Deciding When to Rebalance Your Investment Portfolio

by Michael on Aug 12, 2013 · 7 comments

Image of Balancing Balls

I’ve talked in the past about why you should rebalance your portfolio. In short, you do so to maintain your desired risk profile.

But how do you decide when to rebalance? While it’s good to keep things in check, there’s no sense in going overboard.

While some rebalance at set time points (e.g., annually), we’ve decided to use tolerance bands. Thus, as long as things remain mostly in line, we just leave well enough alone.

Portfolio drift: how much is too much?

Mostly in line. What exactly does that mean? Well… As long as things stay within 5% of our targets, we don’t make any changes. We do direct new money to whatever happens to be underweight, but we don’t actively rebalance within that range.

There’s nothing particularly scientific about these boundaries, 5% is just a nice, round number. If you prefer to use 3% (or whatever), that’s okay. The point of these rules is to enforce consistency and to take the emotion out of your decisions.

So, given our current targets of 60% stocks and 40% bonds, we tolerate anything in the range of 55-65% stocks — and, conversely, 35-45% bonds.

But we don’t stop there…

Since we subdivide our equity holdings into domestic vs. international and our bonds into “regular” vs. inflation-indexed, I also look within classes. It’s possible for these ratios to get out of whack even if the overarching 60/40 remains within bounds.

Given our 2:1 target of domestic-to-international stocks, we tolerate anything between 62-72% for domestic (and 28-38% international). The same goes for bonds, where we target a 2:1 ratio of regular-to-inflation-indexed bonds.

Putting our plan into practice

That’s all well and good, but with multiple accounts and a desire to keep things relatively simple, how do we keep track of everything? While we could use a tool like Vanguard’s Portfolio Watch or Personal Capital, I use a simple spreadsheet.

I use Google Docs, though Excel or Open Office would work. On Sheet 1 (Overview), I have the high level overview with multiple sections — one for the overall stock:bond breakdown, one for the domestic:international breakdown, and one for the regular:inflation-indexed breakdown.

On Sheet 2 (Data), I have the raw data. This is again broken into sections, and there is a row for each type of holding in each of our accounts. And Sheet 3 (Allocation) holds our targeted allocations — 60/40 overall, and 67/33 within each division.

Note: I’ve kept the allocation information as separate variables instead of hard-coding it into the various equations. THus, I’ll be able to easily change these values. if/when we change our target allocation.

So it works something like this… Roughly once a month, I update the the Data sheet. I grab the numbers from Moneydance, where they’re nicely summarized on a per-account basis, so this step only takes about a minute to complete.

Our balances are then summed in the appropriate sections on the Overview sheet, which calculates the proportional breakdown across asset classes as well as our targeted dollar amounts. These latter values are based on our total holdings and the percentages from the Allocation sheet.

The Overview sheet also includes a column that compares our actual holdings to our targets and, using conditional formatting, flags things that need attention. In short, this involves telling it to color cells with a deviation in the -4.999% to +4.999% range green. Beyond that, it colors them red.

While this took about half an hour to set up the first time through, everything now auto-calculates so all I have to do is punch in a few numbers on the Data sheet, and then flip back to the Overview to see if anything is coming up red. If there is, it’s time to rebalance. If not, I continue on my merry way.

Update: You can now access a generic version of our asset allocation spreadsheet. It’s availablie in both Excel and OpenOffice format.

I know this was a somewhat convoluted explanation, so… If you’re interested in seeing the actual spreadsheet (minus our actual numbers, of course), I can try to make a generic version available click the link immediately above.


{ 7 comments… read them below or add one }

1 Harlan V. August 12, 2013 at 1:55 pm

I’d love to see a generic example. Just getting started with investments and such and would love to have a point of reference. Thank you!

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2 Mike August 12, 2013 at 5:00 pm

I would also like to see a generic version. I could build it myself but why bother if you already have one. Great idea, though.

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3 linda August 12, 2013 at 10:27 pm

yes, I second that.
thanks

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4 Martin August 13, 2013 at 12:27 am

I like the 5% rule and use it. Every 6 months or so I upload my account to a spreadsheet and it tells me which funds are over the limit and which are below and what amount of cash and percentages need to be reallocated. I do this only with my 401k account.

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5 Michael August 13, 2013 at 8:12 am

Okay… Working on the spreadsheet as we speak. Keep an eye out. I’ll try to post it soon. :-)

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6 midlifefinance August 14, 2013 at 11:50 am

I use a spreadsheet too, but Personal Capital is very useful for a quick snapshot. 5% drift is fine with me. I generally don’t mess with my portfolio all that much.

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7 Paul @ The Frugal Toad August 15, 2013 at 9:27 am

I haven’t had to rebalance my portfolio that much. I have most of my money with Vanguard and their portfolio analysis is top notch and shows how I’m doing compared to my target allocations.

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