Simple Portfolio Rebalancing Spreadsheet

Investors who try to maintain any given asset allocation in a portfolio will soon find that asset price ups and downs have taken that portfolio "out of whack." Here’s a quick explanation of rebalancing - getting that portfolio back in line - with a helpful tool to make the process easier.

The subject of rebalancing, or how and when to buy and sell assets to bring them back to desired amounts within a portfolio, is an important consideration for all investors. Before wading into the complicated question of what is “best,” the two main ways to rebalance to approach rebalancing are:

1. Calendar-based: this is when your rebalancing schedule corresponds to a set schedule calendar, whether it be every quarter, every year, or whatever. It can also be based on specific events, such as when you do taxes, the end of the year after dividends season, the end of the school year, birthdays, or whatever. When the time for rebalancing has come, you simply buy or sell each asset to get it back to its target allocation.
2. Tolerance Band-based: rebalancing is triggered when a particular asset deviates substantially beyond its target allocation. The amount of deviation can be calculated in either absolute or relative terms. For example: if your target is 10% for XYZ, and it is now 12.8% of your portfolio, you’d be 2.8% off in absolute terms, whereas you would be at 28% off from your ideal in relative terms. By the way, I have always called this “threshold” rebalancing, but “tolerance band” rebalancing seems to be the more widely used nomenclature.

The conventional wisdom hasn’t quite settled on which is best, though I lean towards the second, mainly because the tolerance band approach allows for selling/buying trending assets at the times when they are actually trending whereas a calendar-based approach might not. In order to prevent a situation where you are rebalancing the prominent assets in your portfolio much more than the smaller ones, I prefer the relative deviation approach, with a threshold (the tolerance band) at 20%. In the sample portfolios, I use the 25% threshold, and you can read more about my actual method for rebalancing the portfolios here.

But that’s just me, and your mileage may vary. It does seem, though, that frequent rebalancing offers little obvious benefit over less frequent, so no need to come up with something that causes you to rebalance every month, or even every six. In addition, the whole process of optimizing a rebalancing scheme for the months and years going forward is about as reliable as choosing the best assets to hold for that time period, which is to say, not very. In thinking of a plan for rebalancing, it is important to recognize that it's essentially impossible to get perfect. Still, it's a good idea to make an informed choice, so here are some helpful resources:

1. Rebalancing has been mentioned in quite a few Risk Parity Radio episodes, but I would focus on episode 32 and then episode 144 (relevant sections are cued up in the links).
2. Michael Kitces has a great article reviewing the fundamentals of rebalancing and looks at the research about best practices.
3. Chapter 11 in Alex Shahidi’s book “Risk Parity” is all about rebalancing. His basic point is that rebalancing is likely more beneficial for more volatile assets, as can be found in RP portfolios, to take better advantage of selling high and buying low.

Once you settle on a method of rebalancing, the next question may be how to put it into action. To make investing a little easier, here is a spreadsheet which you are welcome to copy and alter as you see fit. I have tried to make it easy to use: you only need to enter in which assets you have, which percentages you’d like them to be in your portfolio, how many shares of each you have currently, and if you like, your “threshold” in the Tolerance Band-based rebalancing approach. You enter in information on just the top sheet, and then it will calculate how to do a complete rebalancing (once you decide to rebalance, you’re bringing all assets back into the right proportions) and also a partial rebalancing (selling or buying just the ones above or below your threshold for rebalancing).

As you complete the spreadsheet, be sure to delete the columns that you don't use. If columns with the question marks are kept in, the spreadsheet will not calculate. If you'd like to add more columns, that's fine as well, but the advice there would be to add them in the middle so that the formulas stay updated.

You’ll also notice that I have presented the spreadsheet without a prominent place for telling you the net worth of the portfolio. I do this for psychological reasons since my goal is to avoid worrying about the total as much as possible. The total is calculated below, though, so if you like, scroll down and then copy and paste the total amount to a more prominent position.

To start using the spreadsheet, click the button below and it will trigger the opportunity to make your own copy:

Then, I have made a screencast walking you through how to use the spreadsheet to track your assets and tell you when to rebalance.

I hope its helpful!

NB: I have labeled this version 1 in anticipation that it will be tweaked and improved over time. If you have a suggestion, I’d love to hear from you!