Fundranker Blog—Method 2 Rebalancing
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Method 2 Rebalancing
The Fundranker system is based on allocating your investments equally across all eight funds in the Top Eight Model Portfolio. We discuss three methods you can use to rebalance your portfolio on our FAQ page. In this post, we’ll discuss Method 2 further. See our posts on Method 1 and Method 3 for further examples.
It is important to note that Method 2 rebalancing involves selling shares from some of your funds that you would not be exchanging otherwise, so consider tax consequences before you use it to balance your taxable accounts. You will realize whatever capital gains or losses those shares have made since you bought them. You may decide that leaving your taxable funds less balanced is better than realizing capital gains earlier than necessary.
Method 2 rebalancing opportunities occur when the earliest possible Fundranker exchange date for a month falls at least 30 days before the earliest possible exchange date for the next month. This will happen next on June 2, 2010. Here is an example of Method 2 rebalancing:
Let’s assume that, as of the close on June 1, 2010, you hold the following:
| Fund | Amount | Since | Above | Below | From | To | Not Balanced |
| 1 | $3,500 | Apr 5 | $100 | < $250 | |||
| 2 | 2,700 | Mar 5 | $700 | fell out | |||
| 3 | 3,200 | May 3 | 200 | < $250 | |||
| 4 | 3,800 | Apr 5 | 400 | $400 | |||
| 5 | 4,100 | May 3 | 700 | < 30 days | |||
| 6 | 2,900 | Feb 3 | 500 | $500 | |||
| 7 | 4,000 | Feb 3 | 600 | 500 | |||
| 8 | 3,000 | May 3 | 400 | 400 |
First, on June 2, 2010, calculate your goal amount to balance your funds: (3,500 + 2,700 + 3,200 + 3,800 + 4,100 + 2,900 + 4,000 + 3,000) / 8 = 3,400
Second, determine which funds you can exchange from. Funds 1, 2, 4, 6, and 7 will have been held at least 30 days as of June 2, thus avoiding roundtrip transactions. Of those, Funds 1, 4, and 7 are above your goal amount. Fidelity won’t let you exchange less than $250, which leaves only Funds 4 and 7 from which to exchange.
Third, determine which funds you can exchange to. Let’s assume that Funds 1, 3, 4, 6, 7, and 8 did not fall out of the Top Eight Model Portfolio and won’t be exchanged in June. Of those, Funds 3, 6, and 8 are below your goal amount. Fidelity won’t let you exchange less than $250, which leaves only Funds 6 and 8 to which to exchange.
Finally, enter your balancing exchanges at Fidelity Investments. Before 4pm ET on June 2, exchange $400 from Fund 4 to Fund 8 and $500 from Fund 7 to Fund 6.
Note that although you usually will rebalance only part of your funds using Method 2, it still helps bring your funds closer to being balanced, and you can repeat it frequently.
Posted 3/30/10 5:40pm ET in Fundranker
