Portfolio Rebalancing

Rebalancing is where the rubber hits the road: the process of checking your account and submitting the orders to match your portfolio's suggested asset allocation. Rebalancing is quickly done by following these simple steps.

Before we dive in, an important note: With TuringTrader.com, you are in no rush to complete this step because all our rebalancing happens while the markets are closed.

Preparations

Each portfolio comes with its specific rebalancing schedule, ranging from daily to weekly or monthly. The easiest way to keep track of the rebalancing schedule is to enable email notifications for the portfolios you are tracking. Read here for instructions on how to set that up.

On the day of scheduled rebalancing, we start with some preparations:

  • Check the net asset value of your brokerage account
  • Check the target allocation for the portfolio
  • Calculate the target number of shares for each asset
  • Calculate the order size for each asset

First, you need to know the net asset value or liquidation value of our brokerage account. This number is the amount of cash in your account, plus the liquidation value of all assets you are currently holding.

portfolio asset allocation

Then, go to your portfolio's page and find the target allocation, expressed as a percentage of the net asset value, for all assets the portfolio is holding. The screenshot above shows an example.

The target allocation is somewhere in the middle of the portfolio pages. Our portfolio pages feature a rebalancing view that removes most of the supplemental portfolio information to get there faster. Portfolio pages open in their rebalancing view when accessed from the dashboard or the rebalance now button found in the email notifications.

Next, you need to determine the position size for each portfolio asset. Calculate this number by multiplying your account's net asset value with the target allocation, and then divide by the last closing price. Most often, the result will be a fractional number. It is good practice to always round down to the next smaller integer value.

TuringTrader's position-size calculator

If you subscribed to our Premium membership, you have access to our position size calculator. Simply enter your total account value, and TuringTrader.com calculates the correct number of shares for you. Even better, TuringTrader.com memorizes the account value. That way, the values are already very close next time you come here.

Lastly, you need to calculate the order size for each asset. This number is the difference between the target number of shares and the number of shares currently in your account. Also, take note of the order type: if the target number is larger than your current shares, you need to enter a buy order. Otherwise, create a sell order.

simple step-by-step instructions

Placing your Orders

Having completed the preparations, you are now ready to place your orders. Doing so is also a multi-step process:

  • liquidate any assets held that are not on your list
  • place the orders calculated above

First, we recommend comparing your list of orders with the assets in your account. Liquidate any holdings in your account that are not on the list of orders you prepared. This step is typically only required for portfolios of individual stocks, but it can't hurt to verify.

Next, enter your orders one by one. Unless otherwise noted, TuringTrader.com uses market orders, which are expected to fill at the next open. Make sure to double-check your orders for correctness.

We recommend not being too literal when placing your orders to avoid excessive commissions. Many brokerages charge a minimum fee, e.g., $1, per trade. Therefore, the change you are making to your portfolio allocation should be meaningful enough to justify that $1 in commissions. If you assume that you might earn 1% on a short-term trade, this profit must be significantly larger than the commission paid. As a rule of thumb, you should probably ignore orders that reallocate less than $500 of capital.

Some account types do not allow overlapping trades, with sell orders for one instrument submitted simultaneously with buy orders for another. This is why we recommend using margin accounts for trading, even though our portfolios don't use margin. If you cannot place overlapping orders, we recommend placing the sell orders while the markets are closed and the buy orders right after the markets open. Trading a few minutes after the markets open will typically not make a noticeable difference. However, the later you put in these orders, the larger the deviation between your actual results and our backtested results may become.

Checking the Fills

It makes sense to check your order fills at your earliest convenience. Most of the time, things should be just fine. However, occasionally, an asset's price went up significantly since we calculated the order size. In this case, your account's cash balance will be negative. Don't let it sit like that until the next rebalance. Instead, go and sell a few shares to make up for the price increase until your account's cash balance is positive.

If you follow these rules, your results from actual trading should closely track our backtested results. If you are interested in the details, we recommend reading our article comparing live trading with backtests.

But successful investing requires more than just following the routine of placing orders. It is essential to make some room in your life to keep the rebalancing schedule. It is vital to stay the course, even when portfolio performance falls short of expectations. This is only possible if you choose a portfolio that fits your objective.