HOW TO REBALANCE YOUR PORTFOLIO - 1
A tutorial (part 1) by Alberto Costa explaining the gap between theoretical portfolio allocation (percentages) and real-world implementation. Using a $10,000 example and three stocks (prices: $100, $150, $10), he shows how transfer fees, broker transaction/inactivity fees, integer-share constraints (must take the floor of share counts unless fractional shares allowed), and uncertain execution prices change the practical allocation (you may buy ~97.6% of intended allocation and hold leftover cash). He recommends accounting for transfer and transaction fees in planning, implementing computations in Excel, and using limit or stop-limit orders (tight price bounds) to avoid unexpected overpayment. The next video will cover rebalancing mechanics (e.g., every six months or yearly).
Chapters
Hello everyone and welcome to this new video. Today the topic is rebalancing, portfolio rebalancing. And this is very important because I realize that times and again, when you watch videos on YouTube, or you go to some course or you read a book and they touch this topic, people tend to do it in a very, very simplified way. And when you are dealing with the real stuff, when you really have to place your trades and then you have to buy, then you start to have a lot of questions that didn't come up during the course, during the video, during the chapter you were reading. So today I want to start discussing about that. This will be split in two parts. And the first part is about the difference between the theoretical allocation, what they show you, and the real one, what will happen from for real. Just to give a little context here, the idea is that maybe I mentioned in the recent videos I am moving to a more passive way of investing because I think it's less time consuming and the results may even be better than more active trading. And one of the techniques, one of the most important is creating a portfolio and then rebalancing the portfolio maybe every six months or every year, right? So in the next video I will discuss more in detail how to do this rebalancing. That basically means you want to go back to the original percentage of your allocation. But for this one again, I want to discuss how we can implement for real the idea of creating a portfolio. And I want you to focus on this part first. Okay, this is the theoretical allocation. So imagine that the course give you this allocation. Say, okay, you have to buy stock A, stock B, stock C and stock a, you buy 30%, stock B, 30 and stock C, 40. So the total is 100%. So what they tell you is usually something like, oh, you know, imagine you have hundred ten thousand dollars. And what does it mean? It means that you buy $3,000 of stock A, $3,000 of stock B and 4,000 of stock C. And you get this allocation. That is exactly what you should, right? So then you go back home and you are happy. And then you say, yeah, yeah, let's do it, let's do it. Then you log into your account and then you realize, oh, wait, the first thing I have to do is to transfer money, right? So you transfer your money from your bank to the broker, your account. And then you realize that, hey, wait a second, I need to take into account the transfer fees because often when you transfer with your bank, there will be some fee, okay? So unless you pay for that and Then you really want to transfer, let's say 10,000. If you just transfer 10,000, maybe what you will actually get is something like, I don't know, 9975. Okay, let's say. So this is already one thing that you need to consider. Okay, There are some fees. Not only the transfer fees, there are other fees we will see later. Let's move on to the real allocation. Because if you imagine again that let's say you have 10,000, right? You say, okay, I need to buy, I need to buy stock A, B and C and maybe the price are listed here. So the white spaces in this Excel is what you need to fill. The rest will be computed automatically with some formula. That is what I will describe during the video. So you say, okay, good. The stock A, the price is $100, stock B is 150 and stock C is 10, right? So if I want to buy 3,000 worth of stock A, I need to buy 30 shares, right? So it's like 3,000 divided hundred is 30 shares. And here you get 20 shares and here you have 400 shares. And this is usually the example you get. Problem is this works only if the amount that you have to buy for each stock divided by this price, that is the share price is actually integer. Because if now for example, because of the fees, you know, here you have 3,000 over 100 is 30. Perfect. But if because of the fees you have 909, 75, as I say now how much you need to buy is 2992.5. Now if you divide this guy by 100, what do you get? 29.93 more or less. So you don't have enough to buy 30 shares, right? Why? Because as I say, this number divided by this number must be integer. So what is the best way to deal with that? You need to buy a number of shares. That is the in mathematics is called the floor is basically you round to the closest, actually no to the lowest integer number. So if it's 29 point something is actually 29. Okay, this one will be 3990, right? Each share cost $10. So it should be 399. This one 2992.5 divided by 150, you get 19 point something. So you buy 19. So let's see what is the real one. So if I compute this divided by 150, actually I should buy 19.95, but I cannot. So I buy 90. So what does it mean? It means that after the fees, your 10,000, let's say are these number. And because you cannot buy, I mean some broker allows you to buy fractions of shares. But in general, if you can only buy integer, then you have to buy less than this. So see here you should buy 2992.5. You can only buy this here, you should buy this. You