Rebalancing

Audaxer

Thrugelmir said:

Audaxer said:

dunstonh said:

Someone with £500k, on the other hand, a 30% loss is very noticeable.  Their value has just dropped by an amount that could by a house.     Some people can handle a 30% loss when they have £10,000 but couldn't handle it when they have £100,000.

dunstonh, if/when there is a crash and equities fall by say 30%, would you as an IFA rebalance a client's £500k portfolio, by selling bonds and buying more equities to get back to their original weightings?

Portfolio should hold more than one equity market and one bond fund.  You are writing as if there aren't multiple investment options available. Not every crisis is going to global i.e. Covid\GFC.   

I was just interested in learning whether IFAs would normally look to rebalance in a scenario where global equities in a portfolio fell by 30%. Yes, it could be a number of equity funds which had different percentages losses, but I was thinking about an example where the overall equity fall was around 30% or more.

cfw1994

Deleted_User said:

cfw1994 said:

dunstonh said:

Sounds more like "fluid weightings" is a faintly meaningless term.   

What term would be better to use?

Sure, "changing your view dynamically" is perfectly reasonable and I would suggest sensible - nothing is static - but really just means you're changing how or in what you are investing in!   

You would be surprised at how many people stick with static though.  

Same reason I suggest my kids (early 20s) invest (pensions or longer term ISAs) broadly in 80-100% equities - I expect that to make most sense over a 10+ year timeline....but I bet if they met an IFA who formally assessed their risk profile, they might be moderately risk averse.  

Many IFAs will have time weighted portfolio allocations.  So, you can sit within a risk band but have weightings based on timescale.  Others that don't have time weightings explicitly will often move someone up the scale a notch with the justification of time invested.        Risk profiles are not hard or cast in stone.   

However, you should not underestimate the average UK consumer.  They want maximum return with no risk.   You get an awful lot of people who baulk the minute there is a 2% loss in value.    Some you can discuss it with and help them understand.  Some don't want to understand.    Every single risk analysis should be personal and include their knowledge, understanding and behaviour as well tolerance and capacity for loss.   

However, you get some people that will make all the right noises say they can handle risk but the minute a risk event occurs, they panic.  We have seen it on these forums.  Often with those that have gone fashioning investing into high risk and warned about the risks they are taking. They say they can handle it but then the following month it has fallen 1% and they are back asking if they should take their money out.

The other issue is the amounts involved.   A 30% on someone with a tiny value paying in monthly will usually go unnoticed.   Someone with £500k, on the other hand, a 30% loss is very noticeable.  Their value has just dropped by an amount that could by a house.     Some people can handle a 30% loss when they have £10,000 but couldn't handle it when they have £100,000.

What term?
Just say "adjusting the holdings".   Fluid weightings sounds a bit "Billy Bulls***" to me!   Either you have static weighings that you rebalance to, or you adjust the holdings according to what you see in the market.   Ideally, in the 12 months ahead, not behind 

I doubt I would be surprised at how many people stick with static though.  I've seen all manner of ignorance across the planet, especially this year!   Always remember that 50% of people are below average!
There is a lot of lack of knowledge in finance - no surprise, given we never teach it!   That is an education thing.

Sticking with static isn't necessarily a 'terrible' thing, I suspect.....but I do think people should examine their finances at least every year to see how they are set up.   

The rest, I don't disagree with.  Nowt so strange as folk!

1. Are you classifying static asset allocations as “ignorance”? 

2. People who don’t examine their investments tend to do better. 

1. Er....I added "Sticking with static isn't necessarily a 'terrible' thing, I suspect"......the ignorance comment was on the suggestion I might be surprised at what people do 
2. Some evidence of that?   It is, I grant you, a beautiful generalisation!  People who *do* examine their investments might be better or more frequent investors....

