Despite my desire to focus most of our attention on debt reduction, that doesn’t mean other aspects of our finances can be entirely pushed to the wayside. Certain areas just need a bit of consideration to keep things going along as smoothly as possible. Plus, now that I finally have a little time to contemplate anything other than numbers, what better time to think about a few more of them? 
If you are tracking the performance of your investments, you’ll notice that the separate portions of your portfolio like, for instance, your US Large Cap and your Emerging Market Micro Cap sections aren’t necessarily moving in the same direction, in the same amount, all the time. (Hopefully so anyway, or you’ve got a bit of diversification to do.) Over time, these disparities can cause one or more areas of the portfolio to be overweighted while leaving other areas underweighted. Which is just another way of saying that you’re taking on more or less risk than you desired when you set up your portfolio. So a little reallocating of funds between the different classes becomes necessary.
There are three general styles of portfolio rebalancing that I’ve stumbled upon:
- Rebalance periodically - Whether annually, biannually, monthly(!) or whatever arbitrary time frame chosen, you pick some date and decide “that day is the day to rebalance.” And when that day arrives, do so. Then put a reminder in your date book for that next arbitrary date in the future to do it all over again.
- Rebalance when a your allocation is off by a particular percent - Pick an arbitrary percentage off your ideal portfolio, and decide “this is how far off perfect my allocation must be for me to rebalance“. And when some portion of your portfolio hits that percentage, rebalance.
- Rebalance when you feel a the market is heading in a particular direction - Give the separate areas of your portfolio a range of allocations - i.e. 20-40% Large Cap Value, 30-50% Small Cap, etc., etc. - and based on how you view the market, you allocate somewhere in that range when you feel that the market is about to change.
The first method is just too arbitrary for me. Too short a time between rebalancing and “if it ain’t broken, don’t fix it” would apply - and you’d needless be incurring transaction fees. Too long a time period and things get too far out of whack, and the portfolio would no longer reflect the level of risk one is comfortable taking. The problem is, there is no perfect time frame; the market just doesn’t move at a steady pace.
Method three, well, that’s just a market timing play. Which, to a me, is just shy of gambling without any of the fun (ala sharing a few good cigars and drinks with friends). I generally believe in the efficient market theory, though I probably lean more towards weak-form efficiency than strong-form. Either way, market timing doesn’t sit in either ends of that spectrum.
Which leaves method two, the route I take - it personally makes the most logical sense. The Large Cap Value portion of our overall portfolio has been creeping away from ideal for some time now, and is finally enough off that the time to take some of the gains in the winners and stock up on the beaten down has arrived.
And so now the fun begins: deciding if the investments we are in are the most appropriate, and, if not, with what to replace them. Changes at the broker I use - namely, no more free mutual fund trades 
- initiated some looking around before the rebalance trigger hit, and I actually stumbled across an interesting group of prospective investments that I may let run for a bit.
Possibly by this afternoon, if it stays quiet here, I’ll have our new portfolio. I’ll even throw it up here, just to see if anyone has an opinion or two on my choices….
C’est la vie. Even though I was thrown off task a bit, people came in with a handful of interesting problems so I wasn’t bothered by the interruption.
