One of the housekeeping chores investors deal with from time to time is “rebalancing” their portfolios.
How does a portfolio get unbalanced? Consider a game of Monopoly. Each player starts with 25% of the money, but after a few rounds of play, some are richer and some poorer. To get back where you started, you’d have to “rebalance” by taking money from some players and giving it to others.
Let’s assume you’ve been following our Fund Upgrading strategy, and you divided your money among the three risk categories as suggested last January. Many things have happened since then! Some funds and categories did better than others. Further, some Upgrading positions moved to cash earlier than others as the bear market unfolded. As a result, the percentages you have now aren’t the same as the ones you started with.
With non-taxable accounts, the first week of a new year is an excellent time to restore order—i.e., taking money from some funds and deploying it to others to get back to your target percentages. For taxable accounts, it’s better to execute transactions by Dec. 31 if you want to tax-harvest 2022 losses.
Absolute precision when rebalancing isn’t needed. As long as you rebalance to within a few percentage points of your original allocation targets, that’s close enough. Making further trades to get even closer to your target allocations would require incurring additional costs but would not make a material difference in your performance results.
Rebalancing is useful not only for Fund Upgrading (online calculator here) but also for Just-the-Basics (JtB calculator) and SMI’s Premium-level strategy Dynamic Asset Allocation.
If you follow more than one SMI strategy, such as blending Upgrading, DAA, and Sector Rotation, also rebalance the amounts allocated to each because the percentages allocated to the strategies will have changed due to performance variations.
For example, Sector Rotation (an SMI Premium strategy) strongly outperformed in 2022, so you could be significantly overweight in SR. It may be wise to reduce risk by selling a portion of your Sector Rotation holding and moving the proceeds into Upgrading and DAA.
