Time vs Threshold rebalancing
A free video tutorial from Mohsen Hassan
Finance & Programming Education
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English [Auto] So now the question becomes, when do we rebalance? There are two approaches. One is based on time. One is based on deviation. So we have time rebalancing and thresholds rebalancing in over time. Rebalancing means that you rebalance your portfolio at specific time intervals could be every day, could be every week to be every month, every year, every hour, every two hours, every five hours, every four weeks. Whatever you want. Yeah. Now, that's one approach. You can do it your way, so I know people who do it every hour. I know people do it every day. I know people who do it every year. Right. It's going to depend on a bunch of things. Then you have Treasurer Andrew balancing, Treasurer Andrew Balancing basically says that it's not you're not going to rebalance because what time it is, you're going to rebalance. If the assets in your portfolio have deviated above a certain threshold that warrants for you to rebalance them. If you come a year later and they're still at 20 percent like we had with twenty point one. Is it really worth it? They haven't really deviated. And if in one day, you know, your portfolio went from 20 in each to twenty five in one and 15 and the other, then even if it's one day you should rebalance because they deviated a lot. So. Time rebalancing is the most popular of the two now, when I mean the most, when I mean the most popular doesn't mean that it's the best. I mean, most people do time rebalancing. Why? Because it's easy. They decide on a time and they do it OK. And then, you know, as an investor, you're obviously not going to rebalance every hour or every day. You might rebalance every month. You might come to your portfolio every month and say, OK, well, what is it looking like? Oh, there's big divisions. Let me rebalance now. And that's something that makes sense. You know, look at it every month. Every year for me is a bit long. But again, if you're a long term investor and you have lots of things going on, well, at least you're doing it once a year. It's it's great, you know, because it'll still be way better than actually dancing. So it's good. Even if you do it every two years, it's better than not rebalancing. And, you know, people don't just rebalance in in order cryptos people actually rebalance throughout their life. You know, I rebalance in my life. So I would have a percentage that's in cryptocurrency and a percentage in other assets, a percentage in real estate, a percentage just in cash in case something happens. And then as things change, I might say, OK, well, now I want to add more in here or, you know, if, you know, things go crazy up, like when cryptocurrency flew up. Well, what happened? I sold some of those cryptos to put in other assets in my life. Right. And so it's very helpful because then you take out of things that went up and put it in things that have it, because it's very hard to know when things go up and when things go down. So if you put yourself in a position that you don't really care because either way you're gaining or building a bit, you're good. You're not I don't care when the market drops. It's just opportunities to make more money. And as a as it as it moves, you know, you're doing transactions and it helps. That's where the rebalancing theory comes from. And now threshold threshold rebalancing is the one that I like doing OK. It's less popular for a reason. So let's let's have an example. To see why I like. And again, if you didn't understand the threshold rebalancing threshold, the threshold threshold rebalancing, our rate threshold rebalancing is basically going to be you saying, OK, well, if my asset allocation. My asset allocation. What's supposed to be and let's let's say let's give an example, let's say I was put at 50 percent and Bitcoin and I don't know, 30 percent in Neil. And let's say I'm not just for the purpose of this example. Let's say I want 19 percent in Utah. And one percent in. Let's just let's give that let's obviously it wouldn't look like something like this, but let's give that example for me to explain what I want to see. So when people are talking about threshold rebalancing, they're saying, well, you know what, I want to rebalance only if there's a deviation in one of these by two percent. So if I come in and Bitcoin is at 55, sort of 52 percent. 52 well, actually, if it's below 48 percent or above 52 percent. I want to rebalance my portfolio, so my threshold is two percent, if it goes above 52 percent, I need to sell some of it to buy the others. If it goes below, I need to buy more of it. I need solders to buy that one. And that's how they do threshold allocation. Absolutely. I don't do it this way because this doesn't work, because if you put a static number here, then what happens with your vision? You need Vicent to go. Well, it can go to minus one. You need it to go above three percent. For you to rebalance, that doesn't make sense because for vision to go from one percent of your portfolio to three percent of your portfolio, that means your other equities would have to have dropped by two thirds for that to happen. Right. Which is too big. It's never going to happen. Or Vicent would have had to make that 300 percent returns tripled its value. And your other points not moved at all for this to happen. So it doesn't work. So the actual threshold, the way you do threshold is by putting a percentage compared to your actual asset allocation. OK, and this is how I do it. And this is this is the only way I actually do it. So I would say and the number I use is about 10 percent, so I would say, look, if my asset allocation changes by 10 percent, I'm going to make a change. What does that mean? That means if Bitcoin if my asset allocation was 50 percent, then if it goes to 45 percent. So 10 percent or 50 percent is five percent. Right. So I would use a plus or minus five percent around the difference between 45 percent and 50 percent, sort of 55 percent. Fifty five percent, then I would rebalance for Neil. Well, 10 percent of 30 percent, well, it would be between 27 percent and 33 percent for IETA, while 10 percent of 19 would be one point nine. So that would be eighteen seventeen point nine percent and twenty point nine percent anywhere below that or above that. And it rebounds. And Vicent, it's only one percent. So if it goes up to one point one. You know, 10 percent of one percent gives me point one percent or zero point nine percent, then I rebalance and that makes more sense because it takes into account the actual allocation that you have in these coins and not just one for all of them, because a two percent change in Bitcoin value compared to the others is going to happen way quicker because you're 50 percent of your portfolio is in that than in something else that is only one percent of your portfolio. OK, so that's how I do it now. So in our portfolio, which we have 20 percent of each, well, 10 percent or 20 percent would be a two percent move. So if it went up to 22 percent or down to 18 percent, then