Model Portfolio
|
||||
Stock
|
Quote
|
Price
|
%
|
|
Amazon
|
AMZN
|
$346.38
|
20.0%
|
|
Apple
|
APPL
|
$ 98.97
|
28.5%
|
|
Facebook
|
FB
|
$ 77.60
|
15.0%
|
|
Google
|
GOOG
|
$586.08
|
15.0%
|
|
Intel
|
INTC
|
$ 35.00
|
10.0%
|
|
Microsoft
|
MSTF
|
$ 45.91
|
10.0%
|
|
Cash
|
1.5%
|
|||
100.0%
|
||||
The following is the current valuation of a portfolio:
Current Portfolio Valuation
|
||||||
Stock
|
Quote
|
Price
|
Qty
|
Value
|
%
|
|
Amazon
|
AMZN
|
$346.38
|
22,000
|
$
7,620,360.00
|
40.42%
|
|
Apple
|
APPL
|
$ 98.97
|
15,000
|
$
1,484,550.00
|
7.87%
|
|
Oracle
|
ORCL
|
$ 40.71
|
17,000
|
$ 692,070.00
|
3.67%
|
|
Google
|
GOOG
|
$586.08
|
12,000
|
$
7,032,960.00
|
37.31%
|
|
Intel
|
INTC
|
$ 35.00
|
20,000
|
$ 700,000.00
|
3.71%
|
|
Microsoft
|
MSTF
|
$ 45.91
|
20,000
|
$ 918,200.00
|
4.87%
|
|
Cash
|
USD
|
$ 1.00
|
-
|
$ 404,300.00
|
2.14%
|
|
$ 18,852,440.00
|
100.00%
|
|||||
As you can see from the current portfolio valuation, our proportion of Amazon stock is too much where as we do not invest enough in Apple and Facebook. Portfolio re-balancing is basically redistributing the investment according to the new allocation. The new value of each stock is:
New Value (Stock A) = Target Holdings (%) (Stock A) x Total Portfolio Value (including cash)
New Value (Stock B) = Target Holdings (%) (Stock B) x Total Portfolio Value (including cash)
After computing target value for each stock we need to convert the value into quantity. The formula is:
Rebalance
|
||||||
Stock
|
Quote
|
Price
|
Qty
|
Value
|
Target %
|
Target value
|
Amazon
|
AMZN
|
$346.38
|
22,000
|
$
7,620,360.00
|
20.00%
|
$ 3,770,488.00
|
Apple
|
APPL
|
$ 98.97
|
15,000
|
$
1,484,550.00
|
28.50%
|
$ 5,372,945.40
|
Facebook
|
FB
|
$ 77.60
|
0
|
$ -
|
15.00%
|
$ 2,827,866.00
|
Google
|
GOOG
|
$586.08
|
12,000
|
$
7,032,960.00
|
15.00%
|
$ 2,827,866.00
|
Intel
|
INTC
|
$ 35.00
|
20,000
|
$ 700,000.00
|
10.00%
|
$ 1,885,244.00
|
Oracle
|
ORCL
|
$ 40.71
|
17,000
|
$ 692,070.00
|
0.00%
|
$
-
|
Microsoft
|
MSTF
|
$ 45.91
|
20,000
|
$ 918,200.00
|
10.00%
|
$ 1,885,244.00
|
Cash
|
USD
|
$ 1.00
|
-
|
$ 404,300.00
|
1.50%
|
$
282,786.60
|
$ 18,852,440.00
|
100.00%
|
|||||
After computing target value for each stock we need to convert the value into quantity. The formula is:
Target Qty (Stock A) = New Value (Stock A) / Price (Stock A)
Rebalance
|
||||||||
Stock
|
Quote
|
Price
|
Qty
|
Value
|
Target %
|
Target value
|
Target Qty
|
|
Amazon
|
AMZN
|
$346.38
|
22,000
|
$
7,620,360.00
|
20.00%
|
$ 3,770,488.00
|
10,885.41
|
|
Apple
|
APPL
|
$
98.97
|
15,000
|
$
1,484,550.00
|
28.50%
|
$ 5,372,945.40
|
54,288.63
|
|
Facebook
|
FB
|
$
77.60
|
0
|
$ -
|
15.00%
|
$ 2,827,866.00
|
36,441.57
|
|
Google
|
GOOG
|
$586.08
|
12,000
|
$
7,032,960.00
|
15.00%
|
$ 2,827,866.00
|
4,825.05
|
|
Intel
|
INTC
|
$
35.00
|
20,000
|
$
700,000.00
|
10.00%
|
$ 1,885,244.00
|
53,864.11
|
|
Oracle
|
ORCL
|
$
40.71
|
17,000
|
$
692,070.00
|
0.00%
|
$
-
|
0.00
|
|
Microsoft
|
MSTF
|
$
45.91
|
20,000
|
$
918,200.00
|
10.00%
|
$ 1,885,244.00
|
41,063.91
|
|
Cash
|
USD
|
$
1.00
|
-
|
$
404,300.00
|
1.50%
|
$
282,786.60
|
282,786.60
|
|
$ 18,852,440.00
|
100.00%
|
|||||||
After this we need to compare target quantity against the existing holdings in order to derive how much shares we need to buy or sell. We also need to round off the target quantity to the lot size. For NASDAQ the lot size is in 100 shares.
