I have set a simple schedule of re-balancing my portfolio every 3 months, if necessary. Re-balancing involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation. In my opinion, this is one of, if not the most important aspect maintaining an index investing portfolio. In fact, I have just done so by buying the lagging component.
If this is new to you, don’t worry. This is really easy to do.
Using Google Sheet To Quickly Perform Auto-Calculation
My preferred approach is to use some form of spreadsheets to quickly calculate for me what needs to be done. Came across this freebie from You Need A Budget which I thought is fairly simple and easy to use. Scroll to the bottom and click on the link which says “Betterment DIY Rebalancing Spreadsheet”. Make a copy of it and you can start editing it! I practically set up mine within 5 minutes.
After you’ve opened up the spreadsheet, all you need to do is to visit your brokerage and extract all the numbers that you need and input them into the yellow cells in the spreadsheet. Of course, you have to make a little amendments to only include the stocks and bonds ETFs you have.
A quick edit left me with the template spreadsheet that looks something like this, based on my Bogleheads 3-Fund Porfolio. And no, I don’t own $888,888 in my portfolio. I wish!
(click on the thumbnail below to see the full-size image)
Once I’ve completed the desired allocation, list of ETFs I own, and their current value etc, the “Action” column tells me exactly how much of each component that I’ll need to buy or sell.
One point I would like to add is that reallocation is not always necessary. I have added a “Deviation” which allows me to quickly see how much each component has deviated with respect to the total portfolio value. If you want to, you can then take action only if deviation of a component exceeds a certain percentage. Some like it at 5%, while others like it at 8%.
Anyway, once you have the amount to buy/sell, you can easily work out how many units of each component you would need to buy, or sell. I tend to avoid selling where possible since transaction fees add up. If possible, I try to buy lagging component with fresh funds. Done!