What is your best approach for missed opportunities?

[Deleted User]

That's a really interesting link, underground.

Probably unfair to ask anyone to carry on the OPs good work and show the result of rebalancing those four investments up to today so, to discuss the issue in more general terms, what really is the power of the rebalance other than keeping its captives inside its comfort zone?

sevenhills

Savingsfox said:

It's pretty simple for me; markets always go up over time.
I Invest every 2 weeks / every month and don't think for one second whether I'm buying at the "top" or the "bottom" - because over time I'll buy somewhere in the cycle, but over time the market will always win.

I always try to sell at the top, I sold a share recently, i3 Energy, its gone down since. That won't make any difference in a few months/years, but I check share prices every day, too often really.

I bought two shares at the top recently, because I was rushing, they are both down 5%+ now

underground99

ZingPowZing said:

That's a really interesting link, underground.

Probably unfair to ask anyone to carry on the OPs good work and show the result of rebalancing those four investments up to today so, to discuss the issue in more general terms, what really is the power of the rebalance other than keeping its captives inside its comfort zone?

In the worked example given back in 2015, the portfolio rebalanced among the three asset types every couple of years for 20 years gave an ending return that was comfortably better than the return of buying an initial amount of 33% of each and letting them all ride. It was not far off the return of putting all the money into the best asset class, while exhibiting lower volatility along the way, and of course the best asset class would not have been known at the start of the 20 years, only with hindsight. So putting all the money into the best asset class at the start was not really a sensible option.

In general terms the point of rebalancing is primarily to ensure that a portfolio does not become over-dependent on the fortunes of one asset class - e.g. US equities had a much worse start to the millennium than everything else, whereas emerging markets flatlined after a strong surge from 2009-11 while other areas continued to grow ; Japan's nikkei had a terrible fall from grace with a lost couple of decades after being the largest stockmarket in the world in the late 80s, and so on. Countless examples of why not to have eggs in one basket.  Reallocating periodically to a target will avoid overexposure to potential risks that could hit one asset class. This reduces volatility of the portfolio versus the extremes that might otherwise be seen.  So, you're right that there is a 'comfort zone' aspect to it, as over-exposure to the fortunes and failures of one asset class is avoided.

The secondary point is that the natural 'sell some of an asset class that has gone up to feed an asset class that has gone down (or gone up less strongly)' is a cycle of sell high buy low rather than the fools game of the other way around, and it can positively affect performance. Different asset classes inevitably have their own time in the sun.  Some investors may be concerned that investing in anything other than the very best performing asset over a time period (e.g. equities vs bonds, or US equities vs Emerging Market equities) is going to cripple their performance by a similar amount by which it dampens the volatility, because they will miss out on some of the compounded returns available by sticking with the very best thing.

But the very best thing in one period will often not be in the next. So letting those gains compound over into something else is fine, you're not throwing the gains you already made into the bin, just deploying them elsewhere. The 'banked' gains which allow the injection of capital from assets at high points into assets at low points creates a beneficial effect - it can produce a higher reward for the risk being taken than if the money just sat in an individual silo while it ebbed and flowed. So the performance is not crippled after all, or at least, not as much as might have been feared.  A rebalanced portfolio can allow the portfolio to be held at a more optimal level than just having a bit of everything and watching some parts of it grow out of control to where it changes the potential risk/reward for the worse.

For example if you held regional investment funds and over the course of the 80s Japan grows to be 50% of the world stockmarkets, but then falls back to 10-20% in favour of something else while it has the worst performance of any market for the next decade ; then in the late 90s the US tech boom causes US to dominate and then falls back in favour of something else while it has the worst performance of any market for the next decade; the people who just let their two separate silos grow and fall back did not really 'cash in' on the fact that they had a diversified portfolio. They just made some nice looking gains on paper and gave them back again as the vast majority of their money was sitting in the asset class that was falling the most for a period of several years. An investor who 're-balanced' back to some sensible 'bit of everything' portfolio would have been selling assets from the top of both those peaks, meaning that although the peaks were not quite as high, they were lucrative.

This 'rebalancing' is perhaps easiest understood when you are talking about individual asset classes which are (generalising) likely to behave in certain ways for a given set of economic circumstances - changes in interest rates, inflation, world trade trends, oil prices, trade wars between certain economies, political change, globalisation, regulation; will affect certain geographic regions or industry sectors of equities, or bonds, or gold etc in different ways and some will be positive for some asset classes and not for others. 

