Rebalance according to scheduled times

Some people rebalance once a year, twice a year, or four times a year. Some people pick a date or certain months of the year and rebalance in those times. One thing to consider if you’re doing it more frequently (e.g. four times a year) is the cost of rebalancing, according to Moneysense. For my Questrade account, buying more Exchange-Traded Funds is free (no commissions paid) but selling incurs a trading commission. Therefore it costs me nothing extra when I rebalance because I usually add extra funds.

For me, I am rebalancing my TFSA ETF portfolio every March and September (twice a year) and am planning to rebalance my non-registered ETF portfolios and RRSP portfolio in June and January (twice a year). I don’t mind doing it earlier but when I calculated the asset allocation, the portfolios weren’t off by very much so I didn’t bother rebalancing them.

Rebalance according to deviation from asset allocation

This comes to the next reason how you might want to rebalance your portfolio- according to deviation from your original asset allocation. I was reading Think, Act, and Invest Like Warren Buffett by Larry Swedroe and he recommended that you rebalance when your asset allocation deviates by an absolute 5%. Kevin O’ Leary also recommended this practice in one of his books, I think it was The Cold Hard Truth on Men, Women, and Money.

What does an absolute 5% mean? For example, if you were supposed to have a portfolio that looked like this:

  • 25% XDV
  • 25% CPD
  • 25% CYH
  • 25% XTR

and it ends up looking like this after a year:

  • 20% XDV
  • 26% CPD
  • 31% CYH
  • 24% XTR

You might want to consider rebalancing because the asset allocation is ‘off’.

But what if I dollar cost average and regularly contribute?

Well, I’m sorry to say that it doesn’t count. In my TD e-series I dollar cost average and contribute monthly. I have been doing this for a few years but never got around to rebalancing. Boy was the original asset allocation off- some were off by 6-7% from the original absolute amount. This was an easy fix though, thankfully. Hopefully, I remember to regularly rebalance on an annual basis.

If you want to read how to rebalance the easy-peasy way and cheap way without having to buy and sell a lot of ETFs or stocks, you can check out my article on how to balance a portfolio or even think about trying out a robo advisor (see our Wealthsimple review for more info) if you’re looking for the easiest possible way to invest and have others rebalance your investments holdings for you.

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