How Often You Should Rebalance Your ETF Portfolio

The question of how often to rebalance an investment portfolio has been studied and restudied since long before ETFs arrived on the scene. Most financial professionals agree that once a year is a good timeframe, at least for those still in the accumulation phase of their investing careers.

Anything less frequent than that increases your risk as positions get more and more out of whack. Anything more frequent than annually, and you may lower your returns by interrupting rallies too often and increasing your “friction” costs (trading commissions, spreads, and possible taxes).

Keep these costs in mind as you rebalance. Tweaking a portfolio by a few dollars here and there to achieve “perfect” balance may not make financial sense.

A guideline is never to pay more than one-half of 1 percent to make a trade for rebalancing purposes.

Another way to approach rebalancing is to seek to address any allocations that are off by more than 10 percent, and don’t sweat anything that’s off by less. In other words, if domestic corporate bonds are given an allocation in the portfolio of 30 percent, don’t worry too much about rebalancing unless that percentage falls to 27 percent, or rises to 33 percent.

If you are in the decumulation phase of your investing career (that’s a fancy way of saying that you are living off of your savings), you may want to rebalance every 6 months instead of 12. Rebalancing has a third purpose for you, in addition to risk-reduction and performance-juicing.

For the retiree, rebalancing is a good time to raise whatever cash you anticipate needing in the upcoming months. In times of super-low interest rates on money market and saving accounts, such as we’ve seen in recent years, it can be profitable to rebalance more often so that you don’t need to keep as much cash sitting around earning squat.

dummies

Source:http://www.dummies.com/how-to/content/how-often-you-should-rebalance-your-etf-portfolio.html