get exposed to the world of investing.  It’s simple to create, doesn’t cost anything in commissions, and it has a surprisingly low management expense ratio.  The portfolio is also quite conservative because it does a 60% equity and 40% bond split and also also providing geographic diversity.  What’s not to like?

Your Initial Percentages

Knowing how you allocated your money is the first step to figuring out how to rebalance your portfolio.  The Global Couch Potato is so simple that figuring out the percentages is super easy.  Just check the website!

20% Canadian Equity
20% US Equity
20% International Equity
40% Canadian Bonds

For the purposes of creating an example.  A modest starting portfolio of $10 000 could be invested in the Global Couch Potato and end up having the money allocated like this:

$2000 Canadian Equity
$2000 US Equity
$2000 International Equity
$4000 Canadian Bonds

That’s the starting amount, but in order to rebalance you would need to figure out what they are worth now.

Checking Your Progress

I’m sure everyone knows how to do this because we’re all very sensitive about our money.  Checking the value of an investment portfolio is usually quite easy to do.  Most people generally login to their brokerage’s website and click on their investment account to see the current value of their portfolio.  Some people might get monthly financial statements from their brokerages that update them through paper documents.  Regardless, finding out what the portfolio is currently worth shouldn’t be a hard task to do.

A quick glance at what the above portfolio might look like had you invested since the beginning of the year might look something like the following (ignoring any dividends or interest payments):

$2285.40 Canadian Equity
$2160.20 US Equity
$2091.60 International Equity
$4205.60 Canadian Bonds

Most likely the values won’t be the same as when you started investing.  Whether you go up or down it doesn’t really matter for the purposes of rebalancing.  All that matters is that you can get the current value for your holdings.

Doing The Math

OK, I’m going to admit, this is the hard part.  Most people have difficulty understanding what it means to rebalance a portfolio and how to do it correctly.  I might be terrible at explaining this, but I’ll give it my best try.  The goal of rebalancing is to get your portfolio to match up with the percentages that you started off with.  After getting all the current values for your holdings, it’s time to figure out how much money you have in total.  For something like the Global Couch Potato portfolio it’s quite easy.

Canadian Equity + US Equity + International Equity + Canadian Bonds = Total Value
$2285.40 + $2160.22 + $2091.60 + $4205.60 = $10 742.82

Sweet!  We made money!  Sometimes this might not happen but that’s something that we won’t worry about if we’re just trying to rebalance our portfolio.  The next thing to consider is whether you’ll be adding or taking away money from your investment portfolio.  If you are, now is the time to add or subtract that amount.  I hope you have made it a habit of saving and that you’ll be adding to your portfolio.  In my example, we’ve been great savers for the first half of the year and will be adding another $1000 to our portfolio.

Total Value + Money Added – Money Taken Away = New Investment Total
$10 742.82 + $1000 – $0 = $11 742.82

We now have our new total.  The next part of the exercise is to figure out how much we need to allocate to the four asset classes in the Global Couch Potato.  I highly suggest using a calculator for this part just to make life easier on yourself.  The formula is quite simple, but of course we don’t want to make mistakes with our money.  Take the percentages of your initial portfolio and now multiply it by the New Investment Total to get how much you should have in each asset class.

Percentage x New Investment Total = New Value
20% Canadian Equity x $11 742.82 = $2348.56
20% US Equity x $11 742.82 = $2348.56
20% International Equity x $11 742.82 = $2348.56
40% Canadian Bonds x $11 742.82 = $4697.13

Take a breath.  We’re almost done.  At this point we know exactly how much we should have allocated in our portfolio.  When we look at our current value of our portfolio the difference will tell us whether we have to buy more of that asset class or sell that asset class.  Figuring this out is easy.

New Value – Current Value = Net Value
$2348.56 – $2285.40 = $63.16 Canadian Equity
$2348.56 – $2160.20 = $188.36 US Equity
$2348.56 – $2091.60 = $256.96 International Equity
$4697.13 – $4205.60 = $491.53 Canadian Bonds

If the Net Value is negative, it means that you would need to sell some of that in order to balance your portfolio properly.  If the value is positive then that means that you will be buying more of that asset class.  In my example, more money was saved to invest which means that additional money will be added to all of the asset classes.  If you’re really attentive you’ll realize that the sum of all the Net Value’s are $1000.  That’s because it’s equal to the new money that we’re adding.

Making The Transaction

Now that we have figured out how much each of our asset classes should changed, it’s now time to put it into action.  Fire up your brokerage website and make the necessary transactions to realign your portfolio back to it’s original percentages.  In our case we’d be doing the following four actions:

Buy $63.16 worth of Canadian Equity
Buy $188.36 worth of US Equity
Buy $256.96 worth of International Equity
Buy $491.53 worth of Canadian Bonds

Doing those four transactions will be easy on most online brokerages.  For a portfolio that is made up entirely of mutual funds it’s simpler because you can do partial shares and there are no commission fees that apply.  Those that invest using ETFs will have to do an extra step of figuring out how many shares to purchase or sell based on the amount that needs to be adjusted.

Net Value / Price Per Share = Number Of Shares

Once this is done you are all set.  Your portfolio should now be rebalanced and your investment portfolio will now reflect the goals that you initially set out to accomplish.

When Do You Rebalance?

This is always a tough question to figure out.  Personally I like to check up on the health of my portfolio semi-annually.  This means that I will give it a quick tune up sometime during the summer months to make sure that my portfolio hasn’t strayed from the path that I set out at the beginning of the year.  Another time that I like to rebalance my portfolio is when I have a significant amount of money that I want to add to my investment portfolio.  Doing the rebalancing act allows me to figure out where I should be putting this new money to.  Another time to rebalance is when something significantly changes the value of your portfolio, such as a stock market crash or a year of exorbitant stock market gains like 2014 for US equities.  Rebalancing too frequently when your portfolio is made up of ETFs and individual equities may cause you to pay additional trading fees which you don’t want to incur.  Figuring out when to rebalance is entirely dependent on how you’ve built your portfolio.

Rebalancing a portfolio should not be used to time the market.  I don’t rebalance because I feel the market is going to go up in the next few months, or that interest rates are going to rise next month.  Rebalancing on a frequent basis is to align the  goals of your portfolio to what you initially wanted to do.  That’s the most important aspect of rebalancing your own portfolio.


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