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Back in November, 2015, I wrote a fairly comprehensive article for Seeking Alpha on the subject of
portfolio rebalancing. I was honored with the piece being selected as an Editor's Pick.
In this brief piece, I want to touch on a somewhat related question. What is "currency"?
In general, when someone says "currency," likely the first thing that comes to mind is "cash." After all, cash is the legal tender of the country in which we live. With cash, we can buy assets.
However, don't forget the perspective that the assets in our portfolio are also a form of currency. To see what I mean, take a quick look at the two screenshots I share below. The first picture features my personal asset allocation as of December 31, 2015.
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| ETF Monkey Portfolio - As of December 31, 2015 |
This second picture features my allocation as of February 5, 2016.
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| ETF Monkey Portfolio - As of February 5, 2016 |
Take a look at the rows highlighted in green and red. The securities shaded in green represent assets that have outperformed during this period, and those in red those that have underperformed. While I have executed a few trades during this period, I have not traded any of the featured securities, so the movement you see is genuine.
Take a look at
BSV and
TIP. On December 31, 2015, these had weights of 8.93% and 4.88%, respectively. As of February 5, 2016, these had grown to 9.27% and 5.10%. If you do the math, that is almost a 5% increase in weighting.
Next, repeat the same exercise with
T,
VZ, and
WMT. Each of these has gained at least 10% in weighting between the periods. Both of these examples reflect the fact that, during the severe YTD market declines, these assets have apparently been viewed as safe havens and have held up extremely well.
In contrast, take a look at
VTI and
VWO, the securities highlighted in red. Their weightings have fallen from 6.00% and 3.34%, respectively, to 5.62% and 3.18%. Both represent weighting declines in the range of 5-7%. In contrast to the first set of assets, not only have these assets declined equally with the overall market, they have actually done worse!
By now, you likely see where I am going with this. I might like to add to my positions in VTI and VWO, to increase their relative weights in my portfolio to what they were on December 31, 2015. Certainly, I could do so using my cash reserves. But what if, due to current market uncertainty, I want to hang on to my cash? Another choice that I have is to sell some of the "green" assets to buy some of the "red" assets. Yes, the "green" assets represent another form of
currency that is at my disposal.
At the end of the day, that is the essence of rebalancing. Using the "currency" of your appreciated assets to purchase those that have underperformed.
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