## What is portfolio rebalancing?

Portfolio rebalancing can be an hard or an easy task depending on how many different assets you have in it, let’s say I have a portfolio with 4 different funds (Mutual Funds or ETFs). Let this portfolio be my template asset mix. I have 30% in TSE:VCN, 50% in TSE:VUN and a little bit of bonds i.e. 20% in TSE:VAB. This is my template portfolio to which I need to refer every time I want to add (or remove) new funds in this asset mix.

### Current Asset Mix

Now let’s say we add 10000\$ in this portfolio to start with as a base investment, just to keep things simple. It would look like our target portfolio if layed out like that.

### Future Asset Mix

But this is the starting amount, the first time we’ve put money in this portfolio, let’s see what might happen a year later!

TSE:VCN and TSE:VUN went up yes! But TSE:VAB took a hit. Not only that but we would like to add another 10000\$. The concept of rebalancing tells us that we must have the same asset mix percentages for each fund. That is, at the end of our rebalancing it should have the same percentages as our template (target) portfolio. Let’s add some money and rebalance!

## How to Rebalance?

A simple way to do this math would be to do a sum of all the assets, that would give us 10400 then add our fresh 10000\$ to it to give 20400\$, look at that nice amount of money! Then run the percentages.
TSE:VCN -> 20400 * 0.30 = 6120\$,
TSE:VUN -> 20400 * 0.50 = 10200\$.
TSE:VAB -> 20400 * 0.20 = 4080\$

There you go, so the numbers calculated above are our target amounts! You don’t need to be exact with the numbers but simply as close as possible. Let’s calculate how much we need to add to each fund.

6120 – 3100 = Add 3020\$ in TSE:VCN
10200 – 5500 = Add 4700 in TSE:VUN
4080 – 1800 = Add 2280 in TSE:VAB

That’s curious, even if TSE:VAB went down, we are still adding a lot in it, yup, that’s exactly what rebalancing is about. You need to stick with your target percentages to make sure the risk stays the same. What I mean by that is let’s say for example that you don’t rebalance and we take the case of TSE:VUN that was now at 52,9% of your portfolio. In a few years it could be around 60-70% of your portfolio and even more if the US market is in full Bull mode (i.e. going up like crazy). Then if it crashes, you will lose a lot more than if you would have rebalanced constantly, every year for example. This will also affect your moral and you might be tempted by the evil! Yes, moving TSE:VUN into bonds while it’s low and then figuring out it’s going up too late and end up buying high: not what we want at all!

## At what interval should we rebalance?

I personally rebalance whenever I need to put a big chunk of money or once a year. I think it’s easier to rebalance if you’re going to add to your portfolio because you only need to buy, not sell which can become costly at let’s say 10\$ per transaction. In our case, a rebalance would cost 30\$ at this rate but we would also add funds, 2 things at once!

## Rebalancing is good for your portfolio

I hope this will help you understand how rebalancing works so you can do it with your own portfolios! Remember that time and consistency is the key to growth.

Disclaimer: please keep in mind that investing can be risky, you could even lose your capital. Rebalancing helps mitigate the risk but does not remove it. I cannot be held responsible for what you do with your money. Invest wisely by gathering information and talking to an advisor if you don’t feel comfortable.

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