I have read all of the guides on rebalancing, but there is something clearly im just not getting.
I have a pie which i have set fund distribution as āby targetsā, as i have say for example, 3 stocks in the pie, one i have at 70%, one at 20% and one at 10%ā¦ So i appreciate that isnt very evenly spreadā¦ but it is how i want itā¦
It appears to me that it often is saying it is āunbalancedā i.e. a day after i have invested it and balanced it to āby targetsā i.e. my weightingā¦
You are confusing āself-balancingā with āby targetsā.
Each stock is likely to grow at different rates meaning that a stock that starts at, say, 70% could end up as only being 50% because the other stocks have risen faster.
When you invest more into a pie if you use āby targetsā it will only put 70% of you investment into that stock.
If you use āself-balancingā then it tries to put the overall proportions back to what you have selected. So in this case the ā70% stockā will get a lot more of your new investment in order to try to get it back to 70%. Obviously the 20% and 10% stocks will then get a lot less than those percentages because they have been doing well.
Be aware that using self-balancing you are effectively putting more investment into your poor performing stocks and putting less into your better performing stocks. Whether that is what you wish to do is something that only you can decide.
The switch to select how you wish to invest is shown after pressing the āinvestā button for the pie. You can also select ācustomā.
Thanks.
Iāve listened to the below video and as far as im concerned, im doing it correctlyā¦ im choosing weights and then choosing āby targetsā so it should follow allocation as iāve chosenā¦ and then, to my mind, it should never be āunbalancedā because.. thats how ive decided it SHOULD be balanced/allocatedā¦ or am i wrongā¦? Why would a pie which invests as āby targetsā be unbalanced?
There is no ācorrectā way to do it, you have to decide if the outcome you want is to invest more into underperforming stocks - so that the overall proportions again become what you want overall.
Or if you want to keep with the individual proportions - meaning that the pie will get further and further from the overall proportion that you want.
You invest Ā£100 into stock A and Ā£100 into stock B.
In year 1 Stock A grows at 100% whereas stock B grows at zero%. Then the new overall proportions will be:
Stock A 67% (Ā£200)
Stock B 33% (Ā£100)
You then invest another Ā£100 into each stock to give
Stock A Ā£300
Stock B Ā£200
And you invest by the same proportions (this is the āby targetā) and they then grow by the same amount (100% and 0%). You will then at the end of year 2 the amounts would be:
Stock A 75% (Ā£600)
Stock B 25% (Ā£200)
Clearly at the end of year 1 the overall proportions are 67:33, i.e. not the 50:50 that you have requested.
Further at the end of year 2 the overall proportions are now 75:25. So it is getting further from the 50:50 that you requested.
Alternatively if you wanted to keep the to overall proportions of 50:50 then at the end of year 1 you would invest the Ā£200 as follows:
Stock A add only Ā£50
Stock B add Ā£150
So at the start of year 2 the value of each stock would be Ā£250. This is the self-balancing system.
Thank you again.
Let me write up the scenario I would like and see if it fits with any of these options!
Stock A = 90% with a value of Ā£90
Stock B =10% with a value of Ā£10
I then want to put Ā£100 into the pie, with 90% of it going to Stock A, and 10% of it going to Stock B.
Stock A = Ā£180
Stock B = Ā£20
I then want to not invest in it for a few monthsā¦
After a few months i do not expect it to be āunbalancedā regardless of whether one stock rises and the other falls, because I have determined that i wanted to put 90% in Stock A and 10% in Stock Bā¦
I think I see where the misunderstanding is.
You are talking about balancing the input (the investment).
T212 refers to the outcome (i.e. the current value).
If both stocks grew at the same rate then your pie would remain balanced (as defined by T212). Unfortunately stocks rarely grow evenly.
In your example, letās assume that it is over 2 years and Stock A grows at 100% per year whereas stock B grows at 0% per year.
By the end stock A would be valued at Ā£540 whereas stock B would be valued at Ā£20. That is a proportion of 96:04 instead of 90:10. So T212 would report it as being unbalanced because 96:04 is not equal to 90:10.
Your next options are:
Rebalance without investment, i.e. sell Ā£36 in stock A and buy Ā£36 in stock B so that it re-attains 10% of the portfolio value (that is rebalancing).
Invest a lot more in stock B than in stock A so that stock B re-attains 10% of the portfolio value (that is self-balancing).
Invest again in proportion 90:10 so that the disparity between the stocks increases (that is by targets).
Do nothing and let the stocks grow according to the market.
Totally agree.
Most of my pies are unbalanced for one reason or another. However, it is a useful way for me to distinguish between investment āpotsā.
So, effectively, I just ignore the unbalanced message.
My interpretation of what topher said was that their pies only have one stock in each of them. [By the way that avoids the rebalancing issue.] They have then set the dividends to be reinvested. Obviously those dividends would then only be automatically invested in one stock, i.e. the stock that is in the pie.
By the way, if the stock is an ETF then that, effectively, turns a distribution ETF into an accumulating ETF which might be useful to the investor when they are selecting the ETF to invest into.
Thanks- i interpreted the sameā¦ one stock for one pie but I wouldnāt have understood the advantage in doing that over just butting the stock but now I understand as a minimum it allows you to auto invest
No, in my experience if one or more stocks produce enough dividends to reach the minimum investment amount for the pie (or the cash in the pie reaches that amount) then additional stocks are bought using the previously set proportions for that pie, i.e. all the stocks in that pie.
Yeah, thatās what I meant. I like to reinvest dividends in the same stock that paid out as it makes it simpler to compare performance on more of a total return basis.