I have an account in Euro’s and most Pies I use have stocks denoted in USD. When I change my pie holdings from let’s say 50 NYSE stocks to 50 other NYSE stocks and I rebalance, it will see the stocks, convert the money to EUR, convert the money back to USD and then invest in the newly picked stocks. It makes me pay twice the FX fee which is very frustrating and very unnecessary.
I would rather see that the pie could keep it’s funds in USD or have the algorithm be more smart that it won’t convert to the base currency when it needs the foreign currency in the same operation (rebalancing).
Especially when you rebalance often, e.g. once a day it adds a 0.3% daily fee that would often result in more costs than profit. In practice, I often need to skip rebalancing now, even though I would have liked to do that more frequently, like how I did before the FX fee was introduced.
I don’t know, I consider leaving the pie concept, but for me it was very useful to use the pies as I can use them to implement different strategies and keep them apart. So I can reflect on what works in the current market conditions.
Also, the advantage for the pies is that I can easily implement an equal weight allocation for stocks within a strategy. A single stock can easily be in different pies in different allocations. I think that would be much more difficult when I only see one position for a stock if I buy it in non-pie transactions.
Furthermore, in the past I also used to do the copy trading from community pies, however, these are updated on a weekly basis, so you need to get all the money out of the pie of that week and then reinvest them in the pie of the next week (e.g. to copy the ARK invest community pies).
That used to be a nice thing to do, but with the introduction of the FX fee it is tough to decide on rebalancing frequencies, however once in 6 months, then it will not reflect my optimal allocation anymore, that would change on a daily basis. If it is still close I try to postpone rebalancing now as the added alpha may not outweigh the 0.3% fee.
Those may be quite personal considerations, but more in general, for me it doesn’t make sense to convert money from one currency to the other and back if you want to keep your allocation in USD. That is just a waste of transactions. The rebalancing can see in the data that the new allocation is still in USD, so exchanging is of no need (and costly). If you just sell a USD stock (most stocks are USD after all) and do not rebuy one directly I can understand it will be transferred to the account currency.
When I started with Trading 212 I actually had a USD account, but as there was no advantage as there were zero fees support said I can use a EUR account as well. So I actually changed at that time to a EUR account, which was easier as most funding accounts are EUR-based, so otherwise I would have FX fees when funding the account.
It’s tough, a lot of decisions. Now I have hundreds of positions and it will be difficult to close the account and reinvest in a USD account as you can only have one account at a time.
I thought you were doing that weekly already, selling off your whole portfolio as soon as there is an updated pie?
Well, I mean, the underlying transactions are costly. Doesn’t bother you so much.
Rebalancing used to be meant every 2-5 year-ish. But then retail needed more action and excitement, so the funds they invested in introduced the almighty yearly rebalancing.
Some even go quarterly, so they can show off a quarterly report and justify their fees.
Let’s try to out it this way; you have an allocation, that would represent a long term exposure wished over certain assets. Think of this long term movement as a slightly exponential increasing curve, which’s movement you want to capture. (As an added note here, it may be that over time you’d want a different allocation, but let’s not bother here, and keep it fixed).
Now, over the short term, stocks of securities tend to have a very erratic movement, that you would very likely model via a Brownian motion with drift. Understand, actually random ups and downs, but with a tendency to move in a certain direction over a long period.
Think again of our curves in the first part; now if you’re looking in more detail, you will see that’s there are entirely made of little erratic waves going up and down all the time, that we’d call noise. This noise is not relevant to the general trend, and is not reflecting the underlying performance, nor the business.
That means, if we were to trade this noise, it would entirely undo our investment thesis of the stock; We wish a certain allocation as we have a certain belief in the performance of the business, but we’re instead actively trading randomness.
That alone, would be destroying any so-called alpha you’d have, and would pretty much guarantee you a portfolio far from the optimal frontier.
You refer to the underlying transaction costs (which initially didn’t exist at Trading 212, but okay), however, my whole point is that I do not want that transaction to happen at all. It seems useless to convert USD to EUR to USD at the same point in time and involves the extra costs that would otherwise not have been there.
No no no. The underlying transaction cost does exist; it is not free to buy and sell shares.
We are graciously offered by our broker to transact for free, but the underlying transactions aren’t free. But that just doesn’t bother you.
Edit: clarification; i am not talking about the currency change, just the actual buys and sells.
I agree that overall costs for Trading 212 are low (that is the main reason I am using Trading 212, and the platform works quite well compared to other brokers). Nevertheless, I still strive for improvements, that is why I suggest to skip the FX transaction as an improvement (for both the user and the platform).
You are transacting way more than you really intend to; of course over a few days, weeks and months, your pie will somewhat differ from your targeted allocation, but most of it is only noise. What you would ought to do is instead rebalance maybe once a year, or only when a few of your stock had a very wide movement, far from the rest of the pie; that would allow you to cash in profit on some outlier outperformer, and buy back at a bigger discount outliers worst performers.
Let me provide one more example why you wouldn’t want to do this.
It is easy to think “But I always sell the higher performers, and buy the lower, so it’s sell high-buy low, it’s all good, it must outperform just sitting on it right?”
And the truth to it, is, no. You’d actually get a 50/50 at outperform / underperform, which heavily depends on how each individual stock perform daily (which is a random behaviour).
Let’s have a very narrow example to grow that intuition;
Say you have stock A, and B, at 50% allocation each. Stock A goes up every day, and for the sake of the argument, stock B stays flat.
Every day, A will be overweighted, and every day, you will sell a bit of A, and buy some B. But over time, you have less and less and less of A, and more and more of B, while B has stayed stagnant the whole time. This will clearly underperform just sitting on your pie.
As daily movement are random, this active rebalancing has a 50/50 shot at improving your returns. More importantly, your initial allocation is derived from your investment thesis, that over a certain period of time, this portfolio should do well; but if you are trading daily on it, you are nullifying your whole thesis, and then it simply doesn’t matter to have 50% on each, or anything else.
It depends on the strategy, but I somewhat do what you suggest. I rank around 8000 stocks every 5 minutes based on attractiveness. Then on a daily basis, I want to sell let’s say 1% of the portfolio that has the lowest attractiveness or stocks that are below a certain threshold. However I did not intend to discuss my personal investing preferences, I just wanted to bring up the point of unneeded FX transactions that create overhead as an improvement, I really had to change my rebalancing strategy because of the fee change and do fewer transactions than I would have liked to do. I love the fact that there are fractional shares so that I can have just 5 euros of certain stocks, otherwise, it would not have been possible to have hundreds of positions with a relative small amount of money.