How To Balance Your Portfolio… The Lazy Way (or when you’re Math Challenged)

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I must admit that math is not my strong point. Buying and selling shares of ETFs in order to regain the delicate proportion and balance of each sector is not my forte either.  This exercise is known as rebalancing your portfolio.

Since the markets are down 10% since March, it might be a good idea to pick up some shares while you can and rebalance your portfolio (and not do your annual contribution of shares to your ETF Portfolio in March like I did!)

In fact, I dread it and avoid the heck out of it if I can. I dreaded it so much that I neglected the ETF portion of my portfolio and didn’t contribute to it regularly. It wasn’t because I had to pay the commissions to trade the ETFs (I do, but at $4.95 a trade, it’s not a big deal), but it was the fact that I didn’t really know how to do the math to balance the funds through buying and selling shares (yeah, embarrassing I know!).

It wasn’t until I read the Millionaire Teacher by Andrew Hallam that I was reminded of the importance of balancing your investments to ensure that there are proper proportions in bonds, Canadian equities, international equities, etc. or else your investments and the hard earned money you invested might go haywire down the road.

When I combined this newfound wisdom from Mr. Hallam with the fact that I no longer pay any fees at all (seriously… $0) to buy ETFs, see my Questrade Review for more details, I decided that I should be done procrastinating.  This move by Questrade to make a serious run at index investors is really smart in my opinion.  It comes on the heels of similar moves by US discount brokerages and is sure to get them a ton of fee-conscious supporters here in Canada.

A Great Tool (Excel)

balancing a portfolioKerry Taylor from Squawkfox has a great free Excel tool to help you rebalance your portfolio easily to ensure that the proper asset allocation (bonds and equities/ Canadian index, International Index etc.) are maintained.

For Those Excel Challenged (like yours truly)

If you’re Excel challenged like me (Note to self- New Years Resolution 2013 is to learn how to use Excel and be proficient at it). The easiest way to rebalance your ETF Couch Potato portfolio is as follows…

Are you ready?

Here it is (it only works if you have extra money):

Just Buy More Shares

Yup. It’s as easy as that. All you have to do is remember the proper MIX of the ETFs that you bought. For example, looking at Canadian Couch Potato’s Model Portfolios:

Canadian equity 20% iShares S&P/TSX Capped Composite (XIC)

US and international equity 40% iShares MSCI World (XWD)

Canadian bonds 40% iShares DEX Universe Bond (XBB)

Let’s say your:

XIC holdings were now $350 (now 33% instead of 20%)

XWD holdings were now $200 (now 19% instead of 40%)

XBB holdings were now $500 (now 47.6% instead of 40%)

You want to add in money so that the 20/40/40 proportion is balanced again (because right now it’s not- it’s Murphy’s Law- the market likes to make your proportions unbalanced just like how disorder (messy room) naturally occurs after order (clean room))

What I usually do is make the 40%’s a normal number.

For example, I will make XWD and XBB to add up to $1000 each.

XWD need to add $800 worth of shares

For XBB will need to add $500 worth of shares

The total for XWD and XBB is $2000 now, and makes up 80% of your new portfolio (40% + 40%). You need 20% of XIC still.

To do this, take $2000/0.8= $2500

Therefore, you need to make up $500 of XIC which is adding $150 worth of shares.

Therefore you will be investing an additional $1450 at this rebalance event.

It doesn’t have to be such a large number (because who has $1450 to invest all the time, really), but you can do this with any number as long as you pick a number you can calculate easily.

I hope this makes sense and I know its rudimentary but it’s a simple (am I going to get some hate comments about how lame this post is? LOL) and important tool to learn if you’re math challenged and buying and selling in order to balance your portfolio isn’t your cup of tea.

