The New Policy:
- review portfolio actual market value vs target allocation ( target = the percentage each holding is to have within the total portfolio) once a year in December
- purchase or sell holdings required to rebalance to target percentage of total portfolio if total bonds (funds and ladder combined) vs equities has moved more than 5% away from target; currently my bond target is 30%, so if bonds go up to 35% or down to 25% (the corresponding numbers for equities - all of them, domestic, foreign, real estate, commodities - is 70% up to 75% or down to 65%)
- rebalance only those holdings where the transaction cost is less than 1%, currently that would be a trade of $1000 since my transaction cost is $9.95 or where a tax loss selling opportunity in the taxable account makes a trade worthwhile
Why the Changes?
- the move to doing the review in December is to do it at the same time as tax loss selling, to kill two birds with one stone and to minimize trading;
- the 5% or more deviation test is the major change, coming directly from the findings of the article; though I could have simply eliminated the yearly review and applied the 5% test at any time throughout the year, I still want to do an annual review of my portfolio, my net worth, the tax situation, decisions about RRSP conversions or withdrawals, perhaps a fundamental alteration of the portfolio targets (which is not the same as rebalancing). In the practical world, rebalancing has to contend with, and fit with, lots of other ofttimes more powerful financial forces;
- tax loss selling on its own may justify a trade, so the opportunity to rebalance fits naturally.
What I Still Wonder About
Unlike the researchers' model portfolio of two holdings - stocks and bonds - my real portfolio contains 16 different holdings (more, if my bond ladder is broken down). Most are quite small - 5% or less; only three are 10% or more (see the Asset Allocation tab in the Google spreadsheet). Several, especially REITs and commodities, are supposed to be volatility reducing with very low or negative correlation to the mainstream equity holdings. It means they are likely to go up while the mainstream equities go down. So, the question is when or if to rebalance in the case that the overall equity total is within the 5% limit (i.e. it says don't do rebalancing at all) but one of the minor holdings has doubled for instance. I don't want to be arbitrary to go back to the days of doing things by "feel" so I need a rule and a good reason for that rule. Perhaps I need not worry, though. Seven months after my portfolio revamp, the most any individual holding has strayed from its target is Vanguard's European Equity (VGK), down only 1.2% despite being hammered by the rising Canadian dollar, which has been almost as strong against Sterling as against the US dollar.