What is your best approach for missed opportunities?

Prism

ZingPowZing said:

Thrugelmir said:

With regards to rebalancing. Depends how many bear markets are encountered along the way.  Unbalanced will potentially be a roller coaster ride. In drawdown perhaps not advisable, 

Imo rebalancing isn't even likely to work in a bear market.
Thrugelmir, can you give an historical example of two stocks that made rebalancing between them work?

We have been through this before. Rebalancing reduces risk not increases overall performance, although it might do both if you are lucky. Using your two stock example, if one increases by 90% and the other drops by 90% your portfolio of two becomes more volatile and is also at risk of a single company failure wiping you out.

For many, maybe not you, the best possible performance is not the goal. I would rather be in the middle than risking the top or bottom.

underground99

ZingPowZing said:

Thrugelmir said:

ZingPowZing said:

Thrugelmir said:

ZingPowZing said:

Thrugelmir said:

With regards to rebalancing. Depends how many bear markets are encountered along the way.  Unbalanced will potentially be a roller coaster ride. In drawdown perhaps not advisable, 

Imo rebalancing isn't even likely to work in a bear market.
Thrugelmir, can you give an historical example of two stocks that made rebalancing between them work?

Volatility is a form of risk. Rebalancing simply forms part of portfolio management tools.  Been around since the 1950's as a theory. 

Historically why would you even have held a portfolio consisting of just 2 stocks? 

You wouldn't but measuring the effect of rebalancing any two investments in your portfolio gives a good indication of the overall benefit (or otherwise) of the exercise. Actually, you can make it even simpler and calculate the effect of rebalancing a single investment against cash over time. Then you can see the gain, or opportunity cost resulting from what you did, or had done to you.
Assuming you want to know..

Why would rebalancing two random stocks out of a sizable portfolio teach me anything?  

Why would a sextant teach you anything?
Tell me the names of two long-hold investments in your portfolio, Thrugelmir, and I'll demonstrate for you.

Clearly if Equity A or Index B has good real term returns over a long period and cash does not have any real terms return, then periodically rebalancing Equity A or Index B against cash to be equal parts of your portfolio is going to give a worse return than just holding Equity A or Index B.  It's an unnecessary drag on the returns potential of the good-performing asset. And likewise if Apple is always going to go up and down at the same time as Samsung, but overall go up more, there is little point trying to figure out how to 'rebalance' the lower performing asset against the higher performing asset and magically get better returns .You can't.  But that is quite a long way from saying rebalancing is useless.

As nobody would really be constructing a broad investment portfolio from just two things (other than if we are talking something generic like 'equities' and 'bonds') there is limited use in looking at two components of a broader portfolio in isolation.  Generally however if you hold a portfolio of uncorrelated assets which each have the potential to deliver returns over time, but the growth spurts are sporadic and one going up will often coincide with the other going down (e.g. equities vs govt bonds over time) there is an efficient frontier at which there's an optimal mix of risk vs reward. This can change over time as for example the bond market was positively correlated with equities market for some of the 80s and 90s while inversely correlated for the first part of the current century. 

When looking at all the different things you could hold, some prices move in the same direction under similar circumstances, while others go in opposite directions.  The covariance of two holdings (how in sync or out of sync they are) needs to be checked to predict what the potential outcome of throwing them into a portfolio together could be, and it gets more complicated with more asset classes in the mix.

In portfolio theory, different combinations of assets give give different risks and returns, and the 'optimal portfolio' mix of assets is the one that meets the requirement that no other collection exists with a higher expected return at the same standard deviation of the return. Rather than focussing on what is the highest return or the lowest risk, the optimal portfolio aims to balance stocks carrying the best potential returns with acceptable risk. When we plot these, we get the 'efficient frontier', which might for example say a good place to stop is 60/40 equities/bonds to avoid the rollercoaster of equity prices that some find intolerable without sacrificing all the growth potential.

