INVESTMENTS - REBALANCING
 
 

HOW TO GO ABOUT REBALANCING YOUR INVESTMENTS

You may have read about the importance of rebalancing your investments, but chances are you haven’t received any guidance on how to do it. This has led a lot of investors to lament, "Rebalancing is great in theory, but how is it done in practice?" Well, I’ll show you how it’s done. Almost anyone with rudimentary math and calculator skills can figure out how to rebalance his or her portfolio.

Step 1: Write down the target investment allocation you set for your portfolio the last time you rebalanced. (If this is the first time you’re rebalancing, write down the target investment allocations you have established for yourself in Chapter 10. Table 1 provides an example of a portfolio allocation of six months ago. (We’ll assume in these illustrations that we last rebalanced in January, and it’s now July.)

Next, consider whether you should change these target allocation percentages. While you should avoid making any major changes in your target allocation percentages, you may want to make small changes in the allocation periodically, usually to account for your advancing years. (Don’t get depressed; we’re all advancing in years, and your children, nieces, and nephews are aging at a faster percentage rate than you are.)
 
 

TABLE 1

Rebalancing Your Portfolio, Step 1

	Investment balances last January	Step 1: Target allocation (%)
STOCK FUNDS
Growth	$5,000	10
Growth and income	15,000	30
Small company	7,500	15
International	7,500	15
Subtotal stock funds	35,000	70
BOND FUNDS
Government	5,000	10
Municipal	5,000	10
Corporate	5,000	10
Subtotal bond funds	15,000	30
Total	$50,000	100

Step 2: Summarize, by investment category, your current portfolio amounts and percentages. If, as may be the case, you have several different investment accounts, be sure to combine them for purposes of rebalancing your investments. Rebalancing doesn’t accomplish much if you’re rebalancing only part of your total investment holdings. See Columns A and B of Table 1 for a summary of current investment status.
 
 

TABLE 2

Rebalancing Your Portfolio

Steps 2, 3, and 4

	STEP 2		STEP 3		STEP 4
	A	B	C	D	E
	Current balance (July)	Current allocation (%)	Target allocation (%)	Addition Reduction	Target portfolio
STOCK FUNDS
Growth	$7,455	14	10	($1,955)	$5,500
Growth and income	16,695	30	30	(205)	16,490
Small company	9,670	18	15	(1,420)	8,250
International	7,265	13	15	985	8,250
Subtotal stock funds	$41,085	75	70	($2,595)	38,490
BOND FUNDS
Government	$4,600	8	10	$900	$5,500
Municipal	4,550	8	10	950	5,500
Corporate	4,755	9	10	745	5,500
Subtotal bond funds	13,905	25	30	2,595	16,500
Total	$54,990	100	100	$0	$54,990

Step 3: Calculate how much money you will need to add or subtract from each investment holding in order to rebalance the portfolio to your target allocation. Column C of Table 2 shows the target allocation percentages and Column D shows the amounts that need to be added to or subtracted from each investment category.

Here’s how to come up with the amounts necessary to rebalance: Consider growth funds. The target allocation is 10% while the current allocation is 14%. Here’s the math needed to determine how much the growth fund holdings need to be reduced to get them from 14% of the portfolio to 10%.

Current growth fund holdings	$7,455
Target growth fund holdings (10% x $54,990)	5,500
Reduction in growth fund holdings necessary to rebalance	$1,955

Here’s the math for international funds:

Current international fund holdings	$7,265
Target international fund holdings (15% x $54,990)	8,250
Increase in international fund holdings necessary to rebalance	$ 985

Step 4: Rebalance the portfolio by adding or reducing enough of each fund to bring that fund back into balance with the target percentage. The result is a rebalanced portfolio, as shown in Column E of Table 2.