If I was keeping my porfolio indexed to the market, wouldn’t I be selling Blockbuster shares each month as Blockbuster lost market share? Why would I end up holding lots of Blockbuster?
I apologize, I was unclear; I’m recommending ‘buy and hold indexing’ where you correct imbalances by buying the stocks you have less of with new investment income, rather than correcting imbalances by selling stocks you have too much of to buy stocks you have too little of. This is a good way to invest for individual investors who have a constant influx of investment funds and who pay trading fees that are a large percentage of their order sizes.
If you have a large pool of capital that you begin with, or you want to actively manage money you’ve already invested, then you may want to actively correct imbalances. It’s helpful to work out the expected value of a rebalancing trade, and make sure that’s larger than the fees you pay (and you may decide to only rebalance once it gets above some larger threshold). Here, you do end up with mostly Netflix- but you bought a lot of Blockbuster when it was expensive, and sold it when it was cheap, whereas the projection investor who knew that Netflix was going to worth 30 times what Blockbuster would be would have put 3% of their money into Blockbuster and 97% into Netflix, and so the majority of their current shares would come from when they put a lot of money into cheap Netflix stock. I haven’t heard about that sort of projection investing playing well with rebalancing- and if I remember correctly, it was designed for allocating a large pool which you have complete access to, rather than doing dollar cost averaging with a constant income stream.
If I was keeping my porfolio indexed to the market, wouldn’t I be selling Blockbuster shares each month as Blockbuster lost market share? Why would I end up holding lots of Blockbuster?
I apologize, I was unclear; I’m recommending ‘buy and hold indexing’ where you correct imbalances by buying the stocks you have less of with new investment income, rather than correcting imbalances by selling stocks you have too much of to buy stocks you have too little of. This is a good way to invest for individual investors who have a constant influx of investment funds and who pay trading fees that are a large percentage of their order sizes.
If you have a large pool of capital that you begin with, or you want to actively manage money you’ve already invested, then you may want to actively correct imbalances. It’s helpful to work out the expected value of a rebalancing trade, and make sure that’s larger than the fees you pay (and you may decide to only rebalance once it gets above some larger threshold). Here, you do end up with mostly Netflix- but you bought a lot of Blockbuster when it was expensive, and sold it when it was cheap, whereas the projection investor who knew that Netflix was going to worth 30 times what Blockbuster would be would have put 3% of their money into Blockbuster and 97% into Netflix, and so the majority of their current shares would come from when they put a lot of money into cheap Netflix stock. I haven’t heard about that sort of projection investing playing well with rebalancing- and if I remember correctly, it was designed for allocating a large pool which you have complete access to, rather than doing dollar cost averaging with a constant income stream.