The Daily Workshop Report
by Robert Sheard (TMF Sheard)

     Growth Screens
14.37%  Relative Strength  
  8.14%  YPEG Potential  
  6.08%  Low Price/Sales  
  5.75%  Unemotional Growth  
  3.76%  S&P 500 Index  
  3.57%  EPS Plus RS  
  2.88%  Investing for Growth  

     Value Screens
  5.97%  Dow Jones Ind Avg  
  5.05%  Dogs of the Dow  
  3.70%  Beating the S&P  
  2.92%  Dow Combo  
  2.61%  Unemotional Value  
  2.61%  Beating the Dow

In the growth screens we track, I work from an assumption that one updates and rebalances the entire portfolio for each new period. But just what does that entail and what's the difference between updating and reblancing?

Let's say your Unemotional Growth portfolio this month includes the following five stocks:

ENSCO Int'l

PeopleSoft

3Com

Oxford Health Plans

Mosinee Paper

When your monthly update rolls around, let's assume Oxford Health Plans and 3Com are no longer among the top five stocks in the rankings. If you were just going to "update" the portfolio, you'd sell OXHP and COMS, divide the proceeds in half and use them to buy the two new stocks, let's say Parametric Tech and Cisco Systems. That's a pretty simple process requiring four trades.

What that process doesn't do is guarantee that all five stocks you own now are evenly weighted. One or more of them might have increased dramatically while one or both of the stocks you've just sold might have dropped significantly, leaving less to invest in your new purchases.

To "rebalance" the portfolio, you need to recalculate what the average position should be worth to start the new month. Let's say your total portfolio at the end of the first month is $55,000. So at the beginning of month two, in order to be perfectly balanced, each position in a five-stock portfolio should be worth $11,000.

The procedure to accomplish this is a little more complicated and requires more trades. You still begin by selling the stocks no longer on the list (OXHP and COMS in our example). Then you check the three stocks you're carrying over (ESV, PSFT, and MOSI) to see what their values are in relation to that new $11,000 target. Then you'd either buy or sell more shares of those three stocks to bring them in line with that value.

Doing that should leave you with $22,000 left over with which to buy the two new stocks (PMTC and CSCO). You're still replacing two stocks, which requires four trades, but then you're also adjusting three other positions, for a total in this example of seven trades.

In most months, anywhere from zero to two stocks will require replacement, so a decent estimate just based on replacing stocks each month would be 25 trades a year. But I think it's important to rebalance the positions periodically so one doesn't get woefully out of balance with the others and put your entire portfolio at greater risk. If you do that every month, you might be looking at as many as 75 trades a year.

A happy medium may be more appropriate for most investors. You might update the stocks every month, but save the rebalancing for once a quarter, or whenever you feel a stock has gotten too big in relation to the others. As always, fit these guidelines to your personal situation.