You will be able to use regular investments and withdrawals to rebalance without selling.
Grace's rule from lesson 6.2, Calendar or threshold rebalancing, says she rebalances once a year. When her birthday month comes round, her portfolio is a few points off target, and she braces herself to sell part of her world fund, pay commission on the sale and commission again on the bond purchase. Then she realises she is about to invest her monthly S$1,500 anyway, and that money has to go somewhere.
If you invest regularly, you have a rebalancing tool most people overlook. This lesson shows how to use it.
The method is simple. Each month, before you invest, compare your holdings with your target. Send the new money to whichever asset is below its target, rather than splitting it by your target percentages.
Made-up example: Grace's portfolio is worth S$100,000, with S$72,000 in shares and S$28,000 in bonds. Her target is 70/30, so she is two points heavy in shares. She invests S$1,500 a month, and for this example prices stay flat.
In month one, all S$1,500 goes to bonds. Her bonds reach S$29,500 out of S$101,500, which puts shares at about 70.9%.
In month two, she works out how much bonds need to reach 30% of the new total of S$103,000. That is S$30,900, so S$1,400 goes to bonds and the remaining S$100 to shares. She is now exactly at 70/30.
In month three, she is on target, so she splits her S$1,500 the normal way: S$1,050 to shares and S$450 to bonds.
Two months of new money closed a two-point gap without a single sale. In real life prices will move during those months, so you redo the comparison each time, but the method stays the same.
The same idea works in reverse when you take money out. If you need to withdraw, perhaps in retirement or during a career break, sell from whichever asset is above its target. A withdrawal from the share side after a strong year for shares trims the overweight while giving you the cash you need.
For most readers of this course, withdrawals are years away. It is still worth writing the rule now, because the order you draw from your holdings becomes part of the investment policy statement in module 8.
Every sale costs commission and half the spread, as lesson 3.1, Expense ratio and the costs it leaves out, explained. A rebalance done by selling one fund and buying another pays those costs twice. A rebalance done with new money pays them once, on a purchase you were making anyway.
There is a second benefit that is harder to price. You never sell anything, so the money stays invested the whole time, and you never have to make the uncomfortable decision to sell what has been doing well. Your monthly routine absorbs the rebalancing so quietly that it barely feels like a decision.
If your broker offers a regular savings plan that buys on a fixed split each month, check whether you can change the split, or switch to manual purchases when you need to steer the money. A plan locked to fixed percentages buys in proportion and cannot rebalance for you.
The limit is size. Monthly contributions can close a small gap quickly and a large gap slowly.
Farhan's case shows it. His long-term money is S$52,000 in his world fund and S$8,000 in his new Singapore government bond fund, about 87% shares against a 65% target. If he puts his whole S$1,000 a month into bonds and prices stay flat, three months take him only to about 82.5%. To reach 65% with new money alone, his bonds would need to grow to S$28,000, which would take about 20 months, and that assumes shares do not keep rising.
His hybrid rule from lesson 6.2 says shares above 70% trigger a rebalance at his next check, so the rule asks for a sale. He works out that selling S$13,000 of his world fund and buying bonds would take him to 65/35 straight away. He decides to follow the rule at his July check, and to use new money in the months before then so the sale is smaller.
The same thing happens after a crash. If shares fall hard, the gap can be far bigger than a few months of contributions can close. Your rule will tell you to sell bonds and buy shares at a frightening moment. A written rule earns its keep at exactly that moment, and lesson 6.4, Test your rule on a made-up crash, lets you rehearse it before it is real.
Your own figures will show whether new money is enough or whether your rule will soon ask for a sale. Have your latest balances, your target and your usual monthly amount in front of you before you start.
Work out where your next three monthly contributions should go to move your portfolio back towards target.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).