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Couch Potato Portfolio: I'm up 42% on one of my stocks, how do I rebalance?

  • Last Updated:
  • Jul 18th, 2012 10:49 pm
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[OP]
Jr. Member
Dec 14, 2005
143 posts
19 upvotes

Couch Potato Portfolio: I'm up 42% on one of my stocks, how do I rebalance?

Apologies if this is a newbie question, but I wasn't expecting to ever run into this decision. So I run a couch potato portfolio, here's how I divide my assets, I'm up +42% on my real estate trust investments, which only makes up 5% of my portfolio:

Canadian Equity 30%
US Equity 20%
International Equity 20%
Emerging Markets 10%
Real Estate 5%
Fixed Income 15%

Now, once a year, I max out my RRSP contribution, so I buy up more stock to bring each asset up to it's target distribution. Since I'm always adding money in such a big chunk, I've never had to sell stock, I just buy less or more to even them all out. The question is, should I sell my real estate stock, and then buy it back up? Or, since my RRSP is obviously a long term investment, should I just hold onto it?
3 replies
Deal Addict
May 31, 2007
4996 posts
2110 upvotes
I would sell it back to 5% and then buy whatever has done the worst. It will most likely be your Canadian or International Equity.
I just did this today except I sold bonds to buy Cdn and INT equity.
Deal Addict
Aug 28, 2010
3521 posts
1218 upvotes
Halifax
So if you real estate has increased by 42%, that roughly means its gone from 5% to 7% of your total portfolio, correct?

If so, I see no need to rebalance. I usually give 5% latitude before I bother with rebalancing. So for example for your Canadian equity, if it's between 25% and 35%, it seems fine to me.


Now when adding money I'll try to get closer to the exact target. But I don't feel the need to rebalance when not adding money unless things have gone a decent amount away from the target.

Of course, that's just my strategy. Different people are going to have different strategies and comfort zones.
Deal Addict
Oct 4, 2009
2415 posts
1158 upvotes
Montreal
FunSave22 wrote:
Jul 18th, 2012 8:29 pm
If so, I see no need to rebalance. I usually give 5% latitude before I bother with rebalancing. So for example for your Canadian equity, if it's between 25% and 35%, it seems fine to me.
Nominal bands of 5% as you describe make sense when all components of a portfolio have similar allocations(say a 4 way split of 20-30%) but on their own they are more suspect when one component is 6 times larger than another as in the OP's situation.

To avoid this inconsistency a band can be used that is based on the % increase/decrease of the original allocation. For example a rebalancing might be triggered when an asset has gained or lost 50% which would give a 2.5-7.5% band on RE, a 5-15% band on EM, etc. Some people will use both types of rebalancing triggers.

OP, pick whatever rebalancing procedure you prefer and then stick to it. The more automated the procedure the better. Whether you rebalance now or at your next yearly contribution is unlikely to make much of a difference in the long run.

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