Skip to Content

Keeping Investing Simple and Portfolio Rebalancing

The approach to managing and growing your money should be in a way that caters to the kind of time you want to expense to grow it.

If you are more passive about it, and would want it to grow with the general economy, a systematic approach to buy low and sell high could prove better than picking stocks.

Many season market commentators including, Buffett, Munger and now even Ritholtz advocate building a portfolio of ETFs. The main reason to use this over unit trusts or mutual funds? Costs.

Ritholtz provides in this article how to keep investing simple:

1. Use ETFs to get equity exposure more often than picking individual stocks.

2. Valuation when making purchases matters more than anything else I can think of to your long term investing success.

3. Low Cost passive investing, dollar cost averaging into 5 broad indices (Big cap, tech, emerging markets, fixed income, etc.) is ideal for do it yourself investors.

4.  Rebalance across various asset classes regularly. Do so at least annually, preferably quarterly. (Online tools for doing this should drive your broker selection).

5. Keep your Costs and Expenses low. This may be the only free lunch in all of investing.

6. Reduce your Turnover level; keep it low (this helps with #5, plus most of these)

7. Avoid the Noise: Reduce your consumption of useless chatter, be it in print or on TV. Classic investing books are vastly superior to ephemeral market gossip.

8.  Review your portfolio regularly. Check your allocations monthly. To see how your holdings are doing, use weekly, not daily charts.

9. Venture Capital and Private Equity ain’t easy — if you lack the skills, capital and risk tolerance, avoid them.
9B. Most IPOS are a sucker game.

10. Avoid new financial products at all costs.

[Ritholtz | Keep Investing Simple | Read more]

On rebalancing

To further clarify point no 4, the main question ask is:

If you are picking individual stocks, how does rebalancing take place? Do you sell a winner or loser?

In another post to sum up his TV appearance at Bloomberg, Barry clarifies:

Take a portfolio model of 60% equities 40% bonds (60/40) primarily held through broad ETFs. After there was a hypothetical big quarter for bonds and a weak quarter for stocks, your 60/40 portfolio ends up looking more like 58% Equities and 42% bonds. The market action has led your holdings to drift away from your allocation. Rebalancing means that you are returning back to your original asset allocation model weightings.

Why do this? Because history teaches us that all broad asset classes will eventually mean revert. The goal of the rebalance is to take advantage of the short term volatility and price swings to move you back towards your model 60/40 allocations at more advantageous valuations.

In practice, it means you trim your bonds holdings after they had a good run and you buy equities after they have fallen. If you have more asset classes, you do the same, rebalancing to your model. A typical allocation may be that are 62% equities 31% bonds, 4% Real estate and 3% commodities 62/31/4/3. On a regular basis, quarterly, semi annually or annually, you rebalance back to your original allocation.

50/50 is a very conservative allocation, 60/40 more  moderate, 70/30 more aggressive, 80/20 even more so. The original allocation decision you make is a function of your risk tolerance, assets, and time horizon.

If you own Berkshire or Visa or JNJ (as we do) and they are working, you lock them in your portfolio and let them run. With individual stocks, you DO NOT rebalance — but eventually, you may have to make a sell decision. That is an entirely different conversation.

Asset classes mean revert. Any stock can go to zero, but an asset class cannot. And the reason to own an individual name (versus an index) is that it has the potential to outperform that broad index. That’s why you DO NOT rebalance them — it defeats the primary purpose of owning individual companies. .

[Ritholtz |A word about portfolio rebalancing | Read more]

I run a free Singapore Dividend Stock Tracker available for everyone’s perusal. Do follow my Dividend Stock Tracker which is updated nightly  here.


This site uses Akismet to reduce spam. Learn how your comment data is processed.


Sunday 13th of January 2013

It is true, if you are doing well in your job and earning high income and having high saving rate.

Why do you need to bother too much on your high saving rate to earn high returns?

A reasonable and stable returns that beat inflation will eventually lead you to financial freedom when you retire from your high income paying job. But, of course you must enjoy the Rat Race till your retirement too.

Fan Wu

Saturday 12th of January 2013

I will give you an example of my thought process. I bought an AU equity called at 4.4 cents and this is what I wrote:

I started looking through listed companies in AU, one by one. Having skipped almost all resources stocks, I did find a few interesting companies. But you know the problem is always the price. I understand you are reluctant to touch equities in other countries because of currency and cost issues, but I want you to know what I like anyways. For your information, InteractiveBrokers can let you trade AU stocks at 0.08% of trading value, which is reasonable in my opinion. I know you always do your own DD, so I just point out things which attracted me in the first place.

