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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.

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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 Jan 21 '16 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 Jan 21 '16 at 6:35
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    @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. – littleadv Jan 21 '16 at 6:42
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    You're right, I was 100 off, but the point stands. – littleadv Jan 21 '16 at 6:44
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    The cost of rebalancing should also be taken into account when determining when to rebalance. Commissions, fees, taxes, slippage, etc. – blm Jan 21 '16 at 8:27

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