You run a mutual fund. Your portfolio's performance is measured against the S&P 500. You're supposed to have about 2% yield. And you need to do a percent or three better than the S&P 500 each year, compounded, to warrant the fees you charge, which are much higher than those of an index fund.
If you were trying to be exactly equal to the S&P 500, you'd note that 14.7% of it, today, comprises telecom stocks. But you're bullish on telecom from the prices where they're generally trading today, so you want to be overweight that sector. So in your portfolio, maybe you hold 23.5% telecom stocks. If you were just marketweight, then you'd have 14.7% of your portfolio represented in that sector.
Marketweights usually apply to sectors, but sometimes you get enormous market cap single stocks, like Apple or Amazon or Google or Facebook, and you have to then take a position to be over-or-underweight those stocks...or just have them represent in your portfolio whatever they rep in whatever index against which your portfolio's performance is being measured. Easy.
Related or Semi-related Video
Finance: What does it mean to rebalance ...1 Views
finance a la shmoop what does it mean to rebalance an account alright people
here's your account pretty broad-based equity portfolio and pretty pie chart -
they're nice going there editor's 17% bank and insurance 14%
telecommunications 9% consumer comestibles 6% drugs legal ones 11%
chemicals in commodities 8% transport and whoa 35% tech well just five years
ago Tech was only 15 percent of your portfolio and it performs better than
double the returns of the rest of the market in that time period so Wow what
time is it need a high tech watch to answer no its rebalancing time why well
because you want to just compound at market rates and yes Tech has been
amazing and wonderful and loving but Tech can get crushed in bad times as
well and the huge 37% exposure to it is well keeping you up at night and it's
see it's gotten up 2% there since we started this video it's just too much [girl waking up in bed at night]
risk attributed to one relatively narrow area of the investing economy even [pie with a risk tag on it]
though it touches everything well you're thinking about making tech more
representative of a balanced broad S&P 500 index fund where in that fund it [S&P 500 document]
represents on only say 11 or 12 percent so you sell some Apple you sell some
Google you sell some Amazon Facebook Netflix Microsoft and you buy a [company logos]
smattering of high dividend high yielding defensive stocks like Chevron [military plane flying]
for Dow Chemical and Bank of America it's kind of defensive in practice [company logos]
portfolio managers rebalance their portfolios all the time so they
represent the promise they made to investors when they raise the money in [scale with tech out-weighted by diverse products]
the first place to be a fully diversified fund taking only market risk
in the process and if they still need to do any rebalancing beyond that and well [people doing yoga in park]
then they just enroll in a hot yoga class
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