Thrugelmir

ZingPowZing said:

Back along I proposed a four stock portfolio for another thread,  £40000 invested in each of 4 stocks. The stocks were not chosen for illustrative purposes but actually work very well in that regard: two high growth mega caps AAPL and Microsoft, and two stolid defensive
high dividend shares Glaxo and BHP. What I would call a balanced portfolio.
In August I worked back to see what difference rebalancing made to the overall value over the last ten years.  (I know: aftertiming but the result was an eye opener).
With rebalancing, £160000 in Aug’10 became £662381;
without rebalancing £1,109,080. 
And the breakdown was APple £614,707
Microsoft £403,593
Glaxo £50,901
BHP £39879 (no increase over a decade).

Hardly a balanced portfolio.  We were all born with hindsight.  If I had have of bought just £10k of Frasers (Sports Direct) in 1999. Excluding dividends and reinvestment of. My holding would now be worth £790,000. Or Amazon after the Dot Com bust when the share price fell over 90% to just $6. 

As a miner BHP would be regarded as cyclical rather than defensive. As commodity prices fluctuate. 

[Deleted User]

Thrugelmir said:

ZingPowZing said:

Back along I proposed a four stock portfolio for another thread,  £40000 invested in each of 4 stocks. The stocks were not chosen for illustrative purposes but actually work very well in that regard: two high growth mega caps AAPL and Microsoft, and two stolid defensive
high dividend shares Glaxo and BHP. What I would call a balanced portfolio.
In August I worked back to see what difference rebalancing made to the overall value over the last ten years.  (I know: aftertiming but the result was an eye opener).
With rebalancing, £160000 in Aug’10 became £662381;
without rebalancing £1,109,080. 
And the breakdown was APple £614,707
Microsoft £403,593
Glaxo £50,901
BHP £39879 (no increase over a decade).

Hardly a balanced portfolio.  We were all born with hindsight.  If I had have of bought just £10k of Frasers (Sports Direct) in 1999. Excluding dividends and reinvestment of. My holding would now be worth £790,000. Or Amazon after the Dot Com bust when the share price fell over 90% to just $6. 

As a miner BHP would be regarded as cyclical rather than defensive. As commodity prices fluctuate. 

Sure. But the difference you see would most likely apply to any portfolio segmentation rebalancing effect: those four just exaggerate the effect for demonstration purposes. Some things go back to their old relationship, most do not. 
Try it with your long held investments, Thrugelmir; unpick the effect of your “top slicing.” Just for the exercise.

Linton

ZingPowZing said:

Thrugelmir said:

ZingPowZing said:

Back along I proposed a four stock portfolio for another thread,  £40000 invested in each of 4 stocks. The stocks were not chosen for illustrative purposes but actually work very well in that regard: two high growth mega caps AAPL and Microsoft, and two stolid defensive
high dividend shares Glaxo and BHP. What I would call a balanced portfolio.
In August I worked back to see what difference rebalancing made to the overall value over the last ten years.  (I know: aftertiming but the result was an eye opener).
With rebalancing, £160000 in Aug’10 became £662381;
without rebalancing £1,109,080. 
And the breakdown was APple £614,707
Microsoft £403,593
Glaxo £50,901
BHP £39879 (no increase over a decade).

Hardly a balanced portfolio.  We were all born with hindsight.  If I had have of bought just £10k of Frasers (Sports Direct) in 1999. Excluding dividends and reinvestment of. My holding would now be worth £790,000. Or Amazon after the Dot Com bust when the share price fell over 90% to just $6. 

As a miner BHP would be regarded as cyclical rather than defensive. As commodity prices fluctuate. 

Sure. But the difference you see would most likely apply to any portfolio segmentation rebalancing effect: those four just exaggerate the effect for demonstration purposes. Some things go back to their old relationship, most do not. 
Try it with your long held investments, Thrugelmir; unpick the effect of your “top slicing.” Just for the exercise.

