Saturday, September 24, 2016

Rebalancing Woes

Rebalancing is the act of bringing your portfolio back to its original allocation, therefore reducing your risks through diversification. It also helps to sell away good performing asset classes and buy in non-performing ones.1

However, there are some occasions where it is a bit difficult to do rebalancing. The main reason for this is there is nothing in the non-performing asset class to buy in. For example, you needed to do rebalancing between equities and REITs. You have identified which equities to sell, but you cannot find any from the REIT side.

Still, rebalancing has to be done. You do not want to get caught out with an over-allocated asset class. To address the “rebalancing woes”, check out some of the recommended methods below.

Relooking at Current Holdings

The easiest option would be to add positions to your current holdings. At least there is some familiarity involved, since you need not go around looking for new ones, as long as your fundamental analysis of the holdings is still in the healthy range (come to think of it, if it is not in the healthy range, it would be sold off).

Exchange Traded Fund (ETF)

ETFs are another good way to address the issue.2  However, not every index out there is followed by an ETF. At the moment the S-REIT ETF is not available yet, so this method may not work well for the above example.

Temporary Withdrawal of Cash

During rebalancing, the asset class that gets increased temporarily would be cash. If no rebalancing is done, you would have a higher-than-allocated cash component, and this may cause a little problem to your ideal allocation. It would be prudent to move the excess cash out so that The Bedokian Portfolio goes back to the planned allocation. To do this, however, would “stunt” the growth of your Bedokian Portfolio, since the portfolio size is reduced and the “compounding magic” delayed. Good thing is, the withdrawal is temporary, and the cash amount withdrawn could be deployed in the next rebalancing schedule, which by then the economic situation may have changed and you would have more suitable choices to buy in.

1 – The Bedokian Portfolio, p 80

2 – The Bedokian Portfolio, p 122


  1. ETF and Cash are good choices. I included Safer bank Preference shares, Strong Bond, Property Purchase directly.

    1. Thank you Cory for your comment. Your other choices are good ones as well.

  2. I think if you have a target asset allocation, the rebalancing shouldn't be difficult at all. Or maybe it's just easier for me when I only have 3 funds in my portfolio!

    1. Hi Lazy Singaporean. Yes, I agree it would be easy on a 3-fund portfolio and using ETFs to do rebalancing. For my portfolio it has 5 asset classes, and it is made up of ETFs and individual securities as well. :)