In Daniel Goldie and Gordon Murray's little 80 page book, The Investment Answer, they set up five critical decisions. All have been addressed elsewhere on this blog, but I want to review their number five – The Rebalancing Decision. Thus far the decisions covered are: 1) The Do-It-Yourself 2) The Asset Allocation 3) The Diversification and 4) The Active versus Passive. While rebalancing is an important decision when it comes to portfolio monitoring, it is not as big a decision as the other four, particularly if one is using the TLH spreadsheet.
Rebalancing the portfolio is simply monitoring decisions #2 and #3. If one asset class moves above or below the target percentage, some tweaking is necessary. Here at ITA Wealth Management, we recommend upper and lower limits of 20% to 30%. Here is an example for a 30% target limit. Assume one allocates 15% of the total portfolio to a particular asset class. If the asset class rises above 1.30 x 15% or 19.5% of the total portfolio, we sell shares so as to bring the asset class back into balance. If the asset class drops to 0.70 x 15% or below 10.5% of the total portfolio, we will use available cash to purchase shares of the ETF representing that asset class.
When the TLH spreadsheet is set up properly, the Dashboard worksheet monitors the rebalancing issue and tells the manager how many shares to purchase or sell to bring the asset class back into balance. From personal experience, once the portfolio has all asset classes in balance, rebalancing is rather rare and it can be accomplished by using cash from dividends to boost asset classes that lie below target.
Another special feature of the TLH spreadsheet is the ability to set up a customized benchmark, or what I call the ITA Index. Platinum readers interested in this subject need only ask for help.
I am a strong advocate of doing it yourself rather than paying out 50 to 100 basis points in management fees. Any excess fees make it more difficult to outperform the market.