can buy this, right? So you buy less. In reality, what you buy is this number 9740 instead of 9975. So you are buying 97.6% of your total allocation. What do I mean by that? It means that you need to take into account when you are creating your portfolio that first I put a note here what you have to take into account. Number one, you may have some transfer fees, okay? So when you transfer your money from your bank to the broker account, then you may lose some money. Then you need to divide, right, this number, the amount for each stock divided by price, right? And if the numbers are not integer, you need to round to the lowest integer. And this is also something else that you need to take into account the buy price. What is a buy price? Right? Because usually you buy in the market and you know the price is moving. So unless you put a kind of order that allows you to give a bound for the buy price that you have, for example, a stop limit order. And if you don't know what it is, you can watch my videos. Even this price may be uncertain. It may be a little higher, a little lower, depending on the type of order that you are executing. So this is also something else you need to consider, right? The buy price. You only know when you buy. But to know how much to buy, you need to know the buy price. So I know it's a little confusing, so let me try to say it again. In order to know how much you have to buy, you need to know the buy price, right? But the buy price is uncertain because it can change. You only know the buy price when the transaction is executed, right? But the thing is that to execute a transaction, so to know how much to buy, you need to to know the buy price. So it's like a circle, right? To know how much to buy, I need to know what I'm paying, but I know how much I'm paying only after I buy. So you need some kind of order that allows you to at least have a tight range for the buy price. So for example, a stop limit order may be something like, well, I want to buy only if the price is between 100 and 100.1. Okay, something like that. The third thing that you need to consider is the transaction fees. Because when you trade, often you have to pay some kind of fees to the broker. And you can have a fee when you are buying and you can have a fee also if you don't trade. Like if you have a portfolio that is something where you don't have to do anything, only rebalancing every six months or one year, what is the problem? The problem is that if you use the broker that is charging you inactivity fees, that means every month you pay something. If you don't trade like interactive brokers, then these must be taken into account, right? So if you also put the fees, maybe you say, well, I have to pay every year, considering everything, maybe $100, then you're buying even less, right? So all this is very important, is very important because again, it's the difference between the theory and the practice. Look at here, right? In theory you put 30, 30, 40. In practice you put 29.1, 28.6 and 39.6. So you end up having some cash in your account. But it's not a problem. Usually the big mistake is to think that, oh, I buy 30%. 30%, 40%. And then maybe when you add up, they say, well, you don't have enough money to buy this amount of shares. And you're like, hey, how is it possible? I mean, at the course they told me that I do this. Yeah, but they didn't tell you all this. They didn't tell you that you need to have integer number of shares. They didn't tell you that you have the fees of the broker that you need to take into account. And, and maybe they didn't even tell you that you need to pay something for transferring your money. So with this video, my objective is to make you aware of these potential challenges. And the good thing about that is you can implement, as I did, all these computations in Excel, so you don't have the risk to be mistaken. If you say, for example, well, I know that I transfer 10,000 and the bank is taking 25, then I know this. I know how much the broker is charging. Maybe he's not charging anything for the transactions, or maybe, maybe he's charging, let's say, $5 each for each order, right? So it's like $15 already. Well, I know that I have to take also $15 here, nine activities fees. Great, so how much do I need to buy? And this is how much? 29 shares. 19 and 398, right? If those are the prices, of course, as I say, this price may change. So what I suggest you is to use a limit order that is basically the maximum you want to pay or a stop limit order and then use this price as the limit price. Because you know that okay, if the transaction executed at a lower price, great. You know, I may have some more cash remaining in my account. But what you don't want is computing the amount you have to buy based on a price and then paying more because then this way you may exceed your total capital. So I hope this video was helping some of you guys who are starting and who wants to know how to implement for real this thing. The next video as I say, will be more about the rebalancing and we will use some of the concepts you have seen here. But this is the starting point. It's very important to get it right because if already the creation of the portfolio is not right, then you will have troubles. So it's super duper important that you can get this right. And if you have any questions, just let me know. Write me a comment. I am more than happy to clarify anything. Otherwise, if you like the video you found it informative, put a like share with someone who you think may benefit. Because this kind of knowledge I think is very important to avoid mistakes that you know very well in trading and investing. Mistake cost money. With that I thank you for watching and see you next time.
