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With the launch of ITF Portfolios, it’s time to talk about portfolio and wealth management, what rebalancing is, some common strategies, and how it can help you as an investor.
Portfolio rebalancing is the process of realigning the weightings of assets in a portfolio so that they maintain your target allocation splits. This has been a common tool in traditional markets for decades.
Allocation percentages shift whenever the market moves, so it’s important to rebalance at designed intervals of time or certain thresholds to maintain your target allocation strategy. Buying and selling different assets helps you return to that target.
By doing so, you can gain more control over your long-term risk levels. You can protect yourself against sudden, drastic dips in price on individual assets, you can hedge against losses, and potentially improve your portfolio’s overall performance.
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Balancing and rebalancing revolves around portfolio diversification and asset class exposure. In short, this involves selling a percentage of your higher-performing assets to buy into an under-performing asset, with the expectation that it will later increase in value.
You don’t want to be overexposed to any high-risk assets, and you also do not want to be underexposed to assets with the potential to experience strong gains.
Well-performing assets can be used to redistribute gains to other assets, potentially improving your portfolio’s overall performance. In this way, you can lock in some profits and also protect or improve the performance of your investments in other asset classes.
There are a number of advantages to portfolio rebalancing, especially for long-term investors with more diversified portfolios.
The list below includes some of the most noteworthy cases for a constant mixing of assets.
What is more, portfolio returns are largely driven by strategic asset allocation (studies suggest over 90%), as well as general market movement and active portfolio management. A constant mixing can be used to address all of these areas, and keep your portfolio aligned with your own individual strategy.
Note: A “buy and hold” strategy can outperform a rebalancing strategy.
There are a lot of factors to this. Portfolio performance will depend on your allocation splits, your rebalancing approach or designated cycles, and especially the market conditions.
The condition of the market has great influence on how much success you will have when rebalancing. In a market characterized by generally rising prices (trending), “buy and hold” will likely outperform any constant mix approaches.
Conversely, in an oscillating market, a constant mixing can potentially win over simply buying and holding. This could also be the case in a sideways market.
In a declining market, you likely won’t see any gains, but you can use a constant mix for some loss protection.
The problem is, it’s very difficult to consistently and accurately predict the markets. If you find yourself rebalancing in a trending market, you may likely underperform.
There’s no method to guarantee the market won’t change direction as soon as you designate your rebalancing cycle. This is where it comes down to your individual ability as a trader, technical analysis, and market fundamentals.
The process is very much like what investment managers do with mutual funds. A traditional fund may include for example, 50% stocks - 50% bonds depending on how conservative or risky an investor wants to be.
If you want to be more conservative, you might set your split to 75% bonds - 25% stocks. A similar approach can be applied to a portfolio of crypto assets.
It’s really just portfolio management in general you’re looking at here, but let’s zoom in on crypto assets just for example.
The first step involves being able to monitor your assets, track their value, and decide on consistent intervals to rebalance. These intervals should be based on your specific strategy, goals, and risk-level.
To do this with crypto, you need to track your coins and tokens in terms of value, not quantity or market cap. When you know exactly how much money you have into each individual coin or token, you can then decide percent allocations based on these real values.
That’s really all you need to do to get started. Your next step is deciding which rebalancing strategy and cycle will work best for your goals and expectations. Let’s look at the two most common strategies to do this.
With this rebalancing strategy, you decide specific points in time to return your portfolio to your desired allocations. This time may be on a daily, weekly, monthly, or annual basis.
It may even be hourly depending on how much time you have available to monitor, buy, sell, and trade assets. But this isn’t for your average investor; this is more for day traders who make their living on the markets.
Keep in mind, the crypto markets move much quicker than traditional markets, so some may be prefer higher frequency cycles. This is largely open to debate, however, and will depend more on your individual ability and knowledge as a trader - not just some automated tool that does the rebalancing for you.
The image above illustrates periodic rebalancing, showing how the rebalancing occurs at specific times. Periodic rebalancing is one of the simplest strategies to execute.
You can see here that after 24 hours (the given period of time) the allocations are no longer equal, so you now need to rebalance to achieve your optimal percentages in each category again.
A threshold rebalancing cycle involves buying and selling assets according to a desired percent allocation for each individual asset.
As you can see in the example above, any time there is a deviation of +/- 10%, a rebalance is triggered to close the gap between the assets and bring them back in line with your strategy.
Applying this strategy to crypto assets, whenever the percent allocation of individual coins drifts apart, you would then rebalance to return to your desired allocation. You don’t want that split to deviate too much, because with more deviation comes more change to your portfolio’s risk level.
If you have 25% of your portfolio in bitcoin, and a 25% split for your other assets, you want to keep your 25% split as near your target allocation as possible. This is where threshold rebalancing comes in.
The answer to this question is dependent on answers to a number of variables including: your risk tolerance, time horizon, liquidity needs, goals, and more. Digital assets exist in a volatile and high-risk market, and their value can change frequently.
This means no matter how experienced or affluent you are as an investor, you should always seek independent financial advice in the context of your own unique circumstances.
That said, let’s zoom back into crypto allocations in a portfolio.
How you divide your percentages between various coins and tokens will depend on your total allocation in crypto, how conservative or risky you are, and your goals and expectations for your overall portfolio’s performance.
Based on how you classify your holdings and your individual investment strategy, there are various ways you can split your crypto portfolio. Let’s break down a few basic strategies for you now.
Other more advanced splits may include:
You also need a way to track your investments so you know when and what to rebalance.
There are numerous ways you can do this, such as using custom spreadsheets, or getting portfolio apps and software that monitor your assets and their performance. Some apps even do the rebalancing for you at designated intervals of time or based on gains and returns.
The important thing is that all of your holdings are easily viewable and organized into one place. Some important elements you want to record about your crypto assets may include:
Along this backdrop, the team here at ITF has been developing a tool for cross-exchange portfolio management and automated rebalancing.
ITF Portfolios is a tool to help you track and manage your portfolio of crypto assets. As development progresses, we will add more assets, tools, exchanges and features to help you manage your overall investment portfolio, including crypto assets.
You’ll be able to view and manage your allocations in different assets, pick and choose your own custom allocations, and even backtest your portfolio against historical data before executing your own strategy on the market.
It is our belief that a tool like this will add unique value to investors, even if they have only a small allocation of their overall portfolio in crypto assets.
We acknowledge that simply buying and holding can outperform automated rebalancing, so this tool is more about all-around wealth management.
If you have an asset allocation of 20% in crypto, it might make sense to keep it right around that allocation over a longer period of time. This is where automatic rebalancing can come into play, helping you stay at that 20% mark and providing you with a more “hands-off” investment.
Interested in learning more? Check out our our eBook on rebalancing, ‘Rebalancing a Cryptocurrency Portfolio: How to Intelligently Invest in a Highly Volatile Market’.
Inside, you’ll find extra insights and considerations to complement this post and further your reading on rebalancing a portfolio of crypto assets.
Read online or download the PDF here for easy access for when you’re offline.
The articles provided by IT Alpha d/b/a Intelligent Trading Foundation (“ITF”) are provided for informational purposes only. This post does not constitute investment advice, financial advice, or trading advice. ITF does not recommend that any specific cryptocurrency should be bought, sold, or held. Digital assets exist in a volatile and high-risk market, and their value can change frequently and without notice. ITF takes no liability for any decision(s) made or action(s) taken by any of our readers. Our articles are not meant to replace independent financial advice, and ITF strongly recommends any purchaser of digital assets, even if such user is experienced and affluent, seek independent financial advice in the content of their own unique circumstances.
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