Many investors consider the recent stock market pull-back to be a great buying opportunity, and are eager to rebalance (at least the ones that aren’t panicking and selling their stocks). But should they rebalance now, or wait a bit longer?
To make this decision easier, I’ve created a downloadable rebalancing table that incorporates Larry Swedroe’s 5/25 rule, which is an excellent way to keep your rebalancing schedule disciplined in times like this. Using the 5/25 rule, you would rebalance your portfolio if an asset class wanders either plus or minus 5% from the original asset allocation target, or plus or minus 25% of the original asset allocation target (whichever one is less). If this all seems a bit confusing, download the rebalancing table and plug in your target asset mix (the spreadsheet will automatically calculate the minimum and maximum rebalancing thresholds for you using the 5/25 rule).
Rebalancing Table: 40% Fixed Income + 60% Equity Target Asset Mix
*ETF Portfolio is comprised of 40% Vanguard Canadian Aggregate Bond Index ETF (VAB), 20% Vanguard FTSE Canada All-Cap Index ETF (VCN) and 40% Vanguard FTSE All-World ex Canada Index ETF (VXC)
As long as your asset class weightings are within these minimum and maximum rebalancing thresholds, you can just sit back and not enjoy the ride. If cash from distributions or new contributions has accumulated, top-up whichever asset classes are underweight.
Believe it or not, many investors will be surprised to learn that their portfolios are still relatively in balance. As of the market close on August 25, 2015, the asset allocation for a balanced ETF portfolio*purchased at the beginning of 2015 would still be within their minimum and maximum rebalancing thresholds (see chart above as of August 25, 2015).
More aggressive investors will likely find the same result. Although their Canadian equities will be down slightly, most portfolios will generally be within their rebalancing thresholds (see charts below as of August 25, 2015).
Rebalancing Table: 25% Fixed Income + 75% Equity Target Asset Mix
*ETF Portfolio is comprised of 25% Vanguard Canadian Aggregate Bond Index ETF (VAB), 25% Vanguard FTSE Canada All-Cap Index ETF (VCN) and 50% Vanguard FTSE All-World ex Canada Index ETF (VXC)
Rebalancing Table: 10% Fixed Income + 90% Equity Target Asset Mix
*ETF Portfolio is comprised of 10% Vanguard Canadian Aggregate Bond Index ETF (VAB), 30% Vanguard FTSE Canada All-Cap Index ETF (VCN) and 60% Vanguard FTSE All-World ex Canada Index ETF (VXC)