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Hi all. Curious: if you're trying to rebalance a 3- or more-part portfolio to tweak back to your original allocation, in temporary contribution percentages, but you only currently figured what dollar value to add to the losers, how might the mathematical equation go.

I am a cheapy small fry Sharebuilder with three ETFs (IRA one), and, as far as I know, that may the only way to do it.

Below is my simple example from which I calculated the dollar amounts to drift it back to a hard 60-20-20. (Forgive that the amounts are so small, I do know one probably might only rebalance if they drift at least 5% from original, right?)

$1k original contribution

(original) A 600 B 200 C 200

time passes A 642 B 206 C 190
62% 19.8% 18.3%
Under my belabored calculation (I can post that if there are other dim bulbs like me, curious), I discovered that, in order to revert back to the "hard" 60-20-20, I would add 8 to B and 24 to C, making both 214, and (hopefully correct) back to the orginal.

My question, if the only option I have is to change the percentage of my automatic investment plan from the 60,20,20, I would temporarily shift, what B and C's perct. to??? I mean that's probably a dumb question?
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I'm not exactly sure what is your question but I'll try...

At this time you have: 642+206+190 = 1038 (total)

You want to get to
A = 1038 * .6 = 622 (rounding)
B = 1038 * .2 = 208
C = 1038 * .2 = 208

So, you need to move 2 to B and 18 to C.

I don't know how much you would need to spend to rebalance but it may not be worth it to move 2 to B (or even 18 to C).

If I understand your question, you want to do the rebalancing with new money instead. In this case, add the new money to the total, calculate how much each needs to have and how much more you need to add from the new money to get to your target.

HTH,

- zol
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Unless you have free trading and lots of time, I would suggest you establish some re-balancing rules.

For example, re-balance annually unless some component is more than 5% out of balance. So if your original 60/20/20 moved to 54/26/20 you would move some from B back to A.


There are studies that show the frequency or re-balancing has a significant effect on returns. Specifically the highest return on a portfolio composed of S&P500 plus Lehman bonds will be by re-balancing every 7 years! The reason for the long time frame is simple. Bull markets tend to be longer than a couple of years, so pulling funds out, lowers returns. Worse yet, Bear Markets are also longer than a year, so adding equity funds while the bear market has more to run, is really bad.

Gordon
Atlanta
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Stupid question, if I automatically invest $225 each time, typically at 60%/Fund A and 40% Fund B, if the present balance drifted
to 57.4%A and 42.6%B, next time via new savings, to get back to the hard 60/40, I would add, what 62.6%A and 37.4%B? Or am I off?
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You are right on, but by the time the transactions are complete, they may very well be off again. So this makes for an impossibly complex calculation each time. And what happens if values vary enough that contributing 100% of this month's contribution to a single fund is not enough to rebalance the account?

Most people deal with this by keeping contributions constant for an extended period and then rebalancing once a year or so.

Overdoing it makes for lots of paperwork and increases costs. But you get the general idea. So use it more as a guideline than an ironclad rule.
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Stupid question, if I automatically invest $225 each time, typically at 60%/Fund A and 40% Fund B, if the present balance drifted to 57.4%A and 42.6%B, next time via new savings, to get back to the hard 60/40, I would add, what 62.6%A and 37.4%B? Or am I off?

Not enough information provided, but you are off in your methodology.

At a minimum, we would need to know:
- What is the current total investment?
- What is the number of automatic investments you want to take to get back to the 60/40 mix?
- What will happen to the prices of the investments during the time that you are moving from the 57.4/42.6 mix to the 60/40 mix? (good luck with this one!)

If the current total investment is signifcantly larger than your automatic investment, a 62.6/37.4 investment mix may take years to get you back to 60/40, even if the prices stay the same. If the price of B continues to increase relative to the price of A, it may never get you back to 60/40.

On the other hand, if the current total investment is the same as your automatic investment amount, 1 investment of 62.6/37.4 will get you back to 60/40.

To get back to 60/40 in the quickest possible time, you need to translate from the percentages to dollars, and determine how many additional dollars you would need to put into A to get it back to 60, then divide that number of dollars by your automatic investment amount to see how many automatic investments you need to devote 100% to A to get back to 60/40.

If you are unwilling to devote 100% of an automatic investment to A, you would have to decide how much (in dollars) you are willing to devote to A for each automatic investment, then divide the dollars you need to add to A by that amount to get the number of automatic investments you need to split that way to get back to 60/40, considering the additional dollars you will be adding to B during that time.

Of course, if the price of either one takes a big jump relative to the other during this process, you will still end up out of balance.

I would second the suggestion to look at rebalancing only when you are out of balance by at least 5% (and I would further suggest 10%, instead of 5%). If you only want to rebalance by using new investment dollars, I would then suggest devoting 100% of your automatic investments to the investment that is below the goal, until you acheive your desired mix, then switching back to 60/40.

AJ
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jq-

Given the current allocation of
A $642
B $206
C $190

With a contribution of $225 you would make the percentages
A $115.8 or 51.5% (52)
B $ 46.6 or 20.7% (21)
C $ 62.6 or 27.8% (28)

Giving you
A $757.8
B $252.6
C $252.6

To figure this out you start just like you did and figure the dollar amount it would take to get back into 60/20/20. In this case $32.

$0 (A) + $8 (B) + $24 (C) = $32

So you subtract the $32 from the $225

$225 - $32 = $193

Then you take the $193 and divide it up by the 60/20/20 and add the amount you just figured out earlier


$193 * .60 = $115.8 + $ 0 = $115.8
$193 * .20 = $ 38.6 + $ 8 = $ 46.6
$193 * .20 = $ 38.6 + $24 = $ 62.6

Then
$ 642 + $115.8 = $ 747.8
$ 206 + $ 46.6 = $ 252.6
$ 190 + $ 62.6 = $ 252.6

$1038 + $225.0 = $1263.0



Peace!!

d(balanced contributions)/dT
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I wouldn't worry until you are at least 10% off in your balances.

MZ4
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One other thing to keep in mind, depending on how much commisions you pay, try and keep transaction costs below 2%. Or 1% each way. So if you pay $10 commisions, don't rebalance unless your trading $1000.

JLC
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One other thing to keep in mind, depending on how much commisions you pay, try and keep transaction costs below 2%. Or 1% each way. So if you pay $10 commisions, don't rebalance unless your trading $1000.

When I was reading the discussion, my first thought was that by managing so tightly the OP is going to spend an awful lot on transaction costs.

I also am a small-timer, relatively speaking, and I don't like the price of buying ETFs so I buy no-load mutual funds belonging to the discount brokerage where I have the account. The Roth has 5 funds, diversified across various sectors. In order to keep things easy for myself I've decided to keep the balances roughly equal. When I put in my $500 every month I buy whatever has the lowest balance. Depending upon performance, that could be anywhere from one fund at $500 to all 5 at $100. More often, though, it will be $250 each to 2 of them or $200 here, $300 there.

Over time, my portfolio stays pretty balanced and I don't tear my hair out trying to figure percentage points out to the nth value. Yes, I have to manually make contributions, but this works better for me than equal contributions balanced once/year.

YMMV,

Guby
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Hi all:
Dr. Tarr, if you're out there, regarding your advice, helpful by the way, how did you arrive at the $32 figure/amount to get it back to the 60/20/20

you said

$0(A)+$8(B)+$24(C)=$32

I understand it from there
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