Thank you for this detailed explanation. I have recently started a long term stocks and shares ISA with trading 212 and they have the option to rebalance but I really had no idea why I would want to or need to. Confusion cleared up 👍
I have a growth portfolio mostly focused on new and innovative companies (high volatility) and it really makes me nervous to rebalance because I don't know if the companies I'm invested in are temporarily down or if they just fizzled out and died. But I do understand the necessity of rebalancing.
It's definitely tough to know the difference on companies without long term established track records. But I guess that's the point of rebalancing, it means that none of the losers can really affect the portfolio that much. It's ok to let them run a little bit, 10%, or a year, whatever method people choose, but if they grow too large as a percentage of your assets, that's when it can be dangerous. But I get your point. Mathematically of course it's best to rebalance regularly. Psychologically though, it can be tough sometimes. Good point!
Hi Brent, great video! I have been investing in a 401(k) for the past 8 years. My portfolio is currently managed by a broker, however, I have been researching and preparing to manage the portfolio myself. I have read a few articles about rebalancing a portfolio and it's all straight forward. However, being a novice, I do have a question that might sound absurd. How do you go about "selling" your earnings from one asset to allocate to another? Do you get tax penalties for selling earnings from Asset C to allocate to Asset A-referencing your video example? A brief explanation would help me tremendously to solidify my understanding of rebalancing a portfolio. Thank you in advance! - Omar from California
Hey Omar, congrats on taking control yourself and managing your investments. So I can't go into any tax specifics because a) I'm not a tax expert and it's not in my wheel house, but b) Every country and every person is in a different situation. So I can say yes, there are tax implications with selling investments, both from a capital gains perspective and rolling forward capital losses. But the details of that would be much better answered by a tax expert in your area. I don't think it would be that costly to find out, any half way decent tax accountant in California will be able to go over the basics with you, but it would probably be a good idea to find out before going through the rebalancing just so you're not triggering any unwanted tax incidents.
Taxes are always an issue with all investing styles, so each person would have to weigh the pros and cons and structure their tax situation the best they can. Overall though I would say, tax implications are far less important than the actual strategy and maximizing return and minimizing risk. I think people would make far more long term if they just did what's best for the account, and consider taxes as a secondary optimization once you already have the risk reward profile efficient.
sounds great and the strategy make sense. Most people still better off stick with buy and hold S&P500. Beating the market isn’t always the priority for everyone.
While it's true that most people don't beat the S&P 500, I don't agree that means most people are better off. In life we should always try to do what's best, even if it's hard. Many people aren't healthy, so should we just not try? Many people can't get a high level job, so we shouldn't try? Most people don't get a great relationship, so just give up? I always find that to be quite a defeatist attitude to be honest. I never shy away from challenges, even if most people fail at them. I would never have become a professional golfer if I cared how many people failed before me :)
Hey VTS, I wonder what is the most efficient way to rebalance a portfolio, in the given exemple you rebalanced a 20% position that grew to 30% causing a 50% distortion. There are problems rebalancing a 25% or 100% distortion?
I don't think there's any one way that's most efficient, it just depends on the type of trading that's being done. If it's long term lower return buy and hold portfolio then it's usually fine to do once every 6 months or so. But if you're trading tactically and different strategies have significantly different performance from month to month, especially after big winning or losing months, then you'd want to use a tighter threshold for rebalancing to make sure they aren't putting the portfolio at increased risk. Personally I use the "Constant Portfolio Rebalancing" method that I covered in part 3 of that series here: ruclips.net/video/PYQ3g24UBuQ/видео.html
@@VolatilityTradingStrategies mine is the 2nd case, managing a portfolio in volatile markets, thanks for your kindness providing honest and helpful answers to my questions, I will check your video.
@@VolatilityTradingStrategies by the way I found amazing your video that shows the consequences of leverage, how leverage becomes a productive support to solid less volatile strategies but totally ruin a solid volatile strategy.
It's fine if you can do it, but you'd need much longer term data to make those determinations. You'd want to see results through multiple different market cycles. Volatility and correlations can change quite a bit during different periods, and not many strategies out there have traded long enough through a full bull and bear market cycle. A few years of data just isn't enough to make those calls, so I do prefer in general to just stick to allocation sizing, but what you're talking about is better if you have the long term data to implement it.
