Portfolio rebalancing after a market increase/decrease

This question was posed by Richard Rogers DDS, Past President of the Maryland State Dental Association and current President of MSDS Member Perks. www.yellowspringsdental.com


Overtime, it is easy to see the impact of Dollar Cost Averaging on the overall performance of a portfolio. MMM discusses a strategy to ‘trigger’ a portfolio ‘rebalance’, back to the individual selected Asset Allocation, when we see a 10% increase/decrease in the investor’s choice of a broad-based index ETF. As we see the ETF value gradually increase and decrease over time, and we purchase at different values over time, over what period of time does a DIY Investor define the increase/decrease? Is this a sudden increase/decrease of the ETF or should the investor look at some other way to know when to look at a portfolio to rebalance?

Monday Morning Millionaire Program Answer:

Portfolio rebalancing after a change in the ETF price (increase/decrease) is not influenced by the time over which the change takes place. It could range from a week to a year or more. Historically, the Monday Morning Millionaire Program maintained a core portfolio with a 50/50 asset allocation between a US money market fund (TDB166) and a US market index exchange-traded fund (SPY or IVV of VOO). The allocation was rebalanced it every time the US market index exchange-traded fund dropped or rose by 10%. As long as fluctuations of this magnitude are happening, this asset allocation outperforms dropping and lateral markets but trails rising markets. Over the course of a market cycle (peak to trough to peak), it equals the market with half the risk as measured by market volatility. The MarketWatch article on this is worth careful study.

The 10% move was arbitrarily selected in the era of high transaction costs which could add up to hundreds or even thousands of dollars. These costs are so low today, less than $10.00 or close to 0% per transaction, that we can ignore them.

Reviewing the situation today, investors could buy more of the US market index exchange-traded fund on a 5% decrease and sell on a 15% or 20% increase. This approach would outperform the market over the course of a market cycle.

We will cover the subject in detail in a future blog.



Dr. Milan Somborac

The Monday Morning Millionaire Program supports do-it-yourself (DIY) investors which I have been for over 50 years. About my team and me

Schedule Your Free Half-Hour Discussion

Get in touch with us and schedule a free half-hour discussion with Milan.