Sell Your Winners & Buy Your Losers (Stock portfolio rebalancing explained) 

Thanks Richard, you're welcome.

Thanks! Yes that works well for the first 10 years or so but after that the amount your investing each months starts to be quite insignificant compared with the overall pot so it can take a little extra tinkering!

Thanks for watching robert, i think it may be the one after next now, as there's another interesting angle I want to cover!

It does seem that ETF re-balancing between, say, broad themes (S&P, Value, Emerging Markets,Small Cap, Growth, etc.) makes sense but it seems far more difficult with individual stocks. I can foresee the benefits if you still have long-term conviction regarding your losers but if you don't it seems re-balancing could introduce even more risk. For instance several years ago my broker recommended Nortel stock after it had suffered some significant declines. He thought it would be a turn around story. On his advise I bought some only to see it decline to bankruptcy. Re-balancing and buying more of that loser would have been a big mistake!

@@rossmacintosh5652 yes you’re right. This video is mainly aimed at fund or index investors. However if you’re an active stock picker, and doing it properly, this should already be taken into consideration. You can’t simply try to invest in good companies, you need to hold good companies that complement each other. This is why star fund managers tend not to outperform over long periods of time. Each has their own style of investing, value growth income etc, but each style comes in and out of favour over time. Each had its time in the sun. Fortunately for these fund managers they can just shut down their fund when it starts to underperform and start again. Unfortunately you can’t do that with your retirement fund, which is why it’s important to have diversity across styles and risk factors! Or you can just back yourself to pick which style will come in to favour at which point… harder still.

OK Mark, So I sell enough Vanguard funds outside of ISA to release £12,300 profits each for wife and myself on March 1st releasing our Capital Gains allowance immediately re- investing into any NEW Vanguard holding fund rather than leaving in cash and then re-balance back onto the previous funds that we are happy with on 5th or 6th April, putting a separated/new £20,000 each onto our anual ISA allowance on or after the 6th April.

@@raybrock2513 pretty much. You can also switch between funds of the same type eg vanguard S&P 500 etf for a blackrock S&P 500 etf. Also remember to transfer assets between you and your wife if one of you has no gains to realise.

Thanks steve!

Hey! I’ve seen your videos a few times, keep up the good work!

Thank you! Yes i will do.

No, thank you for watching!

I’m glad it helped!

Haha!

I use a Nikon Z6, probably a bit overkill for what i do!

Thanks max. I hope you're well!

Always a welcome comment!

It's not something i know munch about, but i can certainly look into the data and see if there is anything there. The thing is that all of these "ideas" that we come up with for timing the market have already been thought of by other professional investors. And when they find one that works they plow so much money into it that it quickly becomes in-effective. So it's vrey very hard to find this stuff now, unless you're very good at programming and using AI!

This is an important point yes, lots of the time you can rebalance by simply investing cash as you save. Thanks!

Many of us invest in the tax-advantaged retirement accounts our countries offer. As a result there is no disincentive for us to re-balance. I just haven't done it because I hope the winners will keep winning and fear the losers will keep losing. Momentum... It is hard to have enough faith in your losers.

Momentum is an interesting point Ross. It’s real, and cutting short momentum is not a good idea. Hence why having a year gap or a trigger drift of 10%+ can still help you capture some of it. There’s lots of debate and research about different strategies tho, you can really go down a rabbit hole. It’s also important to note that this video is focused on investors using funds. Active stock pickers should already be doing this to some degree.

Yeah same. Totally understand the logic, but I just buy losers rather than sell the winners. But I have gone over the process in my head many times, so it's good to hear someone talking about it. It may sway me. 👍

@@rossmacintosh5652 good for you, in Italy we don’t have such accounts :( only specific pension funds where you can’t decide where to invest, but only on a very generic asset allocation (aggressive, balanced, etc.). We have however Vanguard LifeStrategy funds which are very efficient in terms of tax savings because you don’t have to do any balancing on your own.

March is generally best, then you already know what other gains you have naturally released for the year. So can harvest other gains up to your CGT allowances. Then you should also make sure to use up any tax wrapper allowances right after the end of the tax year.

There is no end of year or beginning of year advantage. July to July is a good as January to January.

Peter Lynch and warren buffet would recommend this to 99.9% of people.

