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QuestionsCategory: Investor PsychologyHow to rebalance portfolio?
Sun Down asked 2 years ago

Hi Victor & Rusmin,
May I check how to rebalance a portfolio? In the course you mentioned since investing is a probability game, each stock we invest should be of the same amount. So say I have 100k now, and I buy 10 stocks, each stock 10k.
And 3 years later, I have another 50k for investing. How do I allocate this additional 50k into my portfolio? Do I allocate this 50k to increase my existing stocks size, or look for new stocks? If for existing stocks allocation, some stocks maybe undervalue or fair value at that point of time, while others the price may be too high for entry.
So say 3 existing stocks (undervalue or fair value) can buy extra 15k, but the other 7 existing stocks cannot buy as price too high, then the portfolio will be unbalance as as the 3 stocks will now be 45k (15k each) while the remaining 7 stocks will be 70k (10k each)? It will not be the same amount anymore as capital allocation is more than the rest.
Also, say along the way, an existing stock in my portfolio becomes a irresistible buy, which is way below its intrinsic value, and all parameters are still strong, how? Do I buy? But if I buy this stock capital allocation will be higher than the rest and will not be of the same amount anymore?

Seek for your enlightenment please, thank you!
 

1 Answers
Victor Chng answered 2 years ago

Hi Sun down,
 
It depend on the percentage of each of your stock holding. You may want to share currently how many stocks holding and what is the percentage of each stocks so that I can accurately understand what is the situation. 
 

Sun Down replied 2 years ago

Hi Victor,

Now 10 stocks, each stock with 10% allocation.

Victor Chng replied 2 years ago

Hi Sun Down,

With the extra cash, you can top up your existing company which is still undervalued. Do note that the percentage is a rough figure, in real situation your figure may not be exact. As long as the difference is not like 5% or more. I think is generally ok.

The key is to diversify it properly but not to overly rely on one company.

My personal opinion is that holding 10 stocks may be too risky unless you have deeper understanding of investing and businesses. If not, my suggestion is to make it a 15 stocks portfolio.

Sun Down replied 2 years ago

Hi Victor,

Thanks for your reply. So means that the difference in capital for each stock should not be more than 5%?

So if I have 20k, I buy stock A (10k), stock B (10k).

In future, I have another 60k to invest, and stock A is undervalued, I can put the most $500 into stock A?

Hope you can enlighten me further, thanks a lot!

Victor Chng replied 2 years ago

Hi Sun Down,

I think it is better to look in term of % instead of absolute amount. So for instance, you have $100k deploy in 10 stocks which is 10% each. One year later you manage to save up another $50k to invest which will cause your per stock holding to drop to 6.7% ($10k divided by $150k). Since you have $50k in cash which work out to be roughly 33.3% cash position ($50k divided by $150k).

In such cases, I may want to selective deploy my capital on those stock that is undervalued. So let say, I have 3 stocks that is undervalued which is about 6.7% of the total portfolio each. You may not want to immediately deploy to the max percentage, you want to spread slowly so I will deploy at least 2% each ($3003.3 – take $50k/33.3% multiply by 2%) to 3 of the stocks which push their percentage holding up to 8.7% each.

Sun Down replied 2 years ago

Hi Victor,

Thanks a lot for helping me to clear my thoughts, I begin to understand better now.

So now the $150k portfolio will be in the following:

3 stocks x 8.7% = (26.1%) ($39,150)
7 stocks x 6.7% = (46.9%) ($70,350)
Stocks = 73% ($109,500)
Cash = 27% ($40,500)
Total = 100% ($150,000)

But how come only deploy 2% and not 5%? Or to deploy in steps, if it goes down again, another 2% to deploy, and goes down again, last 1%. Maximum 11.7%?

Maximum deplorable not more than 5% in difference for each stock right? For diversification purpose?

Victor Chng replied 2 years ago

Hi Sun Down,

Personally, I don;t like to max out allocation, I like to split them into different tranche. You can also deploy to max immediately if you want.

“But how come only deploy 2% and not 5%? Or to deploy in steps, if it goes down again, another 2% to deploy, and goes down again, last 1%. Maximum 11.7%?” – You are right on this but I will still try to maintain it at 10% max but 11.7% still ok. so some of your stocks may only be 9% plus.

Sun Down replied 2 years ago

Hi Victor,

Noted with much thanks! Appreciated!

Victor Chng replied 2 years ago

Welcome :)