Asset Allocation: Re-balancing with new funds

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:

  1. I retrieve the $ value of each fund in each account and put it into my spreadsheet.
  2. 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).
  3. 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.
  4. 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.


8 thoughts on “Asset Allocation: Re-balancing with new funds

  1. The beauty of re-balancing is that it pretty much forces you (so long as you’ve been in the market for a while and that prices are a random walk around intrinsic value) to buy low and sell high. It’s tough to get into bubbles when your portfolio strategy demands you funnel capital into depressed assets.

    You should really consider investing in some REITs. It’s kind of a fixed income cause it spins off regular cashflow from pretty secure, well-managed assets, but it’s a riskier for your capital (asset appreciation and the trusts leverage themselves etc). That’d be a good third asset class to mix in there for 10% or so of your portfolio.

    • Yup, stocks had been going up a bit in the last month, so I actually ended up buying about 50/50 stable value and S&P 500 to even out the stable value allocation. There is no way I would consider selling shares every month, but buying new shares, it doesn’t hurt to buy varying quantities of different things.

      As nicoleandmaggie said below, I don’t want to add REITs because I just bought a condo AND plan on paying the mortgage off aggressively, which will really overweight real estate in my assets already. Plus, I don’t know where I would put it because my 401(k) doesn’t have a REIT fund, you shouldn’t put REITs in taxable, and my Roth IRA has very little room. I think that’s something I would consider after leaving my employer, when I have a Rollover IRA with many tens of thousands of dollars in it.

  2. She just bought a house, so REITs would be putting too much portfolio into real estate at this point.

    Re: rebalancing… I had been doing it automatically, once a year, with overpriced ING, but I haven’t set that up with Fidelity. Last time I checked I wasn’t too out of whack so maybe they do it with the percentages I gave them when they buy each month. I should probably look into that.

    I do it with buying with my IRAs, which is also where I keep some of the parts of my portfolio that are cheap with Vanguard but expensive with Fidelity.

  3. I hate rebalancing, too. One of my IRA accounts does is for me (an opt in option) on an annual basis. Otherwise, I also do to with cash added. However, I’m sure I’m not as diligent about it as you are!

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