When you have a diversified portfolio of funds, you’re going to experience variations in the values of these investments. Some will grow fast. Some will grow slow. Some will lose money. The whole point of having a balanced portfolio is to control risk and allow you to reach your goals.

I’ll give you a portfolio that I’m currently following and what I aim for when it comes to balancing the funds.

• 25% – S&P/TSX Composite Index
• 25% – DEX Universe Bond Index
• 25% – S&P 500 Index (in US Dollars)
• 25% – MSCI EAFE Index (it’s international)

I just gave the indexes that my investments follow instead of getting into the actual funds/ETFs that I hold. This portfolio is something designed for the long term, hence why I have only 25% in bonds.

The fund allocations I have aren’t even close to meeting that goal. Some of the funds are at 37% of the total portfolio, while others are at 18%. I do have one at 25% though.

The question now is when should you rebalance and the answer is probably going to have a little more market timing than I’d normally want. I’m not going to go into the details because there are other passive investing blogs on the internet that have done these calculations.

Rebalancing at the end of the year

This is probably a pretty passive and objective move. It will keep your risk tolerance in line exactly how you like it. The problem with this type of rebalancing is that when there is a bull market you often miss out on a lot of gains. The reason for this is that you’re most likely selling your equities (which are growing) and buying bonds (which are slow). Over a long enough run you’re missing out on a lot of gains.

So if you look up the stats for a person that invests for retirement and over the years there are more bull markets than bear markets you’ll find that they’d be ahead if they didn’t rebalance.

Never Rebalance

Like I mentioned in the previous point, bull markets will yield you a better result. There is another side of the coin and that’s when you tend to be in a bear market or an uncertain market. The more you rebalance in this market the better off you are.

Use New Money to Rebalance

This is something that I’m currently doing to rebalance my portfolio. I can get away with this because I’m younger and I don’t have a massive net worth built up over decades. I do think this is a good approach. You’re balancing your portfolio without actually changing things around and potentially selling a winning fund to rebalance.

What should you do?

I really can’t answer this question for you because it’s up to you to figure out. It really boils down to how much you value your risk tolerance. We all know that riding out the storm or the bull is the way to go. I plan to just keep pumping money in and try to rebalance that way. I know that can be a losing battle when you’re up several hundred thousand dollars, but it’s fine. I’ve heard that you should rebalance every 4 years, but who knows.

The point is that you have to come up with an objective way of looking at it. You can’t make rash decisions. I like the 4 year one because it allows the market to run the course and takes a lot of reaction away from us.