Smart Rebalancing Method 2.0

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Smart Rebalancing Method

Smart Rebalancing Method

In an up year, transfer 30% (or 50%) of that year's gains from the 2x leveraged fund into a money market fund or short-term bonds. Unless you are more conservative than the approach taught here, using 30% for smart rebalancing should produce relatively better long-term performance.

In a down year, move an amount equal to 2% of total investment assets (the base fund plus the leveraged fund plus the money market fund or short-term bill fund) from the money market fund or short-term bill fund into the 2x leveraged fund.

If your initial asset allocation is 10 million, then 2% is 200,000. Whether your assets later become 5 million or 30 million, smart rebalancing still uses 200,000.

Definition of an up year: the price of QQQ (00662) on December 31, 2024 is higher than its price on January 1, 2024. On the first trading day of 2025, transfer 30% (or 50%) of the 2024 appreciation in 00670L into 00865B. If you transfer 30%, volatility will gradually increase. If you transfer 50%, volatility will remain unchanged.

Watch "Smart Rebalancing" on YouTube

Definition of a down year: the price of QQQ (00662) on December 31, 2024 is lower than its price on January 1, 2024. Sell 200,000 of 00865B and buy 200,000 of 00670L.

How to calculate the current-year profit of a leveraged fund in general: leveraged fund assets at year-end minus leveraged fund assets at the beginning of the year, then minus any new money invested into the leveraged fund during the year.

Watch "Smart Rebalancing" on YouTube

https://youtu.be/TCqCdZ5H7a8?si=18aKnO_Hxyklo0e-

Another smart rebalancing calculation: in the first year, transfer 1/3 of this year's leveraged fund profit (the 00670L profit can be found in the brokerage app) into 00865B (money market fund).

For example, if you earn one million, sell 300,000 and transfer it into 00865B (money market fund). Remember that the remaining profit for this year is 700,000; this needs to be recorded. At the end of the following year, if the brokerage app or website shows that the leveraged fund has earned 2.2 million, subtract the 700,000 profit from the previous year. That means this year's profit is 1.5 million, so the amount to transfer is 500,000.

Transfer that 500,000 into 00865B. Remember to deduct 500,000 from 2.2 million, leaving retained profit of 1.7 million. Record it, because it will be used the next year.

Repeat this every year from then on.

Smart rebalancing can be done even without adding new money.

For example, suppose you start with one million:

400,000 QQQ

300,000 QLD

300,000 money market fund

After the first year, with no additional contributions, the market rises and your assets become:

310,000 money market fund

450,000 QQQ

360,000 QLD

310,000 money market fund

Rebalance according to the smart rebalancing method.

QLD earned 60,000. Thirty percent of 60,000 is 20,000, so sell 20,000 of QLD, leaving 340,000 in QLD. Then use the 20,000 to buy the money market fund, bringing the money market fund to 330,000.

After rebalancing, the assets become:

450,000 QQQ

340,000 QLD

330,000 money market fund

This is 30% smart rebalancing in an up year.

In the second year, the market falls. By year-end, the assets have declined to:

405,000 QQQ

288,000 QLD

340,000 money market fund

At year-end, smart rebalancing uses the initial one million multiplied by 2%, which equals 20,000.

Sell 20,000 from the money market fund, leaving 320,000. Then transfer the 20,000 into QLD, bringing QLD to 308,000. The new asset allocation becomes:

405,000 QQQ

308,000 QLD

320,000 money market fund