Keeping your portfolio aligned with what it’s supposed to do for you
Rebalancing is meant to be a systematic process - whether passive, or active, it needs to be done frequently and intentionally. Here’s two methods you can use to rebalance your portfolio:
- Calendar approach: rebalancing at regular intervals to make sure your portfolio is still in line with your risk tolerance, asset allocation goals, and contains securities that are still fundamentally strong
- Weight-based approach: rebalancing the asset allocation to make sure you’re always in line if it goes out of order past a certain target, because of price fluctuation. Say you are targeting a 80% equity + 20% fixed income allocation in your portfolio, and equities go on a bull run. The increase in equity value might cause your portfolio to look more like 90% equity + 10% fixed income, unknowingly increasing your exposure to equities past your 80/20 target.
Ideally, you’re in a portfolio that has low correlation amongst asset classes to minimize volatility. However, this also means the asset classes will not move in line together and will change overtime, so you need to rebalance frequently.
That’s usually not possible for most people, so make it a habit to check-in at least once a quarter with set benchmarks for profit/losses you’re willing to take out - this requires you to understand the value of each security intrinsically and extrinsically + keep up to date with how macroeconomic changes are affecting your asset classes. If you’re in a commission account, you should compare the tradeoff between these costs and maintaining a subpar portfolio that doesn’t align with your original goals.
Tax considerations are important here if you’re trading in non-registered accounts (e.g. anything outside of the TFSA, FHSA, RRSP, RESP, etc.). You’ll incur capital gains and losses on trades you make, and you might only have a specific amount of trades per year to use (which you might want to use at specific points in time like end of year).