Rebalancing a portfolio using new contributions before selling – Singaporean Explains
Use a worked example to see how new contributions can move a portfolio towards its target allocation without immediately selling holdings.
SINGAPORE FINANCE NEWSSINGAPORE BLOG
9/12/20262 min read
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A portfolio's allocation changes as its holdings rise and fall. Rebalancing means moving it towards an intended mix. One approach is to direct new contributions to the underweight part before deciding whether sales are necessary.
The approach is useful only if the target allocation remains appropriate. Review the purpose and risks of the portfolio first. Returning automatically to an old target is not sensible if your circumstances or investment horizon have materially changed.
Calculate the current weights
Suppose a hypothetical S$20,000 portfolio contains S$15,000 of equities and S$5,000 of a defensive allocation. The current mix is 75% and 25%. Its chosen target is 60% and 40%; this target is an illustration, not a recommendation.
If the investor adds S$2,000 entirely to the defensive allocation, the portfolio becomes S$22,000 with S$15,000 in equities and S$7,000 in the other allocation. The mix becomes approximately 68.2% and 31.8%. It moves closer to the target but does not reach it.
To reach 60% equities using contributions alone while equity value stays S$15,000, total portfolio value must be S$25,000, because S$15,000 ÷ 0.60 = S$25,000. The investor would need to add S$5,000 to the defensive allocation. Real markets move during the process, so the required amount can change.
Compare contributions with sales
Alternatively, within the original S$20,000 portfolio, a 60% equity target means S$12,000 in equities. Moving S$3,000 from equities to the defensive allocation reaches the target before costs and price changes.
Selling can involve brokerage, spreads and other consequences depending on the product and jurisdiction. New contributions may reduce trading, but they may be too small to correct a large imbalance promptly. Evaluate the trade-off rather than assuming one method is always better.
Avoid changing targets because the recent winner looks attractive. The purpose of rebalancing is to manage the intended exposure, not to predict which holding will rise next.
Set a review method
Choose a periodic review or a defined deviation from the target, and document it. Check whether your provider already rebalances the product; unnecessary additional trades can complicate the plan.
Keep records of purchases, sales and costs. Rebalancing is a maintenance decision with risks and expenses, so apply the same care used for the initial investment. It supports a chosen strategy but cannot guarantee a return or prevent a market loss.