4th July 2020

Algoinsights 12 Fundamental Truths, 4th July, Blog, ETFs, Portfolio Rebalancing

Fourth of July is a federal holiday in the United States commemorating the Declaration of Independence of the United States on July 4, 1776.

So, what has this date got to do with me?

Answer: It is the Rebalancing Date for all my ETF portfolios.

I chose this date to start my ETF portfolios years ago because I feel it adds meaning to my portfolios and it is also a date that is easy to remember.

Many people have asked me how I rebalance my ETF portfolios after reading my blog article. While I have told them how I did it, I thought it will be a great idea to have it on my blog for all to see and probably use my methodology to rebalance their portfolios.

What is Rebalancing?

To me, rebalancing is like cutting your hair. You have a specific hairstyle that looks good on you and you want to sport that hairstyle in all your photographs and selfies. As such, periodically, you will discipline yourself to visit your hairstylist to trim the overgrown hair and make you look great again. This is my definition of rebalancing. There are many technical definitions for rebalancing, but I like this best.

Purpose of Rebalancing

The purpose of rebalancing your portfolio is to ensure that your allocation is maintained and your goals for that investment are on target. Every day, the markets are in constant movement. Over time, the asset classes in your portfolio will move out of your ideal allocation. Some asset classes will increase in value while others will decrease in value or stay the same. As a result, your portfolio will go out of sync and will require a trim like your overgrown hair.

2 Ways to Rebalance Your Portfolio

I practise the following two ways to rebalance my ETF portfolio because they are simple to apply and maintain. I hope you like them as much as I do.

Way 1 – Time-Based

This method requires you to fix a date to rebalance your portfolio without fail. For me, it is 12 calendar months from the date I started my portfolio. Some investors prefer to rebalance their portfolio on a monthly, quarterly, or semi-annually basis. For me, that would be too troublesome, so I prefer annual rebalancing. I think it works well for me; besides the number 12 is my prosperity number!

Way 2 – Risk-Based

This method requires you to fix a certain risk tolerance, like +/- 15% to rebalance your portfolio. This means that when your portfolio reaches +15% growth or is -15% underwater, you will step in to rebalance it to your original allocation.

2 Methods to Rebalance Your Portfolio

Essentially, I use the following two methods to rebalance my portfolio.

Method 1 – Conventional

Using this conventional method of rebalancing your portfolio requires you to calculate the allocation disparity in your portfolio on rebalancing day. You would then sell those asset classes that have grown and use the proceeds to buy those asset classes that have gone underwater until your original allocation is achieved. When you use this method, you will incur transaction fees for both buying and selling.

Method 2 – Unconventional

I like this method more than the conventional one. In this method, I just put in more funds (that is, buy more) into each of my asset classes to match the one with the highest growth on rebalancing day to achieve my original allocation. Using this method, you only incur transaction fees for buying. As a result, there are some cost savings here. This is how much I believe in my portfolio. Simple and sweet. It just keeps adding up.

Now that you know my way of rebalancing my portfolios, I hope you would use it to grow your portfolios as well as it has grown mine. Also, this article on portfolio rebalancing can be found on pages 126 to 130 of my new book – 12 Fundamental Truths for Financial Wellbeing which will be made available on my website soon.

Thank you for reading my article.

Great wealth to all.

Victor Ang

Founder & CEO, ALGOINSIGHTS PTE LTD