I would have rebalance. So I wouldn't have rebalanced today based on that, it was too small of movements. Now, is this the right number for you? Not necessarily. It depends on you. So what what is what is what is the right number for you? It depends how often you want to do it. You know, do I want to do it very often? Because, you know, if if I put five percent well, five percent in our situation, five percent of assumptions that are 20 percent, it would have meant that if a coin went to 19 percent, up to 21 percent, then I would have had to rebalance, which would happen way more often, you know, a few times a week. Well, you want to spend that or not. And, you know, it's not beneficial to do it the most often because what happens when, you know, coins keep deviating for a long time? Well, if you keep rebalancing, well, you would have made more money by waiting, letting them deviate way more and then rebalancing as they have already deviated a lot because then one of them would have moved up a lot and the other moved down a lot. And then you would sell that one to get that one. But if as soon as they start deviating, you buy that one and you keep doing that, you actually might not make as much. So you don't have to put it at 10 percent. You can have it at 20 percent. You can have it even more. Right. And you know, you can have it at 30 percent, whatever you want. And in that sense, you're choosing something that works best for you and your timeline and how much time you have to allocate to this. Right. So if you're doing long term and you're you you want to have it for, you know, four years, five years and you don't you have your other things going on? Well, you might say, OK, well, you know what? I want to wait until it's there's a big enough deviation of. Yeah. Three percent, so that if something goes up from 20 percent to either 26 or down to I guess 14 percent, and then I would rebalance because that's big enough or you might even have a higher. So it depends on you. Now, why do I prefer this over time rebalancing? Well, most people do dance because dancing doesn't make sense. All right. Well, I'll tell you why, because when you're doing the time of the dancing, imagine this. Let's say you have and let's let's erase this this situation. Let's put our situation where we have Bitcoin and we had Ayata and we had Vicent and we had what else, Pinelands coin and silico. OK, and 20 percent in each. Now, imagine you are doing monthly rebalancing every month to rebalance. Now let's draw here. Here, we're going to have the time in months. And here we're going to have, let's say, the asset allocation. OK, of the asset allocation of, let's say, uh, vegging of reaching. Now, let's say the asset allocation of vitrine, which, you know, you're starting off at 20 percent. This is in let's say this is actually let's let's say you do rebalancing every. Every yeah, let's let's put it at every month, but here let's have a weekly time scale. So week one, week two, week three, week four, week five. Six, seven, eight, OK. Continue. So the asset allocation in the chain when you started was at 20 now it actually started going up after one week, went up after two weeks, and it came all the way here to twenty five percent. So which in what was worth twenty five percent of your portfolio, instead of being only worth 20 percent of your portfolio. But it's week two, you're only rebalancing on week four and on week eight. So every month right now things change and drops back down in value. And then when you come in on week four, you see that it's a 20 percent. You don't need to rebalance. That goes maybe down. To 15 percent in allocations which were way less compared to the other ones, so you should be balanced by some other stuff and buying more of it, then it goes back up to 20 percent. At week eight, which is the time that you wanted to rebalance, so are you going to rebalance? No, because it's still at 20 percent, right. So you're not rebalancing. So even though there was opportunities to rebalance, you didn't rebalance because the specific time that you came to rebalance was a time where there was no deviation. OK, so you wanted to rebalance on the fourth after one month and after two months, and when you logged in to when you put the Excel sheet on, everything was around 20 percent. You're I'm looking at Vicent, but we're going to have that same thing for each of them. And everything looked like it was correctly balanced. So you didn't do anything and you missed those opportunities to make money. Right. Because if you were doing a threshold rebalancing, then when this deviated here and let's say you were at, let's say, 10 or 20 percent or let's say 10 percent at 20 to. You would have rebalanced here. And then if it went up more after rebalancing, if it continued changing and continued going up your portfolio and did another two percent or 10 percent of where it was, so now you rebalance, you have 20, but then it moved again. You might have rebalanced again. And so you've sold at good times when it was worth more than the others and put your money in other coins that were at a lower price, and then as things change with the portfolio, that means probably either the others went up and that's why the change is now worth less than the others. Well, you would have made more money because the other was when to have more of them, or it's Vicent that went down and you would have lost less money because you have less Vicent as you sold some of them. So in either situation, you you've saved either by making or losing less. And then there's another division here, so you barmore reaching and you buy more region in the year and you sell some of the other. And here as the portfolio gets back or your things change again, you would have again made more money or saved more money by doing the rebalancing. So, yeah, we know that rebalancing works, but the way you do it also has an impact. OK. So I'm not saying don't do time rebalancing, what I'm saying is do any type of rebalancing is better than no rebalancing. Done time rebalancing is great. OK, works and mix might make you money, it's good for you, it's good for your portfolio. It'll help your portfolio. Now. There now the thing is, if you can spend the extra hours to keep an eye on the markets to log into that Excel sheet that I gave you, put in the new number, see if we deviated, but by much. Then you're going to capitalize on those movements. And make and make the mic more rebalancing when they actually count, and not just when you actually came to sit on the computer. It requires more time, but it is more beneficial. So if you do have the time, I suggest doing that approach. And again, if you come in and chain really went up in value and went to 16 and then the dropped to zero point to eight. So then your portfolio is on balance and you can hear or them. I have too much vision and not enough Zilkha. Let me sell this and let's rebalance my portfolio and that'll help. And that's how you do, you know, time rebalancing. This is how you do threshold's rebalancing and this is how you would use, ah, Excel sheet to help you do it in a way smoother fashion.