@@VolatilityTradingStrategies Thank you, great answer. Allow me another question. Allocation sizing sounds good too, but my issue with it is how do i have to set the initial weights. For instance i am invested in 3 etfs (MSCI World, Small Cap World and MSCI Emerging Markets). I am asking myself, what are the optimum weights for this case.
@@Kig_Ama Well I'm not a registered advisor so I can't giver out any personalized investment advice like that, but I'd say in general you would be looking for some type of combination of performance and risk there and matching to your goals. All three of those have been around long enough to start doing those kinds of comparisons, so you just build your ideal allocation and rebalance regularly.
I wouldn't view it that way, instead I would view it as risk management to not allow a portfolio to become too exposed. It doesn't matter what the strategy or investment is, they all go through periods of ups and downs. So even if something is performing well, it's not a good idea to allow the allocation to get too large. You'll still realize the benefits of the investment, but it's definitely advisable to keep those allocations contained to proper allocations.
@@VolatilityTradingStrategies Agreed. But one trade off that needs to be done is that the more instruments your portfolio has, the more fees you'll pay to rebalance it.
Ha! A relic of the past when I used to golf a lot... I've only played about 5 rounds of golf in the last 5 years, so I have more hats than games played.
The only viable way to rebalance a portfolio without selling anything would be through options and stock replacement. But unless you have a large account that's typically not viable, and it's possible that several of your dividend stocks don't actually have very liquid options market. Personally I find the trade off between better results and a potentially higher tax rate for short term capital gains vs tax efficient strategies well worth it. I make a far better rate of return all things included when I have the freedom to sell investments before major market crashes and apply proper risk management.
@@VolatilityTradingStrategies ahh ok Yes, I can see using the DRIP to buy options (and other forms of leverage like margin) on the stocks I need more of, better enabling me to rebalance without selling. Thanks for the the advice!
Easily explained.
Thank you for this detailed explanation. I have recently started a long term stocks and shares ISA with trading 212 and they have the option to rebalance but I really had no idea why I would want to or need to. Confusion cleared up 👍
Also remember for us stocks your dividends gets taxed even though you are under ISA
Very great detail rebalancing video
I have a growth portfolio mostly focused on new and innovative companies (high volatility) and it really makes me nervous to rebalance because I don't know if the companies I'm invested in are temporarily down or if they just fizzled out and died. But I do understand the necessity of rebalancing.
It's definitely tough to know the difference on companies without long term established track records. But I guess that's the point of rebalancing, it means that none of the losers can really affect the portfolio that much. It's ok to let them run a little bit, 10%, or a year, whatever method people choose, but if they grow too large as a percentage of your assets, that's when it can be dangerous.
But I get your point. Mathematically of course it's best to rebalance regularly. Psychologically though, it can be tough sometimes. Good point!
I have been looking for a video like this. Thanks.
Thank you, very helpful
Hi Brent, great video! I have been investing in a 401(k) for the past 8 years. My portfolio is currently managed by a broker, however, I have been researching and preparing to manage the portfolio myself. I have read a few articles about rebalancing a portfolio and it's all straight forward. However, being a novice, I do have a question that might sound absurd. How do you go about "selling" your earnings from one asset to allocate to another? Do you get tax penalties for selling earnings from Asset C to allocate to Asset A-referencing your video example? A brief explanation would help me tremendously to solidify my understanding of rebalancing a portfolio. Thank you in advance!
- Omar from California
Hey Omar, congrats on taking control yourself and managing your investments. So I can't go into any tax specifics because a) I'm not a tax expert and it's not in my wheel house, but b) Every country and every person is in a different situation. So I can say yes, there are tax implications with selling investments, both from a capital gains perspective and rolling forward capital losses. But the details of that would be much better answered by a tax expert in your area. I don't think it would be that costly to find out, any half way decent tax accountant in California will be able to go over the basics with you, but it would probably be a good idea to find out before going through the rebalancing just so you're not triggering any unwanted tax incidents.
Thanks. this video is great!
Thanks man you are awesome. I subscribed and liked
Thanks!
Nice video bro
Wouldn't you have to pay taxes by selling it? And what would be the impact of taxes on overall return?
Taxes are always an issue with all investing styles, so each person would have to weigh the pros and cons and structure their tax situation the best they can.
Overall though I would say, tax implications are far less important than the actual strategy and maximizing return and minimizing risk. I think people would make far more long term if they just did what's best for the account, and consider taxes as a secondary optimization once you already have the risk reward profile efficient.
sounds great and the strategy make sense.
Most people still better off stick with buy and hold S&P500.