When you are periodically rebalancing holdings of non-correlated assets, adding the lower-performing asset to the mix does not create as much 'drag' on the best-performing asset as might be expected, due to the effect of sell-high buy-low. And as we can't know in advance what will be the best performing asset, it's not surprising that people will seek to limit their exposure to 'eggs in one basket' by selling a slice of some of those high performers which recently had a lot of good days to add to the assets that are having bad days. I know you think the whole idea of 'top slicing' and 'rebalancing' to a target allocation is mumbo jumbo invented by the financial adviser community to make investment seem more complicated than necessary, to boost their own wallets - but there is some sense behind it.

Clearly if you have enough risk capacity to just ride out any potential problems in a portfolio held for the longer term, you can just buy the things that you hope will go up the most over long periods, which might be equities generally or particular types of equities.  For those that can't take that level of volatility (whether due to emotions or due to the fact that they really might need to access the money earlier than expected), a balanced portfolio is usually adopted, which for some depending on knowledge level might have more 'rules of thumb' than exact science. As Thrugelmir said in an early answer to the problem posed by OP:  'create yourself a set of rules and stick to them'.

george4064

I think its also worth mentioning that there is most likely more value in rebalancing a portfolio of investment trusts, ETFs or funds then there are a portfolio of individual holdings.

A portfolio of individual holdings will most likely have big 'winners' and 'losers', where running with your winners and cutting your losses with losers may actually work. In contrast, a portfolio of funds (that presumably are different in that they invest in different regions, sectors or styles) will less likely have big winners/losers then one might expect with individual companies so that rebalancing for a portfolio of funds will look more like buy low/sell high and a portfolio of individual companies may look more like you are cutting your winnings and investing in the losers.

[Deleted User]

I see the psychological value of rebalancing and it is one version of good husbandry but I don't think figures support the exercise. 
Diversification is a zero sum game, readily illustrated: if a hundred individuals pool their investments, it would make no difference to their total value at any point; but rebalancing is different as it essentially involves selling the winners to augment the losers, which will have a negative impact overall or, at least, certainly has had a negative impact over the last dozen or so years.

Malthusian

george4064 said:

A portfolio of individual holdings will most likely have big 'winners' and 'losers', where running with your winners and cutting your losses with losers may actually work. In contrast, a portfolio of funds (that presumably are different in that they invest in different regions, sectors or styles) will less likely have big winners/losers then one might expect with individual companies so that rebalancing for a portfolio of funds will look more like buy low/sell high and a portfolio of individual companies may look more like you are cutting your winnings and investing in the losers.

Or selling your "winner" individual shares and buying more of the "losers" may increase returns as market sentiment turns against the winners and bubbles burst, while the losers turn out to be underappreciated bargains. Nobody knows.

The issue is not that a portfolio of individual shares will behave dramatically differently from a portfolio of funds when it comes to rebalancing; the issue is that automatic rebalancing is incompatible with the rationale behind holding individual shares.

If you are automatically rebalancing it suggests you want to reduce risk; in which case why are you holding individual shares?

If you are holding individual shares it suggests you are confident in your ability to analyse company fundamentals and pick shares that will outperform the market, in which case why are you chucking that out of the window and selling a share purely because it's gone up more than the others?

[Deleted User]

george4064 said:

I think its also worth mentioning that there is most likely more value in rebalancing a portfolio of investment trusts, ETFs or funds then there are a portfolio of individual holdings.

A portfolio of individual holdings will most likely have big 'winners' and 'losers', where running with your winners and cutting your losses with losers may actually work. In contrast, a portfolio of funds (that presumably are different in that they invest in different regions, sectors or styles) will less likely have big winners/losers then one might expect with individual companies so that rebalancing for a portfolio of funds will look more like buy low/sell high and a portfolio of individual companies may look more like you are cutting your winnings and investing in the losers.

That is right, george, a fund or trust will not be as volatile as an individual stock; the effect will be less but still - I suspect - a negative one. But a fund or investment trust manager will be rebalancing independently, so rebalancing between funds adds an extra layer of cost to rebalancing itself and, if you're paying an IFA to do it for you, triple whammy!

Thrugelmir

ZingPowZing said:

I see the psychological value of rebalancing and it is one version of good husbandry but I don't think figures support the exercise. 

