Cost of rebalancing portfolio?

raymondred

I decided to manage my own SIPP last year. I have passive investments, trying to keep costs low with trackers, and funds giving exposure to commodities and property.

The total portfolio is about £100,000, and I had planned to rebalance it once a year (unless it moved too far from my target allocations during the year). For smaller allocations my target is 5% - about £5,000 exposure. Some of these investments have fallen about 10% during the year and are now valued at around £4,500.

To rebalance I should take £500 of the gains I have made elsewhere and top-up these up. But it will cost £9.50 dealing cost which is 2% of the £500 top-up and 2.5% of £500 when there is 0.5% stamp duty too. In some cases there are Fund Dilution levies to pay on purchasing units. But unless I allow my smaller allocations to remain under target, I cannot see any option.

As a percentage of the small funds being rebalanced it looks high. Is it better to look at the whole cost of rebalancing (it comes to about £300), which is 0.3% of the whole portfolio. Or should I not rebalance until the smaller allocations are more dramatically unbalanced?

Jegersmart

Are you referring to funds and tracker funds?

With Fidelity it costs me nothing to switch holdings unless there is a spread quoted in a particular fund......

J

Totton

Review your original asset allocation, if it seems correct then rebalance.

westy22

If you are still contributing to the SIPP then there should be no real reason to formally rebalance when the movements are not significant - just divert new money to the under-represented funds / holdings.

If you are not still contributing then I would be tempted to leave rebalancing until the costs balance the potential benefits.

Glen_Clark

Depends how confident you are that your target allocations are exactly right for you.
My feeling is that target allocations are only a guess, so it doesn't matter if it drifts away from this guess a bit.

ChesterDog

In an ideal world, the best way to rebalance would be to add new contributions rather than top-slice existing ones.

That aside, take a look at how you consider your underperformers are likely to perform next year. If their prospects look improved then they may help to rebalance themselves anyway. If their prospects look much the same then there is a good argument for not topping them up yet. If it's a balanced or uncertain outlook (probably the case) then it comes down to informed guesswork, in which case you need to decide for yourself if you are happy to pay the costs or could accept further drift.

These things are really very personal decisions.

FWIW, I personally wouldn't bother with the fiddling and the incurred costs until the drift was around double what you have at the moment. But that's just my own view and what I personally feel comfortable with.

Glen_Clark

Just as a matter of interest how do you arrive at these Target Allocations?
The last time I heard them mentioned was in Tim Hale's Smarter Investing Book where he derided the 'Idiot Quizzes' which some financial advisers use to create them

Linton

I wouldnt rebalance for £500 in a £100K portfolio, it would make too small a difference to be worth the hassle. Suggest you set a minimum rebalance amount to say >5% of the total pot.

You could put your £5K holdings together, assuming there is some sort of connection between them, and regard the whole set as one portfolio item and not be too bothered about the relative sizes of each individual holding, just cutting back items that say double in size.

raymondred

ChesterDog wrote: »

In an ideal world, the best way to rebalance would be to add new contributions rather than top-slice existing ones.

That aside, take a look at how you consider your underperformers are likely to perform next year. If their prospects look improved then they may help to rebalance themselves anyway. If their prospects look much the same then there is a good argument for not topping them up yet. If it's a balanced or uncertain outlook (probably the case) then it comes down to informed guesswork, in which case you need to decide for yourself if you are happy to pay the costs or could accept further drift.

These things are really very personal decisions.

FWIW, I personally wouldn't bother with the fiddling and the incurred costs until the drift was around double what you have at the moment. But that's just my own view and what I personally feel comfortable with.

Mine is a passive portfolio with allocations set for reasonable returns based on acceptable risk over the long term. The idea is that I do not attempt to guess what will perform well and what will not, but cash in profits and move them into less well performing asset allocations on a regular basis, thereby booking profits and buying other asset classes when they are out of favour. The allocations I have chosen are based on one from Tim Hale's book (see my reply to another post below).

raymondred

Glen_Clark wrote: »

Just as a matter of interest how do you arrive at these Target Allocations?
The last time I heard them mentioned was in Tim Hale's Smarter Investing Book where he derided the 'Idiot Quizzes' which some financial advisers use to create them

It was this book which encouraged me to take control of my own SIPP and my asset allocation is based on the risk v returns analysis this book provides for various example portfolios.

grey_gym_sock

it's OK to use limits on how far away a holding can move away from its target allocation before you rebalance it. e.g. 20% (meaning that a 5% allocation would have to fall to 4% or rise to 6% before you'd do anything about it) or 40% (meaning it could go to 3% or 7%).

or look up larry swedroe's "5/25 rule" for a variation on this.

rebalancing isn't an exact science. it's fine to let costs influence your decision about how to do it.