What do the Rebalance options mean in Portfolio Analytics?
NGEN Markets Admin
Last Update 2 years ago
When you run portfolio analytics, we run a backtest of the latest weights of your portfolio.
This means that we start a point in time in the past (the portfolio backtest start date), and then move forward in time assuming that you were holding those position back then.
As we move forward in time, we have three options when calculating returns:
1. Rescale weights: This option gives you two choices (Monthly rescale and Annual rescale). In both cases, we pull back the portfolio weights to the original weights entered by you at the specified interval.
Lets take an example where you started a portfolio made up of two funds with 50% weights each. After a month or so, both funds have now moved (or changed in value), most likely not in the exact same way. If you now look at the value of each of the two fund investments and check how much they make up of the portfolio, it will most certainly not be 50-50 (as you intended). It could be 49.5%-50.5% or 51%-49% etc. Now, you must rescale the portfolio back to 50-50 if you want to continue to hold your original, intended portfolio weights of 50-50. This rescaling process can be done at regular intervals. We give you two options of Monthly and Annual rescale.
2. Fixed weights: This is a theoretical option where we assume that your portfolio weights remain constant throughout the simualtion. Although in reality it wont be possible to do this, unless you rescale your portfolio every single day, which is not practical or cost-efficient. However, this theoretical analysis has a distinct advantage. This lets you analyse how your exact portfolio (as it has been entered by you) performed during different markets in the past, and not the portfolio that has been affected by market movements. As a result, this is our reccommended approach and hence loads by default when you run portfolio analytics.
3. Leave Invested: This has been provided as an option for users for comparitive purposes. We do not reccommend this fr seriously analysing portfolios. This means you start the portfolio as your intended weights and just let it run. Your 50-50 allocation could have become 70-30 after two years due to market movements, but you let it be and never rescale back to 50-50. This simulation will have very different results depending on your start date - since it will suffer from the effects of path dependency.