# Rebalancing a portfolio

Quick question on rebalancing a portfolio. Let's say that 10% of my portfolio is in something really speculative such as bitcoin (speculative for me at least)...now I've said to myself that I'm only prepared to have 10% of the value of my portfolio in this investment in case it goes bust.

As an example, let's say my 10% is made up of 10 bitcoins worth +- 4000 USD. The bitcoin price goes up by 30% taking my speculative investment to 5200 USD.

Generally speaking, when rebalancing portfolios, what should be done here? Should I sell off the 1080 USD as profit, to take my speculative investment back to 10% of my current portfolio value?

Thanks.

Generally speaking, when rebalancing portfolios, what should be done here? Should I sell off the 1080 USD as profit, to take my speculative investment back to 10% of my current portfolio value?

Just selling 1080 is not "rebalancing". Rebalancing is an operation that involves the whole portfolio, not any single investment.

Let's do the math:

``````10% of the portfolio = \$4000
100% of the portfolio = \$40,000
``````

Let's assume that only the bitcoin price changed, and all the rest stayed exactly the same. For the sake of simplicity, your \$36,000 are all in SPY fund.

New values:

``````bitcoin = \$5200
SPY = \$36,000
``````

Now your total is `\$41,200`, your bitcoin portion should be `\$4120`.

What rebalancing means in this situation:

``````bitcoin: Move from \$5200 to \$4120. Sell \$1080 worth of bitcoin
SPY: Move from 36,000 to 37,080. Buy \$1080 worth of SPY
``````

End result:

``````Total: 41,200
10%: 4120, bitcoin
90%: 37,080, SPY
``````

As it should be.

• It's early morning here, so forgive me if my math is bad :P 4000 + 30% increase = 5200. All else being equal, 5200+36000=41200. 10% of 41200 = 4120...so to get my bitcoin back in balance, 5200-1080=4120. Isn't that correct?
– ZASC
Commented Jan 21, 2016 at 6:33
• Math aside...is there generally a threshold or good time to say "hey, I need to rebalance this portion of my portfolio", or does one try and do it as soon as it goes out of sync?
– ZASC
Commented Jan 21, 2016 at 6:35
• @ZASC you would probably do it periodically, with periods being significant enough not to let the volatility noise interfere. I'd say once a year, or maybe half a year if you're really sensitive. Commented Jan 21, 2016 at 6:42
• You're right, I was 100 off, but the point stands. Commented Jan 21, 2016 at 6:44
• The cost of rebalancing should also be taken into account when determining when to rebalance. Commissions, fees, taxes, slippage, etc.
– blm
Commented Jan 21, 2016 at 8:27