Portfolio Rebalancing – Part 1

At the beginning of our investing journey, I did a simulation on our risk profile and the initial simulations were suggesting moderate to conservative allocations of investments. Of course, I did not follow it too much and went full speed for a while to more risky investments. But since then, almost 4 years have passed, and I am curious how my risk profile changed and where we are.

What is the reason?

Well, reading about Ray Dalio’s all-weather portfolio and allocation, and my risk profile, I would like to see how can I better distribute the funds to match a more equilibrated profile. Also, the second point is that having some percent written somewhere, we can do a portfolio rebalancing. Using the first definition I found on Investopedia: Rebalancing is the process of realigning the weightings of a portfolio of assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation or risk.

In simpler terms, if I have an allocation of 20% on risky investments (FOREX/Crypto), and my current percent is 32%, I will sell and withdraw the surplus and investing where it is missing.

First Step of Portfolio Rebalancing

The first step of the process is to redo some risk asset tests, draw a conclusion based on results (how much in each category).

  1. Hesta.com, determines that I am Very ambitious, comfortable with high exposure to growth assets in your super to increase the likelihood of a higher investment return over the long term
  • You may also be comfortable with short-term changes in the value of investments, including negative returns, in aiming for higher returns over the long term. 
  • You’re typically planning to stay invested for at least 7–10 years.
  • You may choose to invest up to 90% in growth assets.

Not sure what to say here, but if I have to conclude, it will be like a 30% allocation to high-risk investments, 50% percent in medium-risk investments, and 20% in conservative investments. 

2. Eastspring.com provides the same Moderate status, but without too many details on what and where. I will wait for another test to print the Moderate status before even thinking about an allocation

indicator moderate

3. Fidelity.co.uk brings a more Moderate to Conservative approach, with slow and steady growth, interpreted as Aims for steady returns over the years and will hold an even split of higher-risk and lower-risk investments. What that even means? 50% low risk to 50% high risk?

4. Calcxml.com provides the Moderate risk profile ( I start to think more and more that I must find a graphic somewhere) but does not provide too many details.

5. Pimet.ro – Finante Personale also suggests the moderate and equilibrated approach.  I am recommended to go for high-risk investments but on a calculated risk.

I am not sure about you, but my only conclusion is that I am a moderate investor. Browsing on google I found multiple plans for the moderate category, most of them focus on a balance between fixed-income investments (like bonds) and diversified stocks. The proportions are either 40% FI – 60% Stocks, 50-50, and a cheeky 80% stocks and 20% F.I. Actually for the last part, I even found a nice article on Herald-Tribune, suggesting:

  • 25% in U.S. Total Market Index Fund
  • 10% into a small-capitalization stock fund
  • 25% diversified international stock fund
  • 10% emerging market fund
  • 5% in Real Estate Investment Fund
  • 5% into large and mid-capitalization common stocks (for dividends)
  • 15% into short-term corporate bonds
  • 5% into cash equivalence

All-weather portfolio

Ray Dalio’s all-weather portfolio asset allocation is composed of: 30%US Stocks, 40% Long term treasuries, 15% intermediate-term treasuries, 7.5% commodities, diversified, 7.5% gold. A visual representation is:

image 3

If I would have to define risk for each asset, I would say that Gold, Medium-term bonds, and long-term bonds are relatively safe investments, there can be a moderate risk in Commodities and Stocks, but no high-risk investments.

According to Tony Robbins book, Money: Master the game, the numbers regarding risk-reward for this portfolio are the following: 9.7% annual returns, you make money in 86% cases (so 8.6 winning years in 10 years), with an average loss of 1.9% (when you lose, you don’t) and the worst loss of -3.9%. The numbers are not too bad.

Now, as we are nearing an end, the next step of the process will be to quantizes the current information we gathered for this article, make a portfolio for ourselves and match the current investments to it, based on the last Portfolio Update we have the latest information of our allocation.

Sorry to end the article so soon, I hope you enjoy it (even if most parts are boring), but I want to draw some conclusions of the asset allocations and not rush it here :D.

Good luck everyone and see you soon in the next article!

Disclaimer: I am not a financial consultant! All the information you find here are my decision, I have taken at that moment, on my own analysis. I am open to any type of discussion about money. If you want to replicate my portfolio take into consideration that it is your money and you can have losses.

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