KCLau's Money Tips Forum

[jutamind]

Assuming that we have created a portfolio of different classes of unit trust with different asset allocation % for long term investing. With the recent market downturn, the asset allocation % would have changed from the initial percentage. Some funds could lose >15%....

Question:

1. Should we rebalance the portfolio, i.e. buy more of the unit trust which has more losses?
2. Or should we set a cut loss % for each of the fund in the portfolio and execute the cut loss strategy whenever the fund hits the loss limit?
3. Or should we cut loss for the losers and hold cash until the loss stabilizes/until rebalance time?

Appreciate your opinion...

[KCLau]

Hi Jutamind,

When you opt to invest in unit trust, I would expect that you need a professional team to manage your money so that you won't need to actively monitor your investment. That's the main difference of buying unit trust funds vs. directly invest in the stock market.

About your questions:

1. Should we rebalance the portfolio, i.e. buy more of the unit trust which has more losses?

Rebalance should be done. Rebalancing is more like selling some winning funds to lock the gain, or switch a portion of the winning fund to the losing one, just to make the portfolio balance. In your case, rebalancing should be done because a loss of 15% should have triggered a rebalancing act.

2. Or should we set a cut loss % for each of the fund in the portfolio and execute the cut loss strategy whenever the fund hits the loss limit?

Since unit trust fund is a very diversified investment, I think cut-loss strategy doesn't apply here. Unless the fund managers really sucks! If the fund is making a loss due to market sentiment, it is just a great opportunity to invest more to average down or rebalance the portfolio. Unit trust funds unlike some company stocks, it won't result in losing all your investment capital.

3. Or should we cut loss for the losers and hold cash until the loss stabilizes/until rebalance time?

This is about the timing issue. We will never get the timing perfect every time. Constantly rebalance when there is significant win/lose, or whenever your porfolio is unbalance of certain percentage (say 10%) is the most passive strategy that works every time. If you want to invest in unit trust, I suggest that you forget about "timing" issue. Don't predict the market - will it goes up? or further down? If you are going to worry about that, there is no point to invest in unit trust at all.

Just my opinion.
Welcome to the forum!

[Guest]

ok in summary, your opinion is to hold to to the portfolio's asset allocation and rebalance whenever there's a significant change to the allocation %.

in terms of rebalancing, is it a better idea to put in more new cash to the funds with lower allocation % to bring it to the original allocation % and less new cash to the performing funds, rather than switching especially between fund houses since this will incur cost?

[KCLau]

ok in summary, your opinion is to hold to to the portfolio's asset allocation and rebalance whenever there's a significant change to the allocation %.

in terms of rebalancing, is it a better idea to put in more new cash to the funds with lower allocation % to bring it to the original allocation % and less new cash to the performing funds, rather than switching especially between fund houses since this will incur cost?

When you have extra saving ( from your cash flow ), then it is great to invest those money in order to rebalance your portfolio. This resulted in more capital injected. Please make sure your original intention is to invest the extra money also. If it is for other short term purposes, it is not advisable to do that.

As you say, switching between different fund houses require more cost because of the service charges. If taking the service charges into consideration (5.5% currently), it is not advisable to switch at all. However, you can switch into the funds from the same fund house.

[jutamind]

the issue is when we are constructing our portfolio, the chances are we will end up with equity and bond funds from at least a few fund managers. so let's consider this scenario:

we have Equity Fund A from fund manager A and Bond Fund B from fund manager B in your portfolio. assuming that you have to switch Equity Fund A due to rebalancing purpose, what is advisable:

1. switch Equity Fund A to Bond Fund A from the same fund manager, even though Bond Fund A from fund manager A is not a part of our original portfolio?
2. sell of Equity Fund A from fund manager A and buy into Bond Fund B from fund manager B?

also, please consider another scenario here (having to switch from bond to equity):

1. switch Bond Fund B from fund manager B to some other equity fund from the same manager?
2. sell of Bond Fund B and buy Equity Fund A from fund manager A?

what is your recommendations in both scenario?

[KCLau]

It is better to keep them in the same fund houses. In your scenario, Equity fund A should be switched to Bond fund A from the same manager A. The reason is to avoid the double service charge you need to pay. 5.5% x 2 = 11%. That's a lot of loading there.

When no load funds are introduced in the future, we won't have this kind of headache - switching freely from whichever fund house to the others.