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Why We Rebalance Portfolios in a Distressed Market


Market Vizion with Wayne Wagner Jr., ChFC

Alright class, it's time for a math lesson in rebalancing. I've had some questions about why we rebalance at these kinds of disruptive times in the market. I want to go through a very simple example of why we rebalance when the market gets disrupted. 

So if we simplify your portfolio down to two positions, you own Stock A and Stock B, both of them are at $10 a share and you own 10 shares of each. So at the end of the day, your entire portfolio is $200 today, and the market gets disrupted. 

At the point we look at rebalancing, the Stock A is down 5%, Stock B is down 40%, which means a Stock A is trading at $9.50 and Stock B is trading at $6. Well, when we rebalance, rebalance looks at the entirety of the portfolio divided by the number of stocks to get back to the proper balance in each one. 

In this situation that would mean selling $17.50 or 1.85 shares of Stock A and buying $17.50 of Stock B or 2.92 shares. Now that can seem innocuous, like it doesn't really impact anything, but this is what the math does on the back end.

When Distressed Prices Rise

Assume at some point in the future, both of those stocks go back to $10 a share. You only own 8.15 shares of Stock A because you sold some and that's worth $81.50 instead of a $100, but you own 12.9 shares of Stock B. That part of the portfolio is now worth $129.20 cents. So the combination is $210.70 cents you made 5% return without the market going up. 

So you went from $10, the market came down, you rebalanced, went back to $10, and you made money simply by rebalancing.

We are doing this right now within client portfolios on a macro basis across the entire portfolio, across all of the equity positions. What we're also doing then is taking a look at questions like:

  • Is there cash on the sidelines? 

  • The goal is to acquire more shares of the most distressed priced assets, not the most distressed companies, but the most distressed priced assets. That's the objective of rebalancing.

This is kind of a little math lesson to walk through you through that. We're going to be doing more of this. If you have questions or your coworkers or friends or family members have questions about this kind of thing, please feel free to send this link to them.

We're Here to Help You Navigate This Crisis

Listen, if you are concerned, if you are fearful or if you are emotional during this season, we don't take that lightly. Please reach out to us. Please connect with us. You're never an inconvenience or an impediment to our day. We love to hear from you. Have a great day from all of us here at Visionary Wealth Management.