In this example, you would conduct quarterly portfolio health check-ups to make sure that the allocated funds stay within 5% of the target ratios. This means that the best-case scenario is to have 50% in bonds, 30% in local stocks, and 20% in international companies. At the same time, you would need to consider portfolio drift
,
which happens when asset categories have different intermittent rates of return, such that, after a while, weightings are likely to alter from initial target allocations—which is why it’s crucial to bear this drift in mind. Taking into account an acceptable
drift of 5%
, you can tolerate the following ratios of the respective investment vehicles before you pull the trigger and rebalance:
You should think about the following when taking a close-up look at the quarterly portfolio performance:
FY17Q1
: As a best-case scenario, the start of the journey uses the recommended 50/30/20 ratio of asset allocation.