Re-balancing is a confusing concept that I’m still becoming accustomed to. The idea of re-balancing one’s entire portfolio at some set time period seems too complicated to me when I’m adding more money each month to my portfolio and then, with bonuses, sometimes adding to it at random times as well.
So I’m trying to re-balance with the new funds I add each month. To do this, I do some math in my spreadsheet and then go into my 401(k) website and update the %s for the new money. I did this last month and again this month and so far, I feel better about this way of doing it.
For example, last month, since I had made such a huge addition to stocks by buying the total international Admiral shares fund in my taxable account, I ended up putting 100% of my 401(k) contribution to the stable value fund.
My first priority is the ratio between fixed income investments and stocks, with the ratio between US and international stocks being second.
Here’s how I do the math:
- I retrieve the $ value of each fund in each account and put it into my spreadsheet.
- I then pretend as if I’ve already added the money, by adding the employer match $ amount to that fund and my contribution to one of the funds randomly. I usually start by guessing the one that is going to be undervalued (fund G for guess).
- The spreadsheet tells me the current value in each category (Fixed Income, Stocks: US, Stocks: International), the current % for each, the target % for each, and the target $ amount for each, as well as how much the current $ value is off from the target $ value.
- I add exactly the $ amount that the fixed income category is off by to the stable value fund and then give the rest of my contribution to the S&P 500 index fund since that is the next category (US stocks) that is off.
So now my asset allocation is reset to 24% fixed income / 76% stocks. The US/international stock balance is still off-kilter somewhat, but I’m okay with that and accept that it will slowly grow back to 50/50.