Thrugelmires long held investments are long held because they havent gone bust or seriously fallen in value in the meantime.  If you could predict in advance which ones those would be you would not need to top slice. SInce you dont, it makes sense to ensure you dont lose your shirt  when one of your selected investments fails.

dunstonh

Audaxer said:

Thrugelmir said:

Audaxer said:

dunstonh said:

Someone with £500k, on the other hand, a 30% loss is very noticeable.  Their value has just dropped by an amount that could by a house.     Some people can handle a 30% loss when they have £10,000 but couldn't handle it when they have £100,000.

dunstonh, if/when there is a crash and equities fall by say 30%, would you as an IFA rebalance a client's £500k portfolio, by selling bonds and buying more equities to get back to their original weightings?

Portfolio should hold more than one equity market and one bond fund.  You are writing as if there aren't multiple investment options available. Not every crisis is going to global i.e. Covid\GFC.   

I was just interested in learning whether IFAs would normally look to rebalance in a scenario where global equities in a portfolio fell by 30%. Yes, it could be a number of equity funds which had different percentages losses, but I was thinking about an example where the overall equity fall was around 30% or more.

We tend to suspend rebalancing during period of very high volatility but apart from that, there is no reason not to rebalance after a drop.   Indeed, rebalancing can be at its most effective at the peak and troughs of markets.  And as you never know when those will be until you look back in time, you have to work on the basis of "if I was investing today, what would I be investing in". 

[Deleted User]

cfw1994 said:

Deleted_User said:

cfw1994 said:

dunstonh said:

Sounds more like "fluid weightings" is a faintly meaningless term.   

What term would be better to use?

Sure, "changing your view dynamically" is perfectly reasonable and I would suggest sensible - nothing is static - but really just means you're changing how or in what you are investing in!   

You would be surprised at how many people stick with static though.  

Same reason I suggest my kids (early 20s) invest (pensions or longer term ISAs) broadly in 80-100% equities - I expect that to make most sense over a 10+ year timeline....but I bet if they met an IFA who formally assessed their risk profile, they might be moderately risk averse.  

Many IFAs will have time weighted portfolio allocations.  So, you can sit within a risk band but have weightings based on timescale.  Others that don't have time weightings explicitly will often move someone up the scale a notch with the justification of time invested.        Risk profiles are not hard or cast in stone.   

However, you should not underestimate the average UK consumer.  They want maximum return with no risk.   You get an awful lot of people who baulk the minute there is a 2% loss in value.    Some you can discuss it with and help them understand.  Some don't want to understand.    Every single risk analysis should be personal and include their knowledge, understanding and behaviour as well tolerance and capacity for loss.   

However, you get some people that will make all the right noises say they can handle risk but the minute a risk event occurs, they panic.  We have seen it on these forums.  Often with those that have gone fashioning investing into high risk and warned about the risks they are taking. They say they can handle it but then the following month it has fallen 1% and they are back asking if they should take their money out.

The other issue is the amounts involved.   A 30% on someone with a tiny value paying in monthly will usually go unnoticed.   Someone with £500k, on the other hand, a 30% loss is very noticeable.  Their value has just dropped by an amount that could by a house.     Some people can handle a 30% loss when they have £10,000 but couldn't handle it when they have £100,000.

What term?
Just say "adjusting the holdings".   Fluid weightings sounds a bit "Billy Bulls***" to me!   Either you have static weighings that you rebalance to, or you adjust the holdings according to what you see in the market.   Ideally, in the 12 months ahead, not behind 

I doubt I would be surprised at how many people stick with static though.  I've seen all manner of ignorance across the planet, especially this year!   Always remember that 50% of people are below average!
There is a lot of lack of knowledge in finance - no surprise, given we never teach it!   That is an education thing.

Sticking with static isn't necessarily a 'terrible' thing, I suspect.....but I do think people should examine their finances at least every year to see how they are set up.   

The rest, I don't disagree with.  Nowt so strange as folk!

