Setting up your rebalancing schedule

This may seem like homework but it's not

One of the main advantages of having an elegantly designed portfolio is the low maintenance required to keep it operating at peak efficiency. It's not an exaggeration to say that you can spend as little as 20 minutes per year on maintenance. Here's why.

A killer portfolio has built-in safeguards that prevent it from going off the rails every time there's a bend on the tracks. The markets frequently go through periods of stress, with declines of 10% or 20%. Your portfolio is designed to withstand these episodes with little to no permanent damage. 

Setting up your schedule

Recall what we said about self awareness in module 1. Think back on the past 12 months and note how often you checked on the status of your portfolio. Most investors do this once per month when their brokerage statement comes out.

Others will check more frequently by going to their broker's website. Still others will only check their progress when their quarterly statement arrives. It's a matter of personal preference.

It doesn't matter how often you check your portfolio, it only matters that you don't allow short-term fluctuations in account value to influence your trading activity. This is important.

Studies show that the more often you check your portfolio value, the more likely you are to over-trade and make tactical mistakes. That's why you should set up a monitoring schedule.

An example of a simple rebalancing schedule

Let's say you've decided to review your portfolio at the end of each year, when you get your brokerage statements. Let's also say that your Plan A. calls for an allocation of 70% equities, 20% bonds, 5% REITs, and 5% gold. Your rebalancing schedule might look something like this:

Let's unpack this, going column by column, left to right.

Column 1 names all of the asset classes that are in your portfolio.

Column 2 shows your original, or Policy, allocation percentages.

Column 3 shows the actual allocations based on current market prices.

Column 4 shows how far each asset class has drifted away from policy.

Column 5 shows your user-defined trigger points for taking actions (trading).

Column 6 describes what actions are called for to rebalance your allocations.\

Note that it may be the case where you are prompted to make a sale, but you don't have enough room for all of the sale proceeds because your other assets have not yet reached their trigger points. In that case, you will "call an audible" and either keep some funds in cash temporarily, or add to one or more of your under-allocated positions without having met a trigger. It's up to you. 

It's easy with today's calendar apps

I'm a big fan of calendar apps. All my important activities are in my calendar, and I have alerts to remind me when I need to do something. This is a great way to set and maintain your portfolio monitoring schedule.

The key element here is time, not the level of the market or the value of your portfolio. I try to get my clients to limit the frequency of checking their portfolio to once a month. Once a quarter would be even better. Studies show that the more frequently an investor checks his portfolio balance, the more he or she trades, and frequent trading is a known drag on performance.

For example, let's say you want to move 10% of your money out of equities and into bonds. So you set an alert that tells you when the equity market reaches a certain point, and you move money out of equities and into bonds accordingly. Easy-Peasy. 

If you followed the steps in module 4 and set up a Plan B, much of this is already built into your maintenance process. You still should set up a periodic, scheduled review for the purpose of rebalancing as needed. This will complement your Plan B.