I spent this whole afternoon looking at AMA group limited. It is a typical serial-acquirer-went-bust story but the situation is overlooked and there is money to be made under very conservative scenarios. I know you always do your own DD, so I just point out things which attracted me in the first place.

Last year, the company did 8.1m in EBIT. It has a net debt around 22m and equity value of 12.5m. So that give you a 4.2x EV/EBIT, which is cheap, but not dirt cheap. Over the last two years, the company had lost millions of millions. But since this guy Ray Malone took over, the company went into black in a single year. Under his management, the company closed the head office in Sydney, outsourced CFO function(first time I heard of this), fired a lot of people(from 265 to 190), including all the directors, strengthened the internal control, sold a lot of businesses which acquired under the previous management.

The business is very respectable. With a revenue of 50m, the company's EBIT margin is at 16%. They are not in Bio or IT but in automobile aftermarket business. I have no idea how established the six operating businesses are in the local market, but they seem to be on a good footing. The auto businesses were hit really hard in the financial crisis, but now they are coming back. 50m seems to be a trough on the revenue side.

The insider has been on a buying spree. The CEO took control over the company in the restructuring @.04 and been buying in the open market since then. Ray Malone has bought around 5m shares in the open market. For a guy in the panel and smash repair business all his life, owing 96m shares means something. Two other fellows on the board has been buying in the open market and from the vendors who received shares as payment @0.0375 per share. What is remarkable is the COO of the company earned around 250K a year and he chose to receive half of his compensation in shares in 2009 and 2010!

Debt structure is also something to speak of. From my understanding, 100% of the debt of the company can be considered long-term facility which will mature in September, 2014. There are lots of covenants, but the company is sitting comfortably with them, according to the CEO. Ray has made paying down all outstanding debt as the top priority. The company is paying 7%+ on the facility, so every dollar repaid the interest saved falls to the bottom line.

The situation is very much like a management LBO. With this kind of leverage, simply paying down debt will work out brilliantly. The company has 22m in net debt. I am not sure if the company can use the NOLs, but even assume a 35% tax rate and 8m in EBIT in the next few years, the company is going to pay the loans off in 5 years. Let's assue the EBIT does not change at all after 5 years, a 8X EBIT should give the company a reasonable 64m in market capital, which is 5X of the original investment. No wonder the insiders are crazy about the shares. Ray Malone said he bought into this company because of the the operational talents here, but we all know buying along insiders in a LBO makes good sense.


Sunday 27th of October 2013

Yup, I have more or less done by portfolio asset allocation based on rebalancing yearly. Though I also dabble in marketing timing on the STOCK allocation. For bonds, it's quite stable.. it's either to maturity or if they recall the bonds.

Fan Wu

Saturday 12th of January 2013

So many people nowadays rely on "experts" to make their decisions. Worse, they delegate the rights to make decisions on experts. I cannot argue with your point, but if people pay more attention to their finances, there will not be that much people being sucked dry by their debts. I do believe you do not belong to this group after reading your posts. Silverlake was a good one and I wish I looked at it a few years earlier.

As to rebalance and tricks like these, they are misleading. How can rebalance make sure you will buy low and sell high? An investment can still be cheap even if it appreciates 1000%. If I were to be a financial advisor, I'd find the cheapest stocks with best quality and advise them to buy and hold until everyone wants them. My best compensation would be from the profits my clients had made.

I actually have an agreement with a friend to manage his money. We never signed anything, but the hurdle rate would be 15%, and after that 50% of the profits would be mine. It is different from a typical 1-20, but it worked well so far for me.


Saturday 12th of January 2013

Hi Fan Wu, like i say, i understand your investment process is detailed and you have made a lot of money from it. But some people are better off devoting their time to better purpose. If you are doing a splendid job as a managing director and enjoy what you do, would you consider existing that to manage a portfolio?

What you do takes time and not all people have that. It takes time to build up that acumen as well.

Rebalancing works because what we talk about are viewing a basket of assets. It works best for people who doesn't want to be spending a lot of time being consumed by this.

Fan Wu

Saturday 12th of January 2013

I really doubt this is a simple way to manage anyone's investment. Buying stocks to me is like buying groceries in the supermarket: trying to buy the best stuff at the lowest price. Of course, first you have to know the stuff well. This principle applies to every asset class.

It is really that simple to be a good investor.


Saturday 12th of January 2013

Hi Fan Wu, thanks for highlighting your point. my take is that most advisors (me included) are looking for a way where folks who want to carry on with their lives and not want to priortize wealth building such that it overtakes their lives.

In that scenario what would be the right approach. The simple approach together with rebalance resolves that because rebalance is a systematic buy low sell high mechanizm.

This site uses Akismet to reduce spam. Learn how your comment data is processed.