Let's assume you decided to invest 100% of your net worth into 10 different stocks/commodities 10% in each. After some time some investments have gained and some have lost. Let's assume you bought bitcoins, for 10% of your net worth, which are up ~1000%. So now you have ~50% of your net worth in bitcoins and ~5% in each of the 9 other stocks/commodities.

What strategy do you guys use? Trade back until 10% for all? Keep the original 10% everywhere? Lower Bitcoin to somewhere between 10% and 50%?

How often are you guys doing this? Every year? Every month? After some specific ratio error?

Number are just made up.

The general advice (if you want to treat your investments blindly) is to rebalance every quarter or year, to keep the same proportions as when you started, according to your desired risk profile.

For example, 10% of your net worth in ultra volatile assets might make sense. Whereas 50% of your net worth in bitcoin is as volatile as monkey-dart-picking a sports team for half your worth. You're gonna have a bad time.

If you don't have alpha (most people), rebalancing according to desire risk profile is a pretty sensible thing to do.

The more involved idea is to hold things according to your thesis. Bought Bitcoins on a plausible thesis that they'd take over world finance, for a $10T market cap? You might want to let that thesis play out. If your thesis was "they'll go up a bunch, but who knows how much", you might want to sell.

My strategy is basically to minimize pain on a particular time frame. "It'd hurt badly if I lost a substantial chunk of this" vs "it'd hurt badly if I missed out on seeing my thesis realized" settles somewhere around 10-20% Bitcoin, for me.

Another metric I use is: "how likely is it to lose 50% before it gains 100%"? I found that a surprisingly good metric on whether to rebalance very volatile assets or not. I rebalance if the answer if "very likely". Bitcoin at $250 was "not very likely" (as I posted in the Bitcoin thread), hence it was a buy/hold. Bitcoin at $700 is....?

I would rebalance twice yearly back to your original asset allocation.

I rebalance twice a year unless there's a big move in one particular asset in which case I might rebalance then too.

Are there any good academic studies on rebalancing? My guess is it would be -EV since to some degree it's self selecting for the lowest return asset.

Yeah there are, I will look it up later if I am bored.

Compared to your highest returning asset? Obviously. Any portfolio that doesn't contain a single asset (or magically multiple assets with identical EV) suffers from this issue, but its entirely irrelevant.

I'd be interested to read these as well.

Does this hold even if you have assets that can lose 50% or gain 100% in a week? For example Bitcoin went from $13 to $260 in 3months and then to $1300 in the same year. Would you still rebalance every 6months?

I assume the answer to your question is if I believe p(lose 50% before it gains 100%")>0.67?

Losing 50% or gaining 100% are not the only outcomes though. How likely is it to lose 101% before it gains 1001%? 100% right?

My own view used to be "Is it +EV? How much is the upside, how much do I need?". Not sure if that is good either though.

Currency speculation is not investing. Bitcoin does not have a positive expected value from holding it.

But if I made the (extremely rash and inadvisable) decision to hold 5% of my net worth in such a highly volatile, ridiculously lol bad currency, I would rebalance back to that frequently.

Here is a wealth of information on rebalancing your investment portfolio back to your original asset allocation.

http://monevator.com/series/how-to-r...our-portfolio/

I did find some interesting parts in there, for example it seems there are points when rebalancing once every 2 years might be better than once every one year or more frequently.

Personally I passively rebalance every time I add money to my holdings, which is about twice yearly.

Anybody who holds something like a vanguard target date fund or vanguard lifestrategy as a one holding solution for all sectors has rebalancing done for them automatically anyway.

If you are really serious about rebalancing I would choose a measuring stick other than the USD, or any fiat currency. Best would be a basket of goods, but then you may well run into some circular issues.

A cool thing to see is the difference in say, a LT chart of the SnP, when priced in: USD, ounces of gold, barrels of oil, etc.

Also, Kevin O'Leary articulates rebalancing really well. Check out some of his YouTube videos if you want to here what he has to say (they are usually like 5 - 20 minutes, I really enjoyed them).

Thanks! But link seems to be down atm.

Does it matter which fiat currency you choose? Does it matter if you choose a CPI instead of a fiat currency? The ratios should be the same anyway right?

Nobody knows its expected value. So far it is up ~100M% vs fiat currencies in ~7years. But that is a totally different debate better suited to have in the Bitcoin thread.

How frequently and always back to 5%? Let's say you invested at $1 and now it is $600. Would you sell at $1.2, $1.44 etc all the way up?

Yes of course. I personally find it a very useful rule of thumb/reality check on if my upside possibility is really worth the downside risk. You can tie yourself into all kinds of knots trying to estimate EV and do "yes, but" all day.

"Is it very likely to go up 100% before it loses 50%" keeps it simple. If the answer isn't "it's very likely", and it's meaningful part of your portfolio, you're probably holding too much of that volatile instrument.

Currency speculation is not investing. Let us just make that clear for any beginners who read this forum. There is nothing generating money underneath, like a company making profits or a loan charging interest. It is just outright gambling or hedging of net worth, fact. The expected value is clearly negative (cost of trading, cost of holding, risk of theft). You cannot second guess currency market movements.

How often you rebalance is personal preference, if you do at all. If you choose to hold a fixed % of your net worth in such a highly volatile negative asset then only you can decide if you want to rebalance yourself and by how much. Cost of trading and tax issues are certainly things you should consider.

http://www.investopedia.com/terms/i/investment.asp
But that is a totally different topic. Let's just leave it.

I can be many other things. Some people view it as something fun, some people want to mess with governments, some people just want to get rich. But that is OT.

I do, future will tell how well I succeeded.