Whereas if you try to look at it at your own individual company level and say let's compare Amazon against Sports Direct, there will be too much noise from company-specific factors to say how you ought to have behaved.  And at any point, the Amazon price might go to the moon or SportsDirect might go bust. So you can't say what goes up must come down. However, US equities or UK equities or Emerging Market equities or the sum of all global corporate bonds or government gilts are not going to go bust, and if one of them goes to the moon it will probably come back. So we can look at cross correlations or covariances of portfolio components and how economic data predicts they may react to an outside event or to a change in another asset class.

The mixed asset funds that target a particular level of managed volatility will be looking to get the maximum reward from a capped level of volatility and will use actuarial-type analysis to figure out how the dice may fall. As portfolio weights ebb and flow they aim to come back to a target, even if that target does change over time as new data is presented.  However, if you are personally only using a portfolio of individually held stocks with their own very unique company-specific characteristics, challenges and competitors, there is probably not a lot of point thinking you should 'rebalance' between the two holdings in some specific ratio of 60% Amazon to 40% Apple or vice versa.

Although you can derive an optimum portfolio from data around the two (Apple vs Amazon), you can only do that with hindsight, and one or other of them might be spectacularly more or less successful than the other next year.   So what you might look to do is not try to play one against the other at all. Simply lump Apple and Amazon into one 'bucket' and then see what exposure you have to that 'US tech' allocation vs your 'Asian manufacturing' or 'global energy production' or 'UK index linked gilts' or 'physical gold' allocation, and periodically balance at that level.

Billy_B_North

mn1 said:

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. 
Same when the market is plummeting and one is reluctant to accept a loss and keeps hanging to a losing investment hoping for a reversal.
Thanks in advance 

God grant me the serenity to accept the things I cannot change,
The courage to change the things I can,
And the wisdom to know the difference.

I’m not religious, but it’s good advice.

[Deleted User]

underground99 said:

ZingPowZing said:

That's a really interesting link, underground.

Probably unfair to ask anyone to carry on the OPs good work and show the result of rebalancing those four investments up to today so, to discuss the issue in more general terms, what really is the power of the rebalance other than keeping its captives inside its comfort zone?

In the worked example given back in 2015, the portfolio rebalanced among the three asset types every couple of years for 20 years gave an ending return that was comfortably better than the return of buying an initial amount of 33% of each and letting them all ride. It was not far off the return of putting all the money into the best asset class, while exhibiting lower volatility along the way, and of course the best asset class would not have been known at the start of the 20 years, only with hindsight. So putting all the money into the best asset class at the start was not really a sensible option.

In general terms the point of rebalancing is primarily to ensure that a portfolio does not become over-dependent on the fortunes of one asset class - e.g. US equities had a much worse start to the millennium than everything else, whereas emerging markets flatlined after a strong surge from 2009-11 while other areas continued to grow ; Japan's nikkei had a terrible fall from grace with a lost couple of decades after being the largest stockmarket in the world in the late 80s, and so on. Countless examples of why not to have eggs in one basket.  Reallocating periodically to a target will avoid overexposure to potential risks that could hit one asset class. This reduces volatility of the portfolio versus the extremes that might otherwise be seen.  So, you're right that there is a 'comfort zone' aspect to it, as over-exposure to the fortunes and failures of one asset class is avoided.

The secondary point is that the natural 'sell some of an asset class that has gone up to feed an asset class that has gone down (or gone up less strongly)' is a cycle of sell high buy low rather than the fools game of the other way around, and it can positively affect performance. Different asset classes inevitably have their own time in the sun.  Some investors may be concerned that investing in anything other than the very best performing asset over a time period (e.g. equities vs bonds, or US equities vs Emerging Market equities) is going to cripple their performance by a similar amount by which it dampens the volatility, because they will miss out on some of the compounded returns available by sticking with the very best thing.

But the very best thing in one period will often not be in the next. So letting those gains compound over into something else is fine, you're not throwing the gains you already made into the bin, just deploying them elsewhere. The 'banked' gains which allow the injection of capital from assets at high points into assets at low points creates a beneficial effect - it can produce a higher reward for the risk being taken than if the money just sat in an individual silo while it ebbed and flowed. So the performance is not crippled after all, or at least, not as much as might have been feared.  A rebalanced portfolio can allow the portfolio to be held at a more optimal level than just having a bit of everything and watching some parts of it grow out of control to where it changes the potential risk/reward for the worse.