​@@JamesShack There's literally a video on youtube of Peter Lynch describing Warren Buffet calling him to ask for permission to use his line in his annual shareholders letter “Selling your winners and holding your losers is like cutting the flowers and watering the weeds.” You don't mechanically buy losers, that's a sure fire way to lose money. Peter calls it diworsification and Munger regularly complains about the nonsense arguments made against concentrated portfolios. You only change course because a company's earnings are going down long term and something in your original investment thesis in the company has changed. Either its run out of steam to grow, it has no moats and competitors entering the market are eating into its profit margins or it can't generate good cash returns on operating capital employed for some other reason. That's what matters. To put it into layman's terms, can the company generate lots of cash and can it invest that cash in itself or acquisitions to grow earnings without harminag the balance sheet in the long term. If yes then its a great company to invest in, your next job is not pay too much for the future cashflows and figure out how much you're willing to pay for it i.e. discounted cashflow analysis and PE ratios. Also they're not great fans of bonds and prefer equities as they outperform them in the long run and bonds aren't necessarily lower risk if you don't know what you're doing, in a rising interest rate environment such as now you can make big mistakes as bond prices and interest rates have an inverse relationship, see the imbeciles at Silicon Valley Bank for example. This video is giving bad advice to amateurs and risks them losing out on those key days in the market when it goes up and makes a paltry return into a great one, further you're adding more costs by having them trade more vs a passive index fund for example that beats most managed funds in the long term anyway. For people who don't want to do the work to stock pick then a passive S&P 500 index fund and getting on with life is best, you'll double your money roughly every ten years as per the average return of the S&P over the last 70 years, just don't put any cash in that you need in the short term and have a cash buffer and you're good to ride out the peaks and troughs of the market on the way up.

Hi, as you say there is quite a big overlap between those two funds. Firstly, is there any particular reason you’re holding both? Are you looking to be more exposed to developed markets? Rebalancing between these two is more of an asset allocation decision. Decide by much do you want to be overweight developed markets and rebalance whenever that gets out of line.

@@JamesShack The reason I ended up with those 2 funds is because I started off with the global all cap, but later realised that the developed world fund has considerably lower costs, so I thought it might be a good way to get more exposure to developed markets. Thanks, that makes sense about reallocating accordingly. Hope you don't think my strategy is ridiculous!

Lets say that you own: ABC, $200k balance, up 40% over the past 12 months XYZ, $100k balance, up 20% over the past 12 months You sell $50k of ABC and buy $50k of XYZ. Now each has a balance of $150k. You are "positioning" yourself for the next 12 months.

Yes that's right.

Only if you believe in that allocation. Typically yes, you should rebalance you strategy at least once a year. But you have to have conviction that is the right strategy in the first place.

@@JamesShack great thanks appreciate the advice.

Hi Stephen, Do not try to apply this to individual stock picking, this should only be done on an overall asset allocation basis.

Could I not just buy more of my stocks that are doing badly. Yes. Re-balancing is based on the philosophy that "this years winner will not be next years winner."

Yes, and then depending on the sub fund there may be be some rebalancing within it.

Craig you have clearly sat thorough at least an hours of my videos ? Why ?

@@JamesShack No worries. I've just stopped.

@@craigross341 👍🏻I’m a beta guy. Fuk off with your alpha shit….. c / thanks you for the channel support

Hi Peter, did you say you were working with a financial adviser? Part of your comment is crossed out.

@@JamesShack I don’t know why it appeared crossed out. It should not be. I have asked the question but wanted to get your opinion too… In general, how can you ensure moving portfolios is not detrimental?

We typically rebalance and take gains at the same time. It’s best to do it just before the end of the tax year so you know how many gains you’ve already released during the year. The other important point is when subscribing for your ISA right after the end of the tax year. But you can normally do all of this bridging the tax year. This is why tax year end is so busy for financial planners!

There is no end of year or beginning of year advantage. July to July is a good as January to January.

The S&P 500 is all large cap, and a fairly even split between growth and value. Which means that an equal weight fund is not getting much benefit from rebalancing at all. What you say is true, growth stocks have outperformed for a long run, but they won't for ever, and it's when the winds change, and these risk factors revert back towards their means, that you get the benefits of rebalancing.

Shouldn’t I expect that... The key word here is “expect.” Re-balancing is based on the philosophy that '"This years winner will not be next years winner."

@@JamesShack hi James, how should I change my Buy and hold ETF portfolio (simple all-world ETF Vanguard) to achieve the benefits from your analysis? Thanks

@@odilostark7130 hi! You don’t really need to do anything, if your in an all world fund it will already be rebalancing within in. Every day I imagine.

@@JamesShack Sounds Good, but I thought Vanguard All World ETF weight of stocks is simply based on market capitalization. That means if the today very high valued technology stocks would decline relative to so far underperforming stocks the Vanguard All world ETF performance would decrease relatively. I thought that the better method would be to sell partially today the very high rated stocks and invest in underrated stocks. What do I get wrong?

Thanks Chris!

Yes that is right