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When rebalancing, if an overpriced asset is sold due to being overweight, is the money from the sale used to purchase more of an underweight one?
If not, could it just be added to the pot for the next quarters investment? Cheers 2 WestCountryEscapee June 22, In this way, you add constituents so as to take you back to your original asset allocation or as near as you can get each time you pay money into the portfolio.
I suspect that if I changed the contribution weights each month that I might end up chasing the loosing funds, which feels like it introduces risk which re-balancing is meant to mitigate against. I built a spreadsheet that pulls in live stock info and then highlights in red if an asset moves out of its range and needs rebalancing.
It also highlights when assets are over-concentrated in a single ETF. I also built in the ability to shamelessly and actively tinker hey — you have to spend the money on something while still maintaining rebalancing provision. It first depends on whether on the thorny issue of whether you consider your primary residence as part of your portfolio or a spending reducer because of the forgone rent.
BTL properties are hard to liquidate and have big CGT implications, but I suppose you could rebalance by paying off mortagage fragments or remortgaging, but is that something you would do as regularly as share transactions? For investments outside tax-efficient wrappers, once a year consideration for both rebalancing and CGT defusing is sensible.
Too often and the tax calculations become onerous. I try and take advantage of market swings when rebalancing. Oh, and never ask a company to do more than one thing in a single letter!
Do you try to keep your portfolio balanced within them, and so triple the number of allocations, how do you minimise tax, how quickly do you want to deplete a pension to fund an ISA. A passive investor is often best off not logging onto the fund accounts to often as you sometimes iterate over and over again.
I agree completely, less insight brings better sleep. But someday we may sell off part of the garden, trade down, do equity release, …. So last month and this month my full contribution has gone into my FTSE All-Share tracker and that will more or less bring me back in line. Steve — I think see you concern about chasing the poor performing fund.
Hopefully by doing this I will tend towards getting more units for my money over the long-term too.
Of course as my pot grows this tactic will lose its effectiveness and then will need to bringing selling into play. Where that threshold would be is something that would be very interesting to know. I guess it would at least be based on how big monthly contributions you actually make. Even using monthly distributions as a re-balancing method require some special amount on the passive account before it starts making sense it seems.
On property, paying off mortgage is not the same as selling some property.
The mortgage is leverage across your entire portfolio, the exposure to the property stays the same regardless of debt applied to it. I strip out the investment property from any rebalancing except where I am making specific allocation decisions buy another?
The idea is risk reduction but I consider the risk of equities is reduced by a finite amount of low risk assets, the value of the risky assets is not relevant to the required amount of safe assets. The implication of reducing a good performer to top up an underperforming asset is the assumption of reversion to the mean, which may or may not happen, it implies I can decide that something is relatively expensive or cheap.
On occasions one might make a judgement on value but only when the deviation from fair value is extreme. Rebalancing could cause one to sell winners to buy losers, who knows? The concept of a fixed proportion of low risklow return assets seems inherently unsound to me.
We are fortunate for the quality of the writing and the careful research and thought displayed here by TA, and also by TI in parallel articles. Long may Monevator thrive! The importance and implications of this rebalancing thing are not always taken on board fully by investors.
That capital gain Buzz Lightyear? So a bit agnostic on that one. What we are looking at here is Momentum versus Reversion to Mean, operating in opposition.
An investor can either: Whatever we do, it is without knowledge in advance of the most successful route. The rebalancing towards a range mentioned in the article, is a sensible compromise, which some have taken further by moving only a proportion of assets at a time e. For those in accumulation, esp early stages, as quite rightly pointed out this is all a bit academic.
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