Number of shares need to buy or sell = Target qty (Stock A) - Existing Qty (Stock A)
A positive value is a buy and a negative value is a sell.
For those stocks that we do not owned before we need to buy them all and those stocks we do not wish to own anymore, we will sell them all.
Additional consideration
Rebalance
|
||||||||
Stock
|
Quote
|
Price
|
Qty
|
Value
|
Target %
|
Target value
|
Target Qty Round
|
Quantity Required
|
Amazon
|
AMZN
|
$346.38
|
22,000
|
$
7,620,360.00
|
20.00%
|
$ 3,770,488.00
|
10,900
|
(11,100)
|
Apple
|
APPL
|
$
98.97
|
15,000
|
$
1,484,550.00
|
28.50%
|
$ 5,372,945.40
|
54,300
|
39,300
|
Facebook
|
FB
|
$
77.60
|
0
|
$ -
|
15.00%
|
$ 2,827,866.00
|
36,400
|
36,400
|
Google
|
GOOG
|
$586.08
|
12,000
|
$
7,032,960.00
|
15.00%
|
$ 2,827,866.00
|
4,800
|
(7,200)
|
Intel
|
INTC
|
$
35.00
|
20,000
|
$ 700,000.00
|
10.00%
|
$ 1,885,244.00
|
53,900
|
33,900
|
Oracle
|
ORCL
|
$
40.71
|
17,000
|
$
692,070.00
|
0.00%
|
$
-
|
0
|
(17,000)
|
Microsoft
|
MSTF
|
$
45.91
|
20,000
|
$ 918,200.00
|
10.00%
|
$ 1,885,244.00
|
41,100
|
21,100
|
Cash
|
USD
|
$
1.00
|
-
|
$ 404,300.00
|
1.50%
|
$
282,786.60
|
282,786.60
|
|
$ 18,852,440.00
|
100.00%
|
|||||||
Additional consideration
Some investment firm impose certain rules that restrict buying or sell if the lot size is too small. For example, some firms may think that buying and selling of just 100 shares is not worth the transaction cost. Therefore additional rules may be required to generate the transaction.
Please note that the above computation does not take into account of cost of transaction. Most fund managers feel that the cost of transaction is negligible. If you want to include the cost of transaction then the actual transaction quantity may be smaller.
