by Jim Stevens (JimStevens@aol.com)
Burlington, VT (Dec. 28, 1998) -- For anyone out there coming up on the time to rebalance or start a new portfolio, today I'll run through a hypothetical year-end switch to show how a real Fool might make the actual trades in his or her real account. For this example let's say you were lucky enough to buy into the Keystone 10-stock model last January (with $10,000) and you are now going to update to the latest stocks and rebalance your holdings evenly across the new positions. This is only hypothetical, so I'm going to use the latest rankings posted on the Fool for the update -- 12/18/1998.
First, you'll need to look at an updated list of your current holdings to find out how much your $10,000 has grown. It's best to do this online in your actual account at your broker's website for the most up-to-date information. I'm going to go through this example as if you were doing this one step right after another while the markets were open. If you do parts of it on the weekend or while the markets are closed, you'd need to make additional adjustments for current prices right before trading. If you hadn't added any money during the year your Keystone 10 port would be something like this:
Shrs Value Fifth Third Bancorp FITB 18 $1,292.62 Coca-Cola Enterprises CCE 28 $1,025.50 Gap GPS 42 $2,273.25 AirTouch Communic. ATI 24 $1,629.00 Computer Associates CA 18 $742.50 Compaq Computer CPQ 35 $1,509.38 Dell Computer DELL 47 $3,504.44 Pfizer PFE 13 $1,551.88 Wells Fargo WFC 25 $943.75 Safeway SWY 31 $1,834.81 Cash $85.00 Total $16,392.12
All right! Not a bad year. Now, if you had added any new money to the account in anticipation of investing it in the new year, it would show up as an additional cash balance. You'd also see any dividends that the stocks had paid through out 1998 in that balance as well. For this example we'll just roll over the original investment. (If you are adding to your investment, you'd need to account for any increase in the amount you are investing before moving to the next step.)
Next you need to get the list of securities for the Keystone 10 (or your chosen stocks) for the new year, with a current price quote. This is something you may want to print out to do the math on. We'll assume that list is the Keystone Current Rankings at the Friday 12/25/98 closing prices. Next, you check to see if any of the stocks you plan on buying are in you current portfolio. In this case we have one, Dell Computer.
Now you know that you'll be making 10 sell trades and 9 buy trades (you'll sell part of your Dell position and not have to make the corresponding buy), so you multiply 19 by the commission you pay per trade. If it were $10 that would mean that $190 would go toward commissions, so you subtract that from the total value of the portfolio and that leaves you with $16,202.12.
From here with list in hand you divide the total by 10 (the number of companies you plan on owning for the next year) to find out the nominal value you'll be aiming for each position. In this case that amount is $1,620.21. Getting down to the wire, you divide -- one by one -- the $1620.21 by the current ask prices to come up with the number of shares you will place orders to buy. Below is the new Keystone 10 list with share prices and the share amounts calculated, rounded down to whole numbers.
Price Shares America Online (NYSE: AOL) 136 5/8 11 EMC Corp. (NYSE: EMC) 81 5/8 19 Intel Corp. (Nasdaq: INTC) 125 12 Oracle Corp. (Nasdaq: ORCL) 41 3/16 39 Cisco Systems (Nasdaq: CSCO) 94 3/16 17 Dell Computer (Nasdaq: DELL) 74 9/16 21 Int'l Business Mach. (NYSE: IBM) 187 15/16 8 Microsoft Corp. (Nasdaq: MSFT) 141 3/4 11 Philip Morris (NYSE: MO) 54 15/16 29 Lilly (Eli) (NYSE: LLY) 85 1/4 19
Okay, from here all you have left is to pull the trigger on the trades. First enter sell orders on the old stocks, selling the total positions of all the stocks except the ones you need to keep -- Dell, in this example. (You need to sell all but 21 shares.) People will use various types of orders or different times of day or week, it's completely up to you. After you've sold out of last year's stocks, you then place orders for the new portfolio's companies in the amounts you determined in the calculations explained above.
If you are shooting to be right on the money, as you probably will be in an IRA, do a check on the amount of cash you have left and the current prices before placing the last trade or two. This way you'll avoid overshooting (or undershooting) your account value. If your account is a margin-enabled taxable one, then you don't have to worry that much about this. Any overrun would simply show up as a small margin balance.
And that's it! If you're an annual trader, just sit back and enjoy for the next 366 days. Have a great week, and PLEASE DON'T DRINK & DRIVE!