Rebalancing with contributions
Typically, additional cash is added to the portfolio periodically (monthly, for example) based on the thought that some percentage of personal income (suggested value is not less than 10%) should be invested.
This technique is especially useful for investors with relatively small portfolios, since by adding cash regularly they keep their wealth from being swept away by high trading costs. In this way, an influx goes directly into underperforming assets and helps align these with the necessary asset allocation strategy.
Let’s go back to the $100,000 portfolio distributed among corporate bonds and local and international equity. Remember that after your stakes grew, the new value of your portfolio became $110,000 and the weights drifted from the initial strategy, becoming 52% in corporate bonds, 33% in local equity, and 15% in international equity.
Now you add $5,000, making the portfolio worth
$115,000
—but what assets should you buy? Let’s start with some assumptions about how the portfolio will look after you infuse some cash into it. First, let’s work on corporate bonds: the 50% that belongs to this category should amount to $115,000 x 50% = $57,500, but there’s already $57,500 in the nonrebalanced portfolio you had by the end of the year. Thus, you can leave this investment vehicle as it is. Moving forward, 30% of local stocks should be $115,000 x 30% = $34,500. As of now, you have in this basket $36,000, which is
$1,500