1. Are you classifying static asset allocations as “ignorance”? 

2. People who don’t examine their investments tend to do better. 

1. Er....I added "Sticking with static isn't necessarily a 'terrible' thing, I suspect"......the ignorance comment was on the suggestion I might be surprised at what people do 
2. Some evidence of that?   It is, I grant you, a beautiful generalisation!  People who *do* examine their investments might be better or more frequent investors....

Dead investors beat us hands down. 

https://www.businessinsider.com/forgetful-investors-performed-best-2014-9

Thrugelmir

ZingPowZing said:

Thrugelmir said:

ZingPowZing said:

Back along I proposed a four stock portfolio for another thread,  £40000 invested in each of 4 stocks. The stocks were not chosen for illustrative purposes but actually work very well in that regard: two high growth mega caps AAPL and Microsoft, and two stolid defensive
high dividend shares Glaxo and BHP. What I would call a balanced portfolio.
In August I worked back to see what difference rebalancing made to the overall value over the last ten years.  (I know: aftertiming but the result was an eye opener).
With rebalancing, £160000 in Aug’10 became £662381;
without rebalancing £1,109,080. 
And the breakdown was APple £614,707
Microsoft £403,593
Glaxo £50,901
BHP £39879 (no increase over a decade).

Hardly a balanced portfolio.  We were all born with hindsight.  If I had have of bought just £10k of Frasers (Sports Direct) in 1999. Excluding dividends and reinvestment of. My holding would now be worth £790,000. Or Amazon after the Dot Com bust when the share price fell over 90% to just $6. 

As a miner BHP would be regarded as cyclical rather than defensive. As commodity prices fluctuate. 

Try it with your long held investments, Thrugelmir; unpick the effect of your “top slicing.” Just for the exercise.

For what benefit?  Share prices aren't linear. Companies have good, bad and indifferent financial years. For a whole variety of reasons. No one ever went broke by taking profits. My personal view is that a 20% rise in a short period of time is a decent gain. If I can diversify further with other opportunities I do. These are unusually volatile markets. Not going to last indefinately.  We all know what happens if you try selling when everybody else does. 

[Deleted User]

Thrugelmir said:

ZingPowZing said:

Thrugelmir said:

ZingPowZing said:

Back along I proposed a four stock portfolio for another thread,  £40000 invested in each of 4 stocks. The stocks were not chosen for illustrative purposes but actually work very well in that regard: two high growth mega caps AAPL and Microsoft, and two stolid defensive
high dividend shares Glaxo and BHP. What I would call a balanced portfolio.
In August I worked back to see what difference rebalancing made to the overall value over the last ten years.  (I know: aftertiming but the result was an eye opener).
With rebalancing, £160000 in Aug’10 became £662381;
without rebalancing £1,109,080. 
And the breakdown was APple £614,707
Microsoft £403,593
Glaxo £50,901
BHP £39879 (no increase over a decade).

Hardly a balanced portfolio.  We were all born with hindsight.  If I had have of bought just £10k of Frasers (Sports Direct) in 1999. Excluding dividends and reinvestment of. My holding would now be worth £790,000. Or Amazon after the Dot Com bust when the share price fell over 90% to just $6. 

As a miner BHP would be regarded as cyclical rather than defensive. As commodity prices fluctuate. 

Try it with your long held investments, Thrugelmir; unpick the effect of your “top slicing.” Just for the exercise.

For what benefit?  

For the benefit of knowing the effect of what you're doing (or having done to you)! good idea on a moneysaving site, you may have thought, even if the principal benefit of rebalancing is supposed to be psychological.

I do admit to getting absorbed in this kind of exercise. I have so far found a limited set of trajectories where rebalancing worked out  advantageously over 10/20 years and not the ones you would think were prime beneficiaries, not Lloyds for example.  

But I am in no hurry to persuade anyone against rebalancing. 

Thrugelmir

Lloyds is a prime example of why investing in individual shares is a lottery.