What's the Best Way to Rebalance Your Portfolio?

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Questions answered: Why should you rebalance your portfolio? When is the best time to rebalance? What are your rebalancing options?

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Key Takeaways:

Why do we rebalance?
- Rebalancing helps keep the risk parameters of our portfolios in place.
- It can increase return potential.
Rebalancing is taking from the investment in the asset class that’s gone up in value to buy an asset class that’s gone down.
How to rebalance:
- A calendar rebalance.
  - Rebalance once a year.
  - Some of the challenges:
    - If the investments haven’t drifted enough, you may not need to rebalance.
    - If you rebalance based on a percentage of your portfolio rather than a calendar date, it’s more effective in a rapid change.
- Threshold rebalancing.
  - You rebalance based upon how far your portfolio has shifted from its target allocation.
  - Software can do this well and automatically trigger a rebalance.
- Constant proportion portfolio insurance.
  - Risk account.
    - Leveraged with future holdings in order to protect from the downside of equity or stock exposure.
  - Safety account.
    - This is a cushion value.
    - You want to make sure this never drops below a certain value.
  - The cushion amount is the amount you need to protect. The remaining amount is the amount you need to grow.
  - The allocation of stocks to bonds doesn’t stay the same.
You don’t want to rebalance too frequently.
- Research shows it’s most effective between 10-15%.
With calendar rebalancing and threshold rebalancing, you’re constantly coming back to a specific allocation.
- With the third approach, the goal of rebalancing isn’t a specific allocation.
  - The goal is to have a fixed amount in your cushion fund and a dynamic allocation of stocks based upon the value of the portfolio.