How To Rebalance Your Accounts

Overview

Tactical portfolios adapt their asset allocation to the markets to take advantage of profitable market opportunities, and to avoid deep drawdowns. The asset allocation at any given time is determined by an algorithm, which is a set of pre-defined rules coded in software. Every time the portfolio's algorithm calculates a new target allocation for the portfolio, you need to adjust the holdings in your accounts to match this allocation. This process is called rebalancing.

TuringTrader.com: accounts on the dashboard

Knowing When to Rebalance

Our portfolios have a regular rebalancing schedule. Some portfolios only rebalance monthly, some weekly, and others daily. TuringTrader.com can send you email notifications when it is time to rebalance your portfolio. Also, your dashboard will indicate which portfolios require your attention.

When to Rebalance

At TuringTrader.com, we understand that life is busy. Therefore, all of our portfolios rebalance outside of regular market hours. The timing looks roughly like this (see more details here):

  • 4 pm (New York, USA): U.S. stock exchanges close
  • 9 pm (New York, USA): New target allocations available
  • Time to prepare rebalancing
  • 9:30 am (New York, USA): Rebalancing orders fill

As you can see, you have a wide window to perform the necessary steps, and there is no rush to be at your desk at a specific time of the day.

TuringTrader.com: account information

Rebalancing steps

Preparations

Before starting the rebalancing procedure, it is a good idea to double-check some information. In particular:

  • The account status timestamp gives you the date and time we last updated this page. For convenience, the time is given in your local time zone. Unless it's the weekend, the last update should be just a few hours old. If it is older than that, the site might not have updated, yet.
  • The last scheduled rebalancing timestamp shows you when this portfolio last adjusted its holdings. This date should be either today or yesterday, depending on the time of the day. If it is older than that, there is likely nothing to do for this portfolio today.
  • The approximated account value should match the net liquidation value of your brokerage account. We are trying our best to reflect the market's ups and downs in this number. However, you will still need to adjust it once in a while. You can do so after clicking the little pencil icon.

TuringTrader.com: account information

The asset allocation table shows the target allocation for your account. It lists the symbols, the percentage of the total capital allocated to each symbol, and calculates the number of shares to hold. If the number of shares displayed in the table is larger than the number of shares you currently hold, you need to place a buy order. Otherwise, you need to sell some shares. The order size is the difference between the target shares, and your current holdings.

Placing Your Orders

Having completed the preparations, you are now ready to place your orders. Doing so is also a multi-step process:

  • liquidate any assets held that are not on your list
  • place the orders calculated above

First, we recommend comparing your list of orders with the assets in your account. Liquidate any holdings in your account that are not listed in the table with the target allocation. This step is typically only required for portfolios of individual stocks, but it can't hurt to verify.

Next, enter your orders one by one. Unless otherwise noted, TuringTrader.com uses market orders, which are expected to fill at the next open. Make sure to double-check your orders for correctness.

We recommend not being too literal when placing your orders to avoid excessive commissions. Many brokerages charge a minimum fee, e.g., $1, per trade. Therefore, the change you are making to your portfolio allocation should be meaningful enough to justify that $1 in commissions. If you assume that you might earn 1% on a short-term trade, this profit must be significantly larger than the commission paid. As a rule of thumb, you should probably ignore orders that reallocate less than $500 of capital.

Some account types do not allow overlapping trades, with sell orders for one instrument submitted simultaneously with buy orders for another. This is why we recommend using margin accounts for trading, even though our portfolios don't use margin. If you cannot place overlapping orders, we recommend placing the sell orders while the markets are closed and the buy orders right after the markets open. Trading a few minutes after the markets open will typically not make a noticeable difference. However, the later you put in these orders, the larger the deviation between your actual results and our backtested results may become.

TuringTrader.com: finish rebalancing

Finish Rebalancing

After you placed your orders for this account, click the button labelled Finish Rebalancing. This marks your account holdings as current. On the dashboard, the action button for this account will now read Review instead of Rebalance. Also, this turns off the rebalancing notifications until the next time the asset allocation changes.

Checking the Fills

It makes sense to check your order fills at your earliest convenience. Most of the time, things should be just fine. However, occasionally, an asset's price went up significantly since we calculated the order size. In this case, your account's cash balance will be negative. Don't let it sit like that until the next rebalance. Instead, go and sell a few shares to make up for the price increase until your account's cash balance is positive.

If you follow these rules, your results from actual trading should closely track our backtested results. If you are interested in the details, we recommend reading our article comparing live trading with backtests.

But successful investing requires more than just following the routine of placing orders. It is essential to make some room in your life to keep the rebalancing schedule. It is vital to stay the course, even when portfolio performance falls short of expectations. This is only possible if you choose a portfolio that fits your objective.

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