Getting back to balanced

To illustrate how to rebalance a portfolio, let’s look at a simple portfolio with four asset classes and a starting value of $100,000

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From the Summer 2014 issue of the magazine.

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To understand how rebalancing works, let’s look at a simple portfolio with four asset classes and a starting value of $100,000. We’ll assume your target allocation is 40% and 60% stocks, with the latter portion divided equally among , and holdings. (It doesn’t matter if your exposure to these asset classes is through ETFs, mutual funds or individual securities.)

Fast forward a year and the portfolio has grown to $112,600. All the asset classes have increased in value, but the equities grew at a faster rate, so the bond allocation has dipped below its target. We’ll need a few transactions to bring it back to our target mix:

If you invest using a single mutual fund or ETF for each asset class, you would need four transactions to get the portfolio back to exact balance. However, if you would incur trading commissions, you’d be better off ignoring the tiny $120 purchase of Canadian equities.

If you use individual stocks and bonds, or if you use multiple funds for each asset class, then you would need to make more than four transactions. To keep costs and taxes to a minimum, con-centrate on the specific holdings that are furthest from their targets and make it a priority to get your overall bond/equity mix right. Remember, your portfolio doesn’t need to be rebalanced down to the dollar: close is good enough. MoneySense has an online tool that makes it easy to figure out what to buy and sell when rebalancing.

To understand how rebalancing works, let’s look at a simple portfolio with four asset classes and a starting value of $100,000. We’ll assume your target allocation is 40% Bonds and 60% stocks, with the latter portion divided equally among Canadian equity, U.S. equity and International equity holdings. (It doesn’t matter if your exposure to these asset classes is through ETFs, mutual funds or individual securities.)

Fast forward a year and the portfolio has grown to $112,600. All the asset classes have increased in value, but the equities grew at a faster rate, so the bond allocation has dipped below its target. We’ll need a few transactions to bring it back to our target mix:

back-to-balanced

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