This YouTube tutorial (Alberto Costa) continues a two-part walkthrough on rebalancing a three-stock portfolio whose target allocation is 30% A, 30% B, 40% C. The video reviews a starting (real) allocation derived previously (29 A, 19 B, and ~398 C implied), shows one-year price movements (example prices: A $190, B $160, C $4) which produce current values A=$5,510, B=$3,040, C=$1,592 (total $10,042) and changed weights (A ~54.3%, C ~15.7%). The presenter demonstrates the rebalancing arithmetic including adding $500 new cash and accounting for fees: compute total portfolio (current value + cash - fees), take target percentages, then buy/sell shares to close the gap. In the example he sells 12 shares of A (29→17), leaves B unchanged at 19, and buys 664 shares of C; after trading the allocation is back near 30/30/40 with about $104 leftover cash. Practical constraints (no fractional shares, transaction fees, using limit/stop-limit orders) and an offer to share the Excel used to compute adjustments are noted.
Questions this video answers
Alberto Costa; June 6, 2021.
30% to stock A, 30% to stock B, 40% to stock C.
$500.
Stock A: $190; Stock B: $160; Stock C: $4.
A = $5,510; B = $3,040; C = $1,592; total = $10,042.
Chapters
Hi and welcome to the second part of the how to rebalance your portfolio. If you remember, last time, we ended up here by showing the difference between the theoretical allocation and the real allocation. So in our scenario we had three stock A, B and C. And the idea was to allocate 30% of our capital to stock A, 30% to stock B and 40% to stock C. What we saw was that when we want to implement that for real, we may not be able to achieve exactly these numbers because there are some fees, because there may be some problem with the amount that you want to buy versus the price you pay. Right. If you remember, I discussed this in the last video. If you didn't watch, I, I really suggest you watch that before moving on with this one. But basically because in general we cannot buy fraction of shares, we may need to buy a little less. And then that's why you may have some differences. So in the previous video at the end, we ended up with this allocation. We had 29.1 for the stock A and then 28.6 for stock B and 39.9 for stock see, and there is some money that we didn't use because of the reasons that I explained. But this is the starting point. Now imagine this scenario. You have done this and you know that your portfolio needs to be rebalanced every year. That means one year later you need to go back and check if these numbers are still the same. Probably they will not. So what do you have to do? You have to buy excess shares in order to go back to this, actually to this theoretical allocation as much as possible. And that's what I'm going to show you right now. So let's stop here for a while. We started, as I said, with this allocation. 29 shares of stock A, 19 of stock B and 12, 398 of stock C. And that's a starting point. But one year later, probably what is going to happen is that the prices, the buy price that we use to execute our buying orders one year ago when we created the portfolio, now the price is different. So just to give you an example, suppose the stock A we bought at $100 now is trading at 190. This one went from 150 to 160 and this one from 10 to 4. What does it mean? It means that now the value of stock A is 5510. This guy is 3040 and this guy is 1592 for a total value of 10,042. So overall you gain some money because you started with 10,000, okay? Minus fee, minus something. But now the value of your portfolio is up. What is the problem? Problem is that this allocation, now the current one, is quite different from the original one. Because remember, stock A, we need to have 30%, but now it's actually 54.3%. This one is actually the same. This one should be 40% and now is only 15.7. So what do we have to do? Selling some stock A and buying some stock C in order to go back to these values or as close as possible. And this is what I will show you now. Before doing that, I want to also include something that may be relevant because one year later, you may also have some funds that you want to put in your portfolio. Ideally, you should not take funds because this kind of investment portfolios should be there for the long term, right? So in this case, I imagine that we have 500 cash that we can put in the portfolio. And this will complicate everything, right? Because not only you have to rebalance and get this percentage, but also you have to take into account this amount of money, okay? And I also assume that for doing this rebalancing, okay, we may have to pay some fees. But let me show you first this part here. I use a formula, okay, that basically is coded here. I will not go through all this, but I just want to give you the idea. The idea is that, okay, if we want to go back to 30%, what do we have to do? We have to take the total value of our portfolio, the current value plus the new cash that we put, okay, Minus the fees that we pay for rebalancing. So for buying and selling the transaction and this total value, okay, we take 30% of that. So now what happens? Well, 30% of that is less than 5,000, 510, okay? Actually, the new amount that we have should be around this value, okay? So we take 30% of the total value of the portfolio plus new cash, minus fees, and then we say, okay, this is what I should have according to my theoretical 30%, right? I have actually this. So the difference, the difference of money that exists between the current amount and what I should have, that is the amount of money that I have to sell. And because this is the number of the, sorry, the price of the shares, right now it turns out I have to sell 12 shares. So this long formula is basically telling you what I just explained. We take the current amount, we take the amount we should have, compute the difference. This is the amount that I have to sell over the current price. This is the number of shares I have to sell. So I have to sell 12 shares. Meaning to say, from 29 I go back to 17. After selling for the stock B, we are already at 30%. So we don't have to do anything. We don't sell, we don't buy anything. It was 19 shares, it stays like that for stock C. If you see now we are at 15.7, we should be at 40. So we need to buy and how much? 664 shares. So by doing that, we had this amount of shares. Now we have this amount of shares. Okay, and if you compute after this operation the new allocation, you have 30%, 30.4, 28.6 and 40. Okay? So this means that with this new way to rebalance the portfolio, we end up again around these values. And if you look at the situation, because we cannot buy as when we created the portfolio, we cannot buy a fraction of shares. So we may have some discrepancies. What happened is that this is the new value of the portfolio after rebalancing. If you compare this with the previous value plus the cash, minus the fees, you realize that we have some cash left, $104. So remember, when we rebalance and when we create a portfolio, we may have some cash left, we should not exceed, right? That's why we want to round to the lowest value in a way so that we have ideally zero cash left. But we may have some cash left. And that's what you have to do basically in practice, selling 12 shares of A and buying 664 of C. I assume also that these are the buying prices or selling prices. But you know, we discussed this in video number one, that in order to get something close to these values, we may need to use some limit or stop limit order. This is something we already discussed. Okay, so this is more or less the idea. Now I know that you may be wondering, okay, how do I do that in practice? You have this nice Excel, but I don't know how to create this formula here. What is that? I have no idea. So if you have any question about how to do that in Excel, you can let me know in the comments. I may make this Excel file available somehow we see how. But if you really need, if, if you think that you need this file, because creating this formula is challenging, just let me know in the comments and I can find a way to make it available for you. With that, I really thank you for watching these two videos. I hope it was useful and it can help you rebalance your portfolio and understanding what is the logic behind. As usual, if you like it, put a like. As I said, if you need the file or you want to ask me anything, write a comment, subscribe to the channel. If you have not yet done so and as usual, see you next time.