For example if you held regional investment funds and over the course of the 80s Japan grows to be 50% of the world stockmarkets, but then falls back to 10-20% in favour of something else while it has the worst performance of any market for the next decade ; then in the late 90s the US tech boom causes US to dominate and then falls back in favour of something else while it has the worst performance of any market for the next decade; the people who just let their two separate silos grow and fall back did not really 'cash in' on the fact that they had a diversified portfolio. They just made some nice looking gains on paper and gave them back again as the vast majority of their money was sitting in the asset class that was falling the most for a period of several years. An investor who 're-balanced' back to some sensible 'bit of everything' portfolio would have been selling assets from the top of both those peaks, meaning that although the peaks were not quite as high, they were lucrative.

This 'rebalancing' is perhaps easiest understood when you are talking about individual asset classes which are (generalising) likely to behave in certain ways for a given set of economic circumstances - changes in interest rates, inflation, world trade trends, oil prices, trade wars between certain economies, political change, globalisation, regulation; will affect certain geographic regions or industry sectors of equities, or bonds, or gold etc in different ways and some will be positive for some asset classes and not for others. 

Whereas if you try to look at it at your own individual company level and say let's compare Amazon against Sports Direct, there will be too much noise from company-specific factors to say how you ought to have behaved.  And at any point, the Amazon price might go to the moon or SportsDirect might go bust. So you can't say what goes up must come down. However, US equities or UK equities or Emerging Market equities or the sum of all global corporate bonds or government gilts are not going to go bust, and if one of them goes to the moon it will probably come back. So we can look at cross correlations or covariances of portfolio components and how economic data predicts they may react to an outside event or to a change in another asset class.

The mixed asset funds that target a particular level of managed volatility will be looking to get the maximum reward from a capped level of volatility and will use actuarial-type analysis to figure out how the dice may fall. As portfolio weights ebb and flow they aim to come back to a target, even if that target does change over time as new data is presented.  However, if you are personally only using a portfolio of individually held stocks with their own very unique company-specific characteristics, challenges and competitors, there is probably not a lot of point thinking you should 'rebalance' between the two holdings in some specific ratio of 60% Amazon to 40% Apple or vice versa.

Although you can derive an optimum portfolio from data around the two (Apple vs Amazon), you can only do that with hindsight, and one or other of them might be spectacularly more or less successful than the other next year.   So what you might look to do is not try to play one against the other at all. Simply lump Apple and Amazon into one 'bucket' and then see what exposure you have to that 'US tech' allocation vs your 'Asian manufacturing' or 'global energy production' or 'UK index linked gilts' or 'physical gold' allocation, and periodically balance at that level.

We'll see the result of rebalancing those three investments over the last five years. 
Templeton Emerging Markets  - price 5 years ago 449, now 1004
Axa Framlington Am Growth - then 400, now 1044
FTSE all share - then 3379, now 3838

Give me some time though.

[Deleted User]

£10,000 invested in each 5 years ago now worth £60,845 total.
Rebalanced yearly £53,200 - by my reckoning.
As far as I have calculated, there are just a few match-up models where rebalancing is better than doing nothing but that may well be a development of the last ten years. So, question is: will the next ten years see a reversion to a former pattern? Unlikely imo.

Thrugelmir

ZingPowZing said:

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.

Sorry my fault. I muddled SD up with another Company. It'll come back to me in due course.


You know little of the history of Amazon that's apparent. The inherent danger when relying on data alone to substantiate a viewpoint. I used Amazon as it's a classic example of rise and fall in a short time frame.  Highly successful investing requires foresight not hindsight. Unless one has a stroke of good fortune. 
 
Easy enough for you to follow Amazons share price between 1997 and 2009. The data is free and accessible. 

AnotherJoe

mn1 said:

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. 
Same when the market is plummeting and one is reluctant to accept a loss and keeps hanging to a losing investment hoping for a reversal.
Thanks in advance 

Its impossible to take all investment opportunities, even real ones. Every one is a trade off, given you'd have to sell soemthing to buy soemthing else at some point. So, no point having regrets you cannot be correct every time.

Waiting for dips is generally a mugs game and tohave regrets about that means you havent understood you cannot time dips or peaks except by luck.

[Deleted User]

Amazon shares have increased in value a hundred-fold since 2007! Pretty amazing. Especially as the company has been a household name through that time. 

Yet I don't think people who never invested in Amazon feel regret - at least, I don't; people who do, I imagine, are those who thought 30 a great time to buy and sold at 50. 

Ash_Pole

I opened a Bitcoin account in 2014 intending to fund it with £1,000 but was put off by the naysayers and doom mongers.
I try not to think about it too much. I also drink a lot more than I used to though I'm sure this is coincidence.