Investment Workshop 17: Rebalancing Your Portfolio

So you’ve been following along in the workshop, you’ve performed your first buy, and maybe a few weeks have now passed that you’re ready for your next purchase. Or maybe the market has shifted and your portfolio allocations are off-target, and you’re wondering how to get it back to your intended allocations.

Welcome to the wonderful world of Rebalancing.

Rebalancing your portfolio is something you’re going to be doing a lot on this journey. You’ll do it every time you add money, withdraw cash, when your allocations change due to changing life circumstance, or as part of normal periodic portfolio maintenance.

Fortunately, the math is the same for each scenario, and even more fortunately we now have tools to do it all for you now. No calculators needed.

Questrade/Passiv (Canada)

Let’s see how this works as you add money to your account. As you work and accumulate money, you will be putting a part of your pay check into your investment account so it can grow and get you closer to your FI target.

You will typically do this transfer as a bill payment from your checking account. Once the cash shows up in your Questrade account, log into your Passiv dashboard.

You’ll see the money you just added into your account show up as an over-allocation in cash, while all the other ETFs you own will look under-allocated. The suggested trades will tell you how much of each asset to buy in order to bring your account back onto target, so you can either copy/paste that into your trading orders on Questrade’s website, or if you’ve enabled trading permissions on Passiv, you can just go ahead and submit the trades from here.

Rebalancing your portfolio is a very similar process. Basically, if something has caused your portfolio to go off target, this is how you bring everything back to where they should be. This can happen if your asset allocations change due to changing risk tolerance, or if the markets have moved in a significant way. However, when you’re building your portfolio, your periodic buys will naturally do this for you, so you don’t usually need to do this. I didn’t rebalance my portfolio until after I retired, and even now I only do it once a year.

Passiv will let you know when your portfolio might need to be rebalanced using the “Accuracy” reading.

If your portfolio drifts too far off target, meaning its accuracy falls to below 90%, that might be a good time to do a rebalance.

The dashboard tells you exactly which assets have drifted and by how much, like so…

However, one important thing to note about Passiv is that by default, the tool doesn’t perform any selling in your account, since they know that in Questrade, buys are free and sells cost money. When you’re adding cash, that’s fine since you can rebalance everything with buys alone, but to do a full rebalance, you’re going to have to allow sells to get you the result you want.

To do this, head on over to “Portfolio Settings” and flip the setting “Sell to rebalance” to ON.

Once that’s on, the tool will calculate your buys/sells for you as normal, and you can either enter the trading orders on Questrade’s site, or just let Passiv do it for you.

Vanguard (USA)

Because Passiv’s not free to Vanguard clients, you’re going to have to figure out the trades ourselves. Well, not you, specifically, because our handy-dandy Rebalancer spreadsheet can figure it out for you!

Here are the download links again, in both Excel and Google Sheet format.

When you open it, start by updating the spreadsheet with your portfolio you actually have. You do this by entering the amount of units in your account into the column on the left.

Next, deposit your cash into the account, and once you can see it on your Vanguard account, add it to the “Cash” row. I’ve modelled adding another $1000 into the account below.

Once you do that, the results on the right tell you what you need to buy to get your portfolio back onto target.

This also works if you’re not adding any new cash to your account and need to rebalance what you already have. In this example, there’s no new cash in the system, so the Cash row is set to 0 while all the rest of the rows have your current holdings entered.

Here, the rebalancer is telling you to what you need to do. In this case, since we’re over-target on BND and VEU, we need to sell 3 units of these funds each, and from the proceeds, we need to buy 1 unit of VTI.

So play around with the spreadsheet. It’s pretty simple, so feel free to modify and change as you see fit, and if you have any further questions about it please let me know at firecracker.revolution@gmail.com!

Conclusion

OK that’s it for today. Rebalancing your portfolio for fun and profit. Catch you all for the next instalment!

Onto the next section!

Go back to the previous section


WORKSHOP TOOLS

How much does it cost to participate in the Investment Workshop? NOTHING. Because that's how we roll. All we ask is that you sign-up using the following affiliate links to keep it free forever:

For Canadians:

1) Questrade

2) Passiv

For Americans:

1) Vanguard

2) Empower



Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.


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