Beating the market isn’t always the priority for everyone.
While it's true that most people don't beat the S&P 500, I don't agree that means most people are better off. In life we should always try to do what's best, even if it's hard. Many people aren't healthy, so should we just not try? Many people can't get a high level job, so we shouldn't try? Most people don't get a great relationship, so just give up? I always find that to be quite a defeatist attitude to be honest. I never shy away from challenges, even if most people fail at them. I would never have become a professional golfer if I cared how many people failed before me :)
Awesome video! What website do you use to see what a specific portfolio would have returned?
Thanks! Not exactly sure what you mean. I calculate everything with Excel spreadsheets if that's what you mean.
Hey VTS, I wonder what is the most efficient way to rebalance a portfolio, in the given exemple you rebalanced a 20% position that grew to 30% causing a 50% distortion. There are problems rebalancing a 25% or 100% distortion?
I don't think there's any one way that's most efficient, it just depends on the type of trading that's being done. If it's long term lower return buy and hold portfolio then it's usually fine to do once every 6 months or so. But if you're trading tactically and different strategies have significantly different performance from month to month, especially after big winning or losing months, then you'd want to use a tighter threshold for rebalancing to make sure they aren't putting the portfolio at increased risk. Personally I use the "Constant Portfolio Rebalancing" method that I covered in part 3 of that series here: ruclips.net/video/PYQ3g24UBuQ/видео.html
@@VolatilityTradingStrategies mine is the 2nd case, managing a portfolio in volatile markets, thanks for your kindness providing honest and helpful answers to my questions, I will check your video.
@@VolatilityTradingStrategies by the way I found amazing your video that shows the consequences of leverage, how leverage becomes a productive support to solid less volatile strategies but totally ruin a solid volatile strategy.
Top video
Link for anyone who want's to watch the next one: ruclips.net/video/PYQ3g24UBuQ/видео.html
ty, i ve a question. what do u think of reblancing by trying to find the optimum weights for each asset for a portfolio with minimized volatility?
It's fine if you can do it, but you'd need much longer term data to make those determinations. You'd want to see results through multiple different market cycles. Volatility and correlations can change quite a bit during different periods, and not many strategies out there have traded long enough through a full bull and bear market cycle. A few years of data just isn't enough to make those calls, so I do prefer in general to just stick to allocation sizing, but what you're talking about is better if you have the long term data to implement it.
@@VolatilityTradingStrategies Thank you, great answer. Allow me another question. Allocation sizing sounds good too, but my issue with it is how do i have to set the initial weights. For instance i am invested in 3 etfs (MSCI World, Small Cap World and MSCI Emerging Markets). I am asking myself, what are the optimum weights for this case.
@@Kig_Ama Well I'm not a registered advisor so I can't giver out any personalized investment advice like that, but I'd say in general you would be looking for some type of combination of performance and risk there and matching to your goals. All three of those have been around long enough to start doing those kinds of comparisons, so you just build your ideal allocation and rebalance regularly.
@@VolatilityTradingStrategies So its a matter of preference, u say?
Isn't this penalizing good performing assets in favor of bad performing?
I wouldn't view it that way, instead I would view it as risk management to not allow a portfolio to become too exposed. It doesn't matter what the strategy or investment is, they all go through periods of ups and downs. So even if something is performing well, it's not a good idea to allow the allocation to get too large. You'll still realize the benefits of the investment, but it's definitely advisable to keep those allocations contained to proper allocations.
@@VolatilityTradingStrategies
Agreed. But one trade off that needs to be done is that the more instruments your portfolio has, the more fees you'll pay to rebalance it.
Those hats....
Ha! A relic of the past when I used to golf a lot... I've only played about 5 rounds of golf in the last 5 years, so I have more hats than games played.
I wonder can these methods be accomplished without selling. I’m a long term DRIP investor and would find that interesting.
The only viable way to rebalance a portfolio without selling anything would be through options and stock replacement. But unless you have a large account that's typically not viable, and it's possible that several of your dividend stocks don't actually have very liquid options market. Personally I find the trade off between better results and a potentially higher tax rate for short term capital gains vs tax efficient strategies well worth it. I make a far better rate of return all things included when I have the freedom to sell investments before major market crashes and apply proper risk management.
@@VolatilityTradingStrategies ahh ok
Yes, I can see using the DRIP to buy options (and other forms of leverage like margin) on the stocks I need more of, better enabling me to rebalance without selling.
Thanks for the the advice!