It might not work for everyone and I'm sure I'll comments pointing out the flaw in this approach (which I'm sure there are many) but this is how I do it! 🙂

I should note that if this math is even more intimidating for you than it is for me, there are relatively new options that are now hitting the Canadian mainstream known as robo advisors.  I know the name sounds all mechanical and scary (who wants a robot in charge of their nest egg?), but I can assure you it's not.  I even updated this post in January of 2018 to highlight my super positive initial experience with a robo advisor, so check out my Wealthsimple review for more information on that score as well as some bullet points on what the heck a robo advisor is, and some of the other options available in Canada.  Overall, it's a super easy way to take a part of your paycheque and turn it into an investing portfolio without hardly any month-to-month work.  Personally, I'll still force myself to do some of this rebalancing math (it's good work for my brain at the end of the day), but if it's just not your thing I seriously recommend checking out the whole robo advisor deal.

Readers, do you balance your portfolio regularly? When do you usually do it and how do you usually do it?

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Young is a writer and former owner of Young and Thrifty and the main "twitter' behind Young and Thrifty's twitter account. She lives in Vancouver, BC and enjoys long walks on the beach, spending time with her anxious dog, and finding good deals. If you like what you read, consider signing up for email updates.

9 Comments

  1. krantcents on June 19, 2012 at 10:37 am

    I review my portfolio annually in December. I usually make small changes at that time. My solution is buying a different class of mutual funds to balance it out.



  2. Nicoleandmaggie on June 19, 2012 at 10:54 am

    For my tax-preferred work investments, they’re on auto-pilot and I pay a little extra for the company to annually re-balance. For my tax-preferred IRAs, I have a low-fee target date fund that rebalances automagically. For my taxable stocks, I re-balance each year when we add new stocks.



  3. Leigh on June 19, 2012 at 11:17 am

    I love this idea of Kerry’s! Re-balancing was super confusing to me too and I liked the idea of re-balancing with new money way better, so I plan to implement that…soon… Good luck!



  4. SavingMentor on June 19, 2012 at 2:18 pm

    Rebalancing with new money definitely makes sense and you will certainly save money on commissions to boot.



  5. young on June 19, 2012 at 5:19 pm

    @SM- Hey nice to see you! I’m still so appreciative of your post for Aeroplan and the points! Yes, definitely it doesn’t make sense to me to spend money to balance the portfolio by buying this, selling that etc.

    I’d rather just make it more simple and know that I’m investing anyway.



  6. young on June 19, 2012 at 5:20 pm

    @Leigh- PHHHEW. I’m so glad I’m not the only one. Honestly I’m kind of embarassed to be a “PF blogger” and not know how to balance a portfolio easily.

    I loved Kerry’s post too- she always has helpful spreadsheets etc.



  7. young on June 19, 2012 at 5:21 pm

    @krantcents- For me, when I buy mutual funds, I don’t have to worry about the commission usually because mutual funds don’t charge commissions.

    It’s good that you only review annually. Doing my net worth updates, I get to see how my portfolio is doing on a month to month basis (I usually break down each stock I have to see how it’s performing). SO that’s either a good or bad thing.



  8. The Passive Income Earner on June 21, 2012 at 11:38 am

    I think that index investing is probably the easiest type of portfolio to rebalance if you are truly indexing. The most important aspect that many don’t do is to have cash/bonds around. What Andrew Hallam does is re-balance between bonds and stocks which is a way of identifying that stocks are cheap and it’s time to buy. For those without much bonds (who really has lots of bonds ?), then using new money is probably the easiest way to know when to buy cheap.

    With a stock portfolio, rebalancing becomes a lot more challenging since you tend to have way more stocks (than index funds) and it’s for diversification. I have been doing it by sector, if a sector is down, I would add to that sector by either adding to a current holding or adding a new holding.

    Cheer!
    The Passive Income Earner – On target for $6,000 in dividends for 2012.



  9. Teacher Man on June 21, 2012 at 5:10 pm

    Completely agree PIE. Someone should write a great ETF Investing eBook on this whole thing…



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