Use your regular investments and withdrawals to rebalance without having to sell.
Grace puts S$1,500 into her investments every month (an invented example). Her rule from Lesson 6.2, Calendar or threshold rebalancing, is to rebalance once a year in her birthday month, and this year that month has come round with her portfolio a few points away from target.
She expects to sell some of her world fund, pay commission on that sale and then pay commission again on the bond purchase that follows. Then she notices that S$1,500 of fresh money is about to be invested regardless, and it has to be put somewhere. If you invest on a regular schedule, your contributions are already a rebalancing tool, though most people overlook them and reach for a sale first.
Grace holds S$100,000 in total, made up of S$72,000 in shares and S$28,000 in bonds. Her target is 70/30, so at 72% she is two points heavy in shares.
Rebalancing with new money means directing your contributions to whichever asset sits below target, rather than splitting them by target percentages or selling anything.
In month one, all S$1,500 goes into bonds. Bonds are then S$29,500 out of S$101,500, and shares drop to about 70.9%.
In month two, another full S$1,500 would push bonds past 30%, so she calculates the amount needed: the target percentage multiplied by the new total, minus what she already holds in that asset. Her new total is S$103,000, and 30% of S$103,000 is S$30,900. She already has S$29,500 in bonds, so they need S$1,400. She invests S$1,400 in bonds and the leftover S$100 in shares, which leaves her at exactly 70/30.
In month three she goes back to splitting by target: S$1,050 to shares and S$450 to bonds. Two months of contributions closed a two-point gap, and she did not sell a single unit of anything.
To do this yourself, take a few minutes before each month's purchase to compare your holdings with your target allocation and find the asset that is below target. Use the formula above to work out how much it needs. If your contribution is equal to or less than that amount, the whole contribution goes to the underweight asset. If it is more, invest only the amount needed there and put the rest into the other asset. Once you are back on target, go back to splitting new money by your target percentages. Grace's numbers stay tidy because prices are held still. Real prices move between months, so you redo the comparison every month using the same calculation.
Many brokers offer a regular savings plan, which buys on a fixed split each month. Find out whether your plan lets you change that split. A plan locked to fixed percentages keeps buying in proportion and can't rebalance for you, so in any month when money needs steering, you place the purchases manually instead.
Lesson 3.1, Expense ratio and the costs it leaves out, showed that every sale costs commission plus half the spread. When you sell one fund to buy another, you pay those costs twice. When you steer contributions instead, you pay them once, on a purchase you would have made anyway.
A second benefit is harder to put a price on. Because you sell nothing, all of your money stays invested the whole time. You also skip the uncomfortable step of selling whatever has been doing well. After a few months the comparison becomes part of your monthly routine and barely feels like a decision.
When you take money out, the same logic runs in reverse. A withdrawal rule says you sell from whichever asset is above target. If shares have had a strong year, for example, taking your withdrawals from the share side trims the overweight and gives you the cash you need in a single step.
Withdrawals come up in situations such as retirement or a career break, and for most learners on this course they are years off. Write your rule down now anyway, because the order in which you draw from your holdings goes into your investment policy statement in module 8.
The limit of this method is size. Monthly contributions close a small gap quickly and a large gap slowly, and even more slowly if shares keep rising while you wait.
Farhan, a character from earlier in the course, has S$52,000 in a world fund and S$8,000 in a new Singapore government bond fund. That puts him at about 87% shares against a 65% target. He invests S$1,000 a month. If every S$1,000 went into bonds and prices stayed flat, he would still be at about 82.5% shares after three months. To reach 65% with new money alone, his bonds would have to grow to S$28,000. That would take about 20 months, and only if shares do not keep rising.
His hybrid rule from Lesson 6.2 triggers a rebalance at his next check whenever shares are above 70%, so it is now asking him for a sale. He works out that selling S$13,000 of the world fund and buying bonds would bring him to 65/35 immediately. You can combine the two methods. Farhan decides to follow the rule at his July check, and until then he sends his contributions to bonds so the sale will be smaller.
After a crash, the gap can be far bigger than a few months of contributions can close. Your rule will then tell you to sell bonds and buy shares at a frightening moment, and that is when having the rule in writing proves its worth. Lesson 6.4, Test your rule on a made-up crash, lets you rehearse following your rule before a real crash arrives.
Before you start, have your latest balances, your target and your usual monthly amount in front of you. Work out how many months of contributions it would take to close your gap. If the gap is too large, or your rule's trigger is already breached, follow the rule's sale, and use new money before the sale date to make the sale smaller. Your own figures will show whether new money is enough or whether your rule will soon ask for a sale.
Work out where your next three monthly contributions should go to bring your portfolio back towards target.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).