PETER DOLEZAL: The benefits of rebalancing your portfolio

Many investors ignore one of the simplest methods available to them, to boost long- term returns of their portfolios

Many investors ignore one of the simplest methods available to them, to boost long- term returns of their portfolios, whether registered or non-registered. Rebalancing portfolio holdings means returning them to their original portfolio percentages when first purchased. This should enhance longer-term returns.

To illustrate the benefits of rebalancing, we’ll use an excerpt from a sample portfolio of Exchange-Traded Funds (ETFs). The chart on the next page shows the actual total return of each ETF holding, both in 2013, and this year to August 31. By the end of 2013, the superb performance of the top three holdings resulted in their comprising a significantly higher proportion of the portfolio in which they were held than when originally purchased. Conversely, the 2013 sub-par performance of the bottom two ETFs would see them reduced to a lower proportion of the portfolio than originally. At the end of 2013, had the holder of this portfolio trimmed his outperforming ETF holdings back to their original proportions, and bought more of the laggard ETFs, the portfolio would today be significantly ahead in total value.

The principle is simple. Once every year or two, an investor should consider selling some of his outperforming holdings, and buying more of the laggards – assuming all were solid choices in the first place. This applies, and requires a disciplined approach of selling high, and buying low – a rather sound principle for any investor.

This is not to be confused with an ill-advised attempt to time market performance, which is rarely successful. Rather, it is simply a means to periodically rebalance holdings back to the original, presumably prudent proportions. The result of this process is the trimming of the high-performers, and the purchase, at a reduced price, of more of the underachievers.

Investors realize not all holdings will increase or decrease by the same percentage in any given year. That is the key reason for diversifying holdings amongst various asset classes, countries and sectors. This dichotomy of performance will result in the eventual skewing of holdings from the portfolio proportions the investor wanted them to represent.

Markets are always cyclical, with a long-term trend to the upside. That cyclicality further supports the logic of periodic rebalancing of holdings. If this is achieved using a discount trading platform, the rebalancing cost is minimal – less than $10 per transaction.

Investors ought to avoid rebalancing too frequently. It need be considered only when a significant deviation occurs in the originally chosen proportion held by a particular investment. Rebalancing of portfolios once every year or two should prove adequate in most instances.

 

A retired corporate executive, enjoying post-retirement as an independent Financial Consultant (www.dolezalconsultants.ca), Peter Dolezal is the author of three books, including his recent Second Edition of The SMART CANADIAN WEALTH-BUILDER.

 

 

Just Posted

Local cadets gain acceptance to RMC

Military careers one step closer

New Star Cinema project approved

Cameo development gets unanimous council thumbs up

Stelly’s sidewalk gets green light

Federal funding brings project to fruition

Witnesses sought for alleged drunk driver crash in Sidney

Crash happened June 16 on East Saanich Rd. and Canora Dr.

Fake crash warns students about real consequences

Saanich Peninsula emergency crews warn against distracted driving

Victoria Ska and Reggae Fest fills harbour with music

Music festival wraps with free party Sunday at Ship Point

5 fun things to do this weekend in Greater Victoria

Victoria Ska and Reggae Fest, Ride Don’t Hide, Cordova Bay Day and more

Blue Jays closer Roberto Osuna suspended for 75 games

23-year-old pitcher faces assault charge

Vancouver Canucks tab Quinn Hughes with No. 7 overall pick in NHL draft

University of Michigan standout was second defenceman picked in first round

Jogger spent two weeks in U.S. detention centre after accidentally crossing B.C. border

Cedella Roman, 19, crossed the border while out for a run

B.C. woman with severely disabled son keeps getting parking tickets

‘There has to be something they could do’

Man brandishes axe during robbery

Mounties were able to locate the suspect within two hours of the incident

‘Creep off’ reporting system aims to track street harassment in Metro Vancouver

Text-based hotline launches to collect public reports on where and when harassment occurs

Happy ending for orphaned bear cubs

Two orphaned bear cubs were captured in Castlegar and sent for rehabilitation.

Most Read