To take transaction cost into account, assuming transaction cost is 1.5% regardless of buying or selling:
Target Qty (Stock A) = (New Value (Stock A) / Price (Stock A)) ÷ (1 + Transaction Cost (%))
Rebalance
|
|||||||||
Stock
|
Quote
|
Price
|
Qty
|
Value
|
Target %
|
Target value
|
Cost
|
Target Qty Round
|
Quantity Required
|
Amazon
|
AMZN
|
$346.38
|
22,000
|
$
7,620,360.00
|
20.00%
|
$ 3,770,488.00
|
1.5%
|
10,700
|
(11,300)
|
Apple
|
APPL
|
$
98.97
|
15,000
|
$
1,484,550.00
|
28.50%
|
$ 5,372,945.40
|
1.5%
|
53,500
|
38,500
|
Facebook
|
FB
|
$
77.60
|
0
|
$ -
|
15.00%
|
$ 2,827,866.00
|
1.5%
|
35,900
|
35,900
|
Google
|
GOOG
|
$586.08
|
12,000
|
$
7,032,960.00
|
15.00%
|
$ 2,827,866.00
|
1.5%
|
4,800
|
(7,200)
|
Intel
|
INTC
|
$
35.00
|
20,000
|
$
700,000.00
|
10.00%
|
$ 1,885,244.00
|
1.5%
|
53,100
|
33,100
|
Oracle
|
ORCL
|
$
40.71
|
17,000
|
$
692,070.00
|
0.00%
|
$
-
|
1.5%
|
0
|
(17,000)
|
Microsoft
|
MSTF
|
$
45.91
|
20,000
|
$
918,200.00
|
10.00%
|
$ 1,885,244.00
|
1.5%
|
40,500
|
20,500
|
Cash
|
USD
|
$
1.00
|
-
|
$
404,300.00
|
1.50%
|
$
282,786.60
|
282,786.60
|
||
$ 18,852,440.00
|
100.00%
|
||||||||
When should you Re-Balance?
Depending on your investment strategy, you can re-balance daily or quarterly. Listed below is just some of the common scenario.
If your investment strategy is to buy and hold, then you shouldn't re-balance your portfolio regularly. Please note that re-balancing a portfolio will reduce your holdings that are profitable and thus realizing your gains. Most of the fund managers will re-balance their portfolio at least quarterly but they will re-balance the portfolio more frequently if the market is volatile. Most of the time the portfolio is being re-balanced when there is a change in holdings, addition or exclusion of certain stocks.
A portfolio that tracks a benchmark closely may need to re-balance more frequently. Some investor will impose certain criteria such that the fund manager must re-balance their portfolio when the deviation from the benchmark (tracking error) is above certain threshold. Index funds or exchange traded fund (ETF) track the benchmark very closely and thus such funds re-balance their portfolio daily.
Another case where re-balance is required is when the asset allocation or country allocation has deviated from the investment target. For example, a portfolio with 70% fixed income and 30% equity may find that the holdings of equity reach 40% during a bull run. Either the investor or the fund manager will decide when to re-balance the portfolio which will sell off the excess equity holdings and convert it back to fixed income products. A portfolio which is compose of 50% US stocks and 50% European stocks may need to re-balance their portfolio regularly especially when two different offices (US offices and European offices) handles the investment of the portfolio together.
There is also the situation where portfolios need to re-balance daily during portfolio implementation. If the total asset under management is very big and it may take weeks to complete the portfolio implementation (i.e. to complete all the Buy and Sell orders); it is advisable to re-balance portfolios daily especially in situation that the sell orders are slower than buy orders. By re-balancing all the portfolios daily, all trade order are good for the day and all unfilled order will be cancelled at the end of the day. Such practice allows the fund manager to monitor the trading more closely during portfolio implementations.
Trade Orders
Trade orders are usually generated by the system under the supervision of fund managers. There are many forms of buy orders and sell orders. They are:
Price
Market orders – The traders will execute the trade at the best current price available.
Limit orders – The traders will execute the trade at the specific price or better price.
Stop orders – Stop order are primarily use by day traders. A buy stop order is triggered when the price reaches above certain price (above market price). A sell stop order is triggered when the price drop below certain price. As fund managers seldom use stop order, I only include this for the sake of completion.
Kill or Fill orders – Such orders must be filled immediately in its entirety or it will be killed. No partial order is allows
Immediate or Cancel – same as kill or fill order except that partial order is allowed. Unfilled order is cancelled.
Timing
Good-till-cancel – The trade is good until it is filled or cancelled by the fund manager.
Day Order – The trade is only good for the day. All unfilled trades are cancelled.
Good-till-date – The trade is good until a date specify by the fund manager.
There are many permutation of trade orders, the following trade orders are the common ones:
Market orders – good till done or cancelled
Limit orders – good till done or cancelled
Market – orders good for the day
Limit orders – good for the day
*****
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