Rebalancing for dollar's buying power at the time of the original deposit

I want to create a portfolio that would be rebalanced according to the relative buying power of dollar at the time of the deposit, but I'm not sure how to do it. I'm not familiar with financial terminology, so please bear with me here ;)

In other words, if I deposit \$10000 on January 1st, the investment would be first diversified into a set of chosen assets (currencies, stocks, commodities, etc.) and then rebalanced once a week based on what that \$10000 was able to buy on January 1st.

What would be the easiest way (for a beginner) to do this sort of rebalancing where you are balancing based on relative worth in time? Are there existing formulas how to calculate allocations?

• I may not be understanding the goal (an example might be helpful). But from your description, wouldn't the portfolio always be balanced according to this criteria? If you want your \$10k portfolio to have, say, \$6k in stocks based on their 1/1 price and you buy \$6k in stocks on 1/1, your portfolio will always have \$6k in stocks based on their 1/1 price whether your stock position went up to \$10k or down to \$2k. Nov 1, 2020 at 9:11
• You propose to have 52 sets of trades per year for a portfolio valued at \$10,000? Nov 1, 2020 at 11:41
• I share Justin's confusion. To me, adjusting for "buying power" sounds like something to do with "taking inflation into effect" (the buying power of a dollar on Jan 1 2021 may not be the same as it was on Jan 1 2020). However, that will/should affect the current-dollar-value of each component of your portfolio in the same way. Given "currencies" as one component, it's certainly possible that changes in exchange rates may alter its "current dollar value", and you might want to rebalance because of that, but that sounds like "normal" rebalancing based on the current value of each component. Nov 1, 2020 at 12:07
• The rebalancing frequency can be anything you want, doesn't matter for what I'm asking. Nov 1, 2020 at 13:27
• @TripeHound You got it right. After some thought it seems that the problem with my question is more about how to hedge dollar effectively against inflation, and how to measure dollar's inflation to calculate allocation for the rebalancing. Nov 1, 2020 at 13:35

2 Answers

I am not going to comment on how you will decide to rebalance. I am only going to talk about the frequency.

and then rebalanced once a week based on what that \$10000 was able to buy on January 1st.

There is common advice to rebalance your portfolio. This is done to keep the balance between the sectors. If an investor wants to be 40% large company stocks, 30% small company stock, 20% bonds and 10% real estate as an example, then periodically they will sell some winners, and invest the proceeds in the sectors that didn't perform as well. This brings them back to their target percentages.

It is not unusual to see advice for an annual re-balancing, or a semi-annual, or even quarterly. But 52 times a year is a little much. I hope for your sake there are no transaction costs. Of course you could also set a percent range so that you weren't trying to sell investments just because the investment was just over the percent you set. Having a range means you might be able to skip some weeks.

It is also tough to do with a small investment. You may find that you need to be able to buy or sell fractions of a share, or you won't be able to get the percentages close. Some brokers will let you trade fractions of a share of stock, or fractions of an ETF.

If you want to do this then unless your inflation rate is extremely large, annual re-balancing should be enough.

Balancing is where you shift your investments around to maintain a particular percentage in each. It's not related to inflation or anything else - the value of the \$ would be irrelevant.

Now, you could invest with the goal of hedging against inflation, and use inflation-linked securities as your "balance". Say, invest 70% Stocks / 20% Bonds / 10% TIPS (or more heavily in TIPS if you're really worried and don't mind the lack of growth). Then however often you decide to rebalance, and I echo mhoran's suggestion to do so not so frequently as weekly, you just keep those ratios the same.