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 division. So we have time to be dancing and dancing you know. Can we bouncing mean that you balance your portfolio at specific time intervals can 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. That's one approach. You can do it your way. So I know people who do it every hour. I know people do it everyday. I know people who do it every year right. It's going to depend on a bunch of them. Then you have Trishul two miles traveled rebalancing basically says that it's not you're not going to bounce because what time it is you're going to rebalance if the assets in your portfolio have deviated it's above a certain threshold that warrants for you to advance them. Now if you come a year later and they're still at 20 percent like we had 20 point one is truly worth it they haven't really deviated. And if in one day you know your portfolio went from 20 in each to 25 in one and 15 in the other then even if it's one day you should rebalance because the deviated a lot. So time dancing is the most popular of the two. That what I mean the most. When I mean the most popular doesn't mean that's the best. I mean most people do time rebounds. Why. Because it's easy to decide on a time and they do it again. And then you know as an investor you're obviously not going to redounds every hour or every day you mentally balance every month. Might Come come to your portfolio every month and say OK well what is it looking like there is big division. Let me rebalanced and that's something that you know 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 dancing. So it's good. Even if you do it every two years it's better than not boxing. And you know people don't just rebalance. And in the crowd the Kryptos people actually rebalance their life. You know some I read balance in my life so I would have a percentage that's in in crypto currencies 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 crystals to put in other assets in my life right. And so it's very helpful. OK. Because then you take out of things that went up and put it in things that happened 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 bet you're good. You know I don't care when the market drops. It's just opportunities to make more money. And as deep as it as it moves you know you're doing transactions and it helps. Gretchen that's where the rebalancing theory come from. And now fresh fruit fresh hold rebalancing is the one that I like. OK it's less popular for a reason. So let's let's have an example to see why I like you if you didn't understand this whole rebalancing Griswold. First of all just bouncing over it. Griswold's rebalancing is basically going to be that you're saying OK well if my asset allocation my assets allocation was supposed to be with let's say let's give an example here let's say ours was at 50 percent in this game and I don't know 30 percent in Neo. And let's say No just for the purpose of this example let's say I want 90 percent in yota and 1 percent in teaching let's just let's give let's get. 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 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 percent or 52 percent 52 Well actually if it's below 48 percent or above 52 percent I want to re rebalance my portfolio. So my threshold is 2 percent. If it goes above 52 percent I need to sell some of it to buy the others. If it goes below and it's by more of its $20 to buy that one. And that's how they do Trishul. I'll get you an adult clip. 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 reaching. You need to go. While it can go to minus one you need it to go above 3 percent. For you to rebalance that doesn't make sense because for Vicini to go from 1 percent of your portfolio to 3 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 the chain would have had to meet that 300 percent returns tripled its value. And your other point is not moved at all for this to happen. So it doesn't work. So the actual threshold the way you do Trishul 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 -- was 60 percent then if it goes to 45 percent. So 10 percent or 50 percent is 5 percent. Right. So I would use a plus or minus 5 percent around that. So between 45 percent and 50 percent sort of 55 percent 5 percent then I would rebalance for Neil while 10 percent of 30 percent. Well it would be between 27 percent and 33 percent for iota. Well 10 percent of 19 would be 1.9. So that would be seventeen point nine percent and twenty point nine percent were below that were above that. And it's redounds and Veach and it's only 1 percent. So if it goes up to one point one you know so 10 percent of 1 percent is me point 1 percent or zero point nine percent. Then it rebounds 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 2 percent change in Bitcoin value compared to the others is going to happen week quicker because you have 50 percent of the portfolio isn't that then in something else that is only 1 percent of your portfolio. So that's how I do it now. So in in our portfolio which we had 20 percent of each while 10 percent of 20 percent would be a 2 percent move. So it will run up to 22 percent or down to 18 percent. Then I would have had rebalance so I wouldn't have rebalanced today based on that. It was two small 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 you want to do it very often because you know if if I put five percent while five percent in our situation five percent of stuff is our 20 percent it would have meant that if we 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 Quint's keep deviating for a long time. Well if you keep rebalancing Well you would have made more money by weeding letting them get 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 he would slide up on to get that one. But if as soon as they start deviating you suck up one by 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 could have it 20 percent. You can have it even more. Right. And you know you can have it 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 know you want to have it for four years five years and you don't you have other things going on. Well you might say well you know what I want to wait until it is a big enough deviation of 3 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. You might even have a higher. So depends on it. Now why do I prefer this over time. Bouncing. Well most people's retirement also because it doesn't make sense. I'll tell you why. Because when you're doing the dancing imagine this let's say you have and let's let's erase this city this stringent Let's put our situation where we have Bitcoin and we have to. And we had Vicini and we had what else finance point and get 20 percent in each. Now imagine you are doing monthly redounds. You do it 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 of the asset allocation of let's say Vicci and vigin. Now let's say as it isn't a Vicini which you know you're starting off at 20 percent this is. And I would say this is actually let's let's see you do rebalancing every every year. Let's let's put it at every month. But here let's have a weekly time scale. So week one week two weeks three week four weeks five six seven eight years. And you saw the asset allocation in the chain when you started was at 20. Now I actually started going up after one week went up after two weeks and it came all the way here to 25 percent. So Vicini what was worth 25 percent of your portfolio instead of being only worked 20 percent of your portfolio. But it's week two. You're only rebalancing on week 4 and on week 8. So every month right now things change. It drops back down in value. And then when you come in on week 4 you see that it's a 20 percent. You don't need to rebalance that goes maybe down. To 15 percent in applications which were way less compared to the other ones. So you should be bound by some other stuff and by Merlots then it goes back up to 20 percent at week 8 which is the time that you want 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 that specific time that you came to rebalance was a time where there was no deviation. So you want to dance on the forwards in one month and after two months and when you log into when you put the Excel sheet on everything was around 20 percent. I'm looking at Vicini that we could have that same thing for each of them and everything looked like it was correctly done. So we didn't do anything. And you miss those opportunities to make money right. Because if you were doing Trish will be dancing. 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 22 you would have rebalanced here. And then if it went up more after rebounding if it continued changing and it continued going up completely you and up another 2 percent or 10 percent of what it was. So now you actually have 20 but then again you might have again. And so you 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 part for you that that means probably either the others went up and that's why Vicini is now worth less than the others. Well you have made more money because the other ones have moved in or it's Vicci that went down and you would have lost less money because you have less vision because you sold some of them. So in either situation Eugene you've saved either by making more or losing less. And then there's another division here so you buy more vision and you buy more which in a new year and you sell some of the other. And here as the portfolio gets back or things change again you would have again made more money or saved more money by doing the rebalancing. So yeah we know that dancing works but the way you do it also has an so I'm not saying don't do time rebalancing what I'm saying is do any type of rebalancing is by no time really bouncing is. To get worse and mix might make you money. It's good for you. It's good for your portfolio. It will 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 putting in your number see if we deviate it. But by much then you're going to capitalize on those movements and make and may make more rebalancing when the actually counts and not just when you actually came to sit on the computer. It requires more time but it is more beneficial to you at the time I suggest to that approach. And again if you come in and Vicini really went up in value and went to 16 and then the Leka dropped to zero point to 8. So then your portfolio is on balance and you can hear it in order to have too much Vicini and not enough Zelenka let me sell these and let's rebalance my portfolio. And I'll This is how you do you know primary dancing. This is how you do Trishul rebalancing. And this is how you do are Excel sheet to help you do it in a way smoother fashion.