Ask MoneySense: Portfolio rebalancing - MoneySense

Ask MoneySense: Portfolio rebalancing

Couch Potato investors typically have a target asset mix that needs rebalancing at least once a year.

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I have had Couch Potato accounts set up for about six years. Whenever I add new money, I’ve been buying more of the ETFs that have done poorly, leaving the best performers alone. Does this strategy make sense?

Brad Riddell, Straffordville, Ont.

“You’re doing the right thing, even if it doesn’t feel like it,” says Dan Bortolotti, author of the MoneySense Guide to the Perfect Portfolio. Couch Potato investors typically have a target asset mix: for example, they may plan to keep equal amounts in stocks and bonds. By adding new money to the worst performers each year, you’re not only keeping your risk level consistent, you’re also “buying low.”

The only problem is this technique stops working when your portfolio becomes large relative to the size of your contributions. For example, say your portfolio is $200,000 with a target of half stocks, half bonds. After a good year for the markets, the portfolio might end up with 55% stocks ($110,000) and 45% bonds ($90,000). Now you would have to add $20,000 in new money to the bond side to get back to even, and many people won’t have that much cash available. In that case, you should sell $10,000 worth of stocks and put the proceeds into bonds to get back to your target allocation.

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