Find some data leading up to Dot Com boom era and subsequent bear market in late 90's and early 00's for your exercise. Here's two shares to perform calculations on , Amazon and Sports Direct. 

underground99

ZingPowZing said:

I see the psychological value of rebalancing and it is one version of good husbandry but I don't think figures support the exercise. 
Diversification is a zero sum game, readily illustrated: if a hundred individuals pool their investments, it would make no difference to their total value at any point; but rebalancing is different as it essentially involves selling the winners to augment the losers, which will have a negative impact overall or, at least, certainly has had a negative impact over the last dozen or so years.

ZingPowZing said:

george4064 said:

I think its also worth mentioning that there is most likely more value in rebalancing a portfolio of investment trusts, ETFs or funds then there are a portfolio of individual holdings.

A portfolio of individual holdings will most likely have big 'winners' and 'losers', where running with your winners and cutting your losses with losers may actually work. In contrast, a portfolio of funds (that presumably are different in that they invest in different regions, sectors or styles) will less likely have big winners/losers then one might expect with individual companies so that rebalancing for a portfolio of funds will look more like buy low/sell high and a portfolio of individual companies may look more like you are cutting your winnings and investing in the losers.

That is right, george, a fund or trust will not be as volatile as an individual stock; the effect will be less but still - I suspect - a negative one. But a fund or investment trust manager will be rebalancing independently, so rebalancing between funds adds an extra layer of cost to rebalancing itself and, if you're paying an IFA to do it for you, triple whammy!

There was that old thread, six years ago this weekend, where Bowlhead looked at three funds covering different regions over a twenty year period which all went up and down at different rates at different points in time.  While the USA fund was the eventual winner (which would not have been known in advance), the approach of having a third of the portfolio assets in each fund, periodically rebalanced back to equal shares, delivered a return not far off the best performing holding, with much smoother volatility.

The rebalanced holdings delivered a better performance than just having three individual pots going up and down their own rollercoasters untouched. Bringing in the two lower performing assets did not end up being a significant drag on performance of the eventual 'best' investment, as their returns followed a sufficiently different path to 'make use' of the broad diversification in a portfolio approach.

Maybe of use to some.

https://forums.moneysavingexpert.com/discussion/5208032/the-power-of-the-rebalance/p1

To make use of diversification you do need assets that will all generally have a chance to grow in value when the mood takes them (rather than e.g. cash which doesn't grow and just dampens performance) and you need assets that are not 100% correlated with each other so they don't all go in the same direction at the same time.  Global markets are increasingly correlated with each other (e.g. US sneezes, UK catches a cold or some other idioms) but different asset classes do follow different paths which you look at equities, bonds, infrastructure, commodities, property etc.

moneysavinghero

How do you deal mentally with situations where an opportunity for good investment has been missed ?
For example when an advisor gives advice to buy an investment, one does not, market goes up, then one keeps waiting for a dip that seems to never happens. 

Just remind yourself of all the times when an advisor tells you to a buy a stock which then tanks and you are glad you missed that 'opportunity'.

[Deleted User]

Thrugelmir said:

ZingPowZing said:

I see the psychological value of rebalancing and it is one version of good husbandry but I don't think figures support the exercise. 

Find some data leading up to Dot Com boom era and subsequent bear market in late 90's and early 00's for your exercise. Here's two shares to perform calculations on , Amazon and Sports Direct. 

Ok.
Fras.L née SportsDirect became a public quoted company in 2007, so I'll start from there:

https://www.sportsdirectplc.com/investor-relations/share-information/share-price-chart.aspx
Price 206.5
https://finance.yahoo.com/quote/AMZN?p=AMZN&.tsrc=fin-srch
Amazon corresponding 2007 price 34.21

Assuming the UK investor begins in '07 with an investment of £10,000 in each, she/he would have at the outset 
292 shares in Amazon
4854 shares in SportsDirect

Rebalancing each June to equal weightings would leave her/him today with 74 Amazon shares and 50314 Fras.L  shares worth a combined £397515.

Pretty good for a £20,000 investment in '07.

But if she/he had not interfered, the investment in Amazon alone would now be worth £647,000. So, clearly the better call, in hindsight.

Give me two more, Thrugelmir.