Portfolio Rebalancing Revisited

One reader requested a review of how portfolio rebalancing is handled.  There are several ways one can set up a rebalancing program and all require the investor have an investment plan.  If one builds a portfolio around individual stocks with no sector or asset class allocation model in place, this review is of little use.  Rebalancing has two primary models (listed below) and the entire concept of rebalancing hinges on setting up a portfolio plan and then keeping that plan in balance.  Some investors would say a plan of 60% invested in stocks and 40% invested in bonds is an asset allocation plan.  Yes, it is a plan, but not all that well thought through.

The “Swensen Six” portfolio relies on five asset classes.  1) U.S. Equities (VTI).  2) Developed International Markets (VEU or VEA).  3) Emerging Markets (VWO).  4) REITs (VNQ).  5) Bonds and Treasuries (TIP and TLT).  While there are other ETFs one might use, the ones I’ve chosen are examples.  This is an example of an asset allocation plan

Here is a link to another portfolio that has a specific plan to deal with prosperity, inflation, deflation, and depression or recession.  The “Permanent Portfolio” is simple and easy to implement.

And now for the two primary ways one might rebalance a portfolio.

  1. Rebalance based on time such as every quarter, year, or every few years as recommended by William Bernstein.
  2. Rebalance when an asset class moves above or below target by a specific percentage.  I use between 20% and 35% for threshold limits.

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Madison Portfolio Update: 29 January 2013

While the Madison is one of three portfolios where the individual transactions are hidden from Platinum readers, I think it is useful to show the Strategic Asset Allocation plan.  The following Dashboard is extracted from the TLH Spreadsheet and it shows how the assets are allocated.

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