Introduction to Calendar-Based Rebalancing

Calendar-based rebalancing is a systematic investment strategy where investors adjust their portfolios at regular intervals, such as annually or quarterly, to maintain their desired asset allocation. This technique helps to mitigate risk by ensuring that no single asset class dominates the portfolio due to market fluctuations. Below are three diverse examples illustrating calendar-based rebalancing in various contexts.

Example 1: Annual Portfolio Rebalancing for a 60/40 Allocation

In this example, an investor has a portfolio consisting of 60% stocks and 40% bonds, with an initial investment of $100,000. At the end of the year, the market performance has shifted the allocation to 70% stocks and 30% bonds. To maintain the desired allocation, the investor decides to rebalance their portfolio at the end of the year.

1. Initial Allocation: 60% Stocks ($60,000), 40% Bonds ($40,000)

2. Year-End Market Value: Stocks = $80,000, Bonds = $30,000

   • Total Portfolio Value = $110,000
3. New Allocation: 70% Stocks ($77,000), 30% Bonds ($33,000)

4. Rebalancing Action:

   • Sell $7,000 worth of stocks to buy bonds.
   • New Allocation: Stocks = $73,000 (66.36%), Bonds = $37,000 (33.64%)

Notes:

• This investor may choose to initiate a rebalancing transaction only if the market value shifts substantially from the target allocation.
• A transaction fee may apply, which should be considered before executing trades.

Example 2: Quarterly Rebalancing for a 50/50 Equity and Fixed Income Portfolio

An investor has a balanced portfolio with a 50/50 split between equities and fixed income securities. Every quarter, they review their asset allocation due to market volatility. At the end of the first quarter, the equities have surged, leading to a new allocation of 60% equities and 40% fixed income.

1. Initial Allocation: 50% Equities ($50,000), 50% Fixed Income ($50,000)

2. Quarter-End Market Value: Equities = $70,000, Fixed Income = $50,000

   • Total Portfolio Value = $120,000
3. New Allocation: 60% Equities ($72,000), 40% Fixed Income ($48,000)

4. Rebalancing Action:

   • Sell $8,000 worth of equities to invest back into fixed income securities.
   • New Allocation: Equities = $62,000 (51.67%), Fixed Income = $58,000 (48.33%)

Notes:

• Quarterly rebalancing can be particularly effective in volatile markets, allowing the investor to capitalize on market movements.
• Investors may also consider tax implications when selling assets for rebalancing purposes.

Example 3: Semi-Annual Rebalancing of a Growth-Oriented Portfolio

A growth-oriented investor with a portfolio primarily in technology stocks (80%) and cash (20%) decides to implement a semi-annual rebalancing strategy to stay aligned with their risk tolerance. After six months, the tech stocks have performed exceptionally well, shifting the portfolio to 90% stocks and 10% cash.

1. Initial Allocation: 80% Tech Stocks ($80,000), 20% Cash ($20,000)

2. Mid-Year Market Value: Tech Stocks = $100,000, Cash = $20,000

   • Total Portfolio Value = $120,000
3. New Allocation: 90% Tech Stocks ($108,000), 10% Cash ($12,000)

4. Rebalancing Action:

   • Sell $8,000 worth of tech stocks to increase cash holdings.
   • New Allocation: Tech Stocks = $100,000 (83.33%), Cash = $20,000 (16.67%)

Notes:

• This strategy allows the investor to take profits while maintaining their preferred risk level.
• Investors should assess their overall financial goals and market conditions when determining the frequency of rebalancing.