You will be able to write a rebalancing rule that covers both index funds and individual stock positions.
Marcus already had a rebalancing rule for his funds, written in the policy he built with Build and run an ETF portfolio. It said nothing about single stocks, because when he wrote it he thought of his stocks as a side project. Module 11 changed that: his rulebook now has targets and limits for each stock, and four breaches waiting to be fixed. A rule that covers half the portfolio leaves the other half to mood, so this lesson writes one rule for both, then applies it to his weights.
Holdings are Marcus's made-up figures, about S$202,000 in all.
Rebalancing the core works exactly as Build and run an ETF portfolio taught it in lesson 6.2, Calendar or threshold rebalancing. You either rebalance on a fixed date, or when a holding drifts outside a band around its target, or both. There's no need to redesign that here. Bring your existing rule across, with the new core targets from lesson 12.1, Core and satellite: where stock picks sit next to index funds.
Marcus's core rule checks weights at a yearly review each January and after any fall of 20% or more in world shares. A core fund is rebalanced if the world ETF is more than 5 percentage points from its 52% target, or any other fund more than 2 points from its target.
Stocks can't be rebalanced the way funds are, because buying more of a stock is a fresh decision about one company. So the rule for stocks has two halves that work differently.
Trimming is mechanical. Any stock more than one point above its target is trimmed back to target at the review, as lesson 11.3, Position and sector limits, and concentration risk, set out. No thesis argument overrides it. That's the point of having a limit.
Adding is conditional. A stock that has fallen below its target is topped up only if its thesis review, from lesson 11.4, Thesis review instead of price stops, says the thesis is intact. If the review says weakened, it stays where it is until the next one. If it says broken, the stock is sold. A fall in price is never on its own a reason to add, which stops the rule from automatically buying more of a company that's failing.
Every trade costs a spread and a commission, and selling can crystallise a gain. Rebalancing with cash that's arriving anyway avoids most of that. Build and run an ETF portfolio shows how in lesson 6.3, Rebalance cheaply with new contributions: direct each new deposit, dividend and coupon to whatever is furthest below target.
Marcus adds S$8,000 every January, and his dividends and distributions arrive through the year. Both now go to the most underweight holding first, and he sells only what the rules still require after that.
Here's the review, worked through. On S$202,000, his targets are: world ETF 52%, S$105,040; bond fund 15%, S$30,300; STI ETF 10%, S$20,200; T-bills 5%, S$10,100; bank and S-REIT 5% each, S$10,100; Larkspur and the chip designer 4% each, S$8,080.
The trims come first. His bank at S$16,000 is more than a point over target, so he sells about S$5,900. His chip designer at S$15,000 is over too, so he sells about S$6,920. His S-REIT at S$12,000, 5.9%, doesn't trigger the single-stock rule, but the cluster cap from lesson 11.5, Correlation clusters: hidden bets across your holdings, does, so he sells about S$1,900. The sales raise S$14,720.
Then the buys. Strictly, the targets call for S$14,040 more in the world ETF, S$300 in the bond fund, S$200 in the STI ETF, S$100 in T-bills and S$80 in Larkspur. Small trades cost more than they fix, so his rule skips any trade under S$1,000 and puts the whole S$14,720 into the world ETF, which ends at about 52.3%, inside its band.
Now add the January deposit. With S$8,000 of new money the portfolio becomes S$210,000, and the targets rise with it. The bank now needs a sale of about S$5,500, the chip designer about S$6,600 and the S-REIT about S$1,500, so sales fall to S$13,600, and the new money plus the sales fund S$18,200 into the world ETF, S$1,500 into the bond fund, S$1,000 into the STI ETF and S$500 into T-bills. Larkspur's S$400 top-up falls under the S$1,000 floor, and its thesis review would have to say intact before he bought it anyway.
The deposit saves only about S$1,100 of selling here, because the stock breaches were big. In an ordinary year, with no limit broken, new money alone usually does the whole job.
Selling the bank and chip designer to meet a limit, after years of holding, is the kind of occasional rebalancing sale that Tax & Reliefs: how your income tax works and the reliefs you can claim describes in lesson 5.1, Dividends, interest and investment gains, as part of investing rather than trading. Lesson 12.4, Tax on gains and dividends: check how IRAS treats you, explains why the pattern of your trades still matters.
The test of a rebalancing rule is whether another person could apply it with your workbook and reach the same trades. That rules out words like "significantly" and "when it feels right", and it means every threshold is a number.
Marcus's rule, added to the space he left in his rulebook: "Each January, and after any 20% fall in world shares, I check every weight. Core funds go back to target if the world ETF is more than 5 points from 52%, or another fund more than 2 points from target. Any stock more than one point over target is trimmed to target, and any group over its cluster cap is trimmed to fit. Stocks below target are topped up only if their thesis review says intact. New money and dividends go first to whatever is furthest below target, and trades under S$1,000 are skipped."
Get your current holdings, their values in SGD and your targets from module 11 into one table, ready to apply your rule.
Write a rebalancing rule covering your core funds and stock positions and apply it to your current weights.
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