That is a good point, which seems to indicate that you should rebalance less frequent.

Assume 30% capital gains taxes. Would it be a good strategy to rebalance when 10% has become 20%? Or at 15%? It seems so arbitrarily, I just want to have a better feel for how you other guys act.

Bitcoin (or any currency) cannot do either of these. It is not generating an income and it is participating in a zero sum game regarding "appreciation". I have no problems with currency speculation for fun (gambling is fun) but it is dangerous and wrong to regard it as an investment, especially when beginner investors read these forums. It is common for gamblers to think they can beat fx markets (they cant).

What you have to do here is max your knowledge of your own countries tax laws regarding capital gains etc. I only know about the UK laws.

Personally I look first to use tax wrappers (so no tax is payable regardless of profits). Can hold quite a lot of different things inside them here, and also build up a huge tax free investment allowance. When talking about capital gains tax that is due on an asset held outside a tax wrapper I look to either carry over losses to offset gains in future tax years or create liabilities in a tax year that do not exceed the personal allowance. You should certainly make the best use of your allowance that you can in any given year. Even without knowing all the tricks I think its possible to avoid paying capital gains tax unless you have extremely large unwrapped investments.

It clearly has appreciate in value over the last 7 years.

http://www.investopedia.com/terms/a/appreciation.asp
I some countries yes. In my country(Sweden) most people keep their stocks in something different where one does not pay capital gains tax but instead pay a fixed percentage every year no matter the gains which is usually the nominal interest rate times the capital gains tax. So I don't really have this option unless some of my other currencies happens to lose a lot of value.

Yes it would matter what fiat currency you use. What I was suggesting is not to use fiat currency at all.

Sure you can argue that BTC, gold, and USD are speculations. Are zero sum. Are ponzi schemes. Are based on the greater fool. They do not generate cash flow.

But they certainly can generate return. I think you are being a bit too dogmatic to say BTC is not an investment.

FWIW, BTC and gold are bets against the dollar ponzi. They are bets that benefit from monetary entropy, disorder, chaos. Seems to fit the times to me.

It has got stronger against other currencys. There is no expected value going forward except the negative costs of trading. If it goes up you have got lucky if it goes down you have got unlucky but there is no way of predicting it. If you ran it a million times the net change would be 0 - costs of trading. There is no underlying growth or profits.

It is an absolutely lol dumb thing to consider as an "investment".

I agree they are hedges against WW3, Global collapse, Fear, whatever you want to call it. They are not hedges with a positive expected value long term.

Care to elaborate? Imo no matter which currency or asset you choose, if you have some assets like
1 GOOG
1 TSLA
1 BTC
1 USD

and decide to represent their value in USD, oz of gold or barrels of oil, the ratio between will still be the same?

i think this assumes that btc is more or less identical to other currencies in all meaningful ways - i do not think that bitcoin supporters subscribe to this view. maybe you are making a distinction between investing and trading since btc is not a cash flow producing asset? either way it seems pretty easy to come up with a thesis that holding btc is +ev (or -ev) - but i think this is clearly something for the bitcoin thread.

as for the OP: another consideration i dont think i saw mentioned was that rebalancing reduces your exposure to positive momentum effects and increases it to negative momentum effects, to the degree those exist in each asset class you are holding. i imagine the tax considerations outweigh the momentum considerations, but its something to keep in mind.

If you look on the bitcoin thread, you will see it was started when bitcoin was about $1. To me this was this biggest investment blunder of my life. I made only about 15K on bitcoin. I had about 4 chances to accumulate bitcoin but they all went wrong.

A currency value is basically (users/quantity)*k. Since the quantity of bitcoin is fixed, if the users go up, the value will rise. If bitcoin users double, the price of bitcoin should double! Furthermore, about 1% of bitcoin is lost per year. Thus the quantity goes down.

Furthermore, with the halving, a large part of the traded bitcoin will disappear. Miners need to pay for equipment and electricity bills. The current supply will dry up.

Bitcoin, imho is about 90% chance to double or more in 2 years. 10% go to zero.

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Vanguard Total World Stock ETF (VT) 100% might be best.

As for stocks you probably can get proper diversification with 10 stocks. I would choose 1 stock over the dollar if I had to. If I did it would have to have low or no debt, a large moat, and some growth. Holding 1 mutual fund like vanguard total stock market, might be all you need.

I don't like people that own numerous assets because historically they have done well. For example European bonds with zero interest rates, has a long-term negative real that is negative. This is not only 1-2% negative, but more like 3-5%.

1. You got Dragi and EU that are losing it, they are using scare tactics to keep responsible members in. Caving to demands of debtors.
2. You got long terms.
3. You got a money supply that is increasing 5% a year (better than USA or UK btw).

You are right for one currency across all your assets if all you care about are your ratios, so long as you are consistent (haha, and so long as the value of currency is non zero...).

I was speaking more about getting a picture of your portfolio and considering returns. The same portfolio could have negative returns in one currency and positive returns in another (though the ratios of the assets would remain the same).

If you start with a ****ty unit of measure, and stick with that ****ty unit of measure your ratios will remain the same. So you will have been consistent. But this does not mean you are right.

Your assumption is that you have the correct allocation at t = 0, and therefore, want to maintain that relationship as time unfolds by rebalancing.

But, to take the logic one level deeper, why is your allocation at t = 0 assumed to be correct? It is because you have faith in your perception of risk and reward in the portfolio.

These things, risk and reward, are what drive your asset allocation in the first place.

Do you see how the logic has come full circle? Being consistent is great, but if you do it from a place of weakness, what does that get you?

It is sort of like the old saying that you should not build castles of stone on foundations of sand.