Restoring the strategic asset allocation
Maintain your risk structure and increase your potential returns in the long-term through disciplined rebalancing.
Your current portfolio composition of the originally selected investment structure will often deviate in the course of time. The reasons for this are e.g.:
- A shift of your target allocation because of market movements
- A deposit in the portfolio
- A withdrawal from the portfolio
In all these three cases, the risk-return profile of your portfolio changes. In order to restore the originally selected risk-return profile, items with very low weightage in the portfolio must be increased and if necessary, items with very high weightage in the portfolio must be sold off. The rebalancing function will calculate all the required buy and sell orders for you so as to restore the strategic asset allocation.
What is rebalancing?
How can I identify a change in the investment structure?
The justETF System will inform you by e-mail about a change in your investment structure. You can determine the tolerance bandwidth within which the weightage of an investment class or an individual ETF may fluctuate in the Portfolio monitoring
. If the value moves away from the defined bandwidth, then you will be notified by e-mail.
For example, you will find the portfolio rebalancing function in Portfolio overview
A graph displayed on the portfolio rebalancing page shows the drift of your current portfolio to the target allocation before and after rebalancing. In addition to the current drift of your portfolio from the plan, you can also see the changes effected by rebalancing. At the right edge of the graph, the drift of your portfolio from the target allocation after rebalancing is shown. Deviations cannot be usually avoided completely, since you can only buy whole units of an ETF on the stock exchange. The deviation accordingly depends on the absolute level of the ETF quote and your investment amount. Your goal should be to reduce the deviation as far as possible. An indication in traffic color lights has been provided for better classification of the extent of deviation. If the light is green, then the difference lies below one percent and if it is red, then the difference lies above three percent.
What is target allocation? The target allocation, also known as strategic investment structure or strategic asset allocation, describes the desired portfolio distribution. That is, the weightage that each item should have in the portfolio. The target allocation is determined while creating a portfolio. It is updated with each adjustment of the portfolio in the planning mode.
You can adjust the target allocation at any time. For this purpose, use the button "Edit target allocation" that lies above the rebalancing graph.
In most of the cases, rebalancing involves the buying and selling of positions. You have the option to rebalance only through buying via a deposit in the portfolio. The advantage is that no taxable capital gains will apply here, unlike in the case of selling. We will calculate the minimum amount you have to deposit in your portfolio in order to rebalance without selling in our hint feature. Click on the deposit amount in the hint to take it over for the calculation. In case of a lower deposit amount, the best possible rebalancing is carried out.
The justETF System calculates an order list for rebalancing with the required buy and sell orders. This is done taking into consideration the saved order fees and the planned deposits and withdrawals. You can see the order fees in the left sidebar and they can be adjusted if required. The calculation that considers the order charges will help you to check the efficiency of your adjustments. You can also adjust the quantities in the order list if required. The resulting deviations can be seen in the rebalancing graph. For more on direct transfer of order to your bank, see the Order list
. Click on "Save" to save the changes in your virtual portfolio in justETF.
In case of withdrawal from the portfolio, the rebalancing function calculates the required sell orders, in order to keep your portfolio as aligned as possible to the target allocation. Select "Withdraw" for withdrawal and enter the desired amount. Subsequently, the system performs all the calculations for you.
Rebalancing is not for free! Note: Order fees and possibly even taxes are applicable on profits upon rebalancing. These costs must always be considered while rebalancing. Costs and benefits of rebalancing must be in proportion. Rebalancing should not be done if the costs are too high.