Rebalancing

One of the common ideas you’ll hear from investment gurus is that you should “rebalance” your portfolio every now and then. Rebalancing is the process of realigning the weightings of a portfolio of assets. It involves periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation or risk. It can take the form of selling stocks that you’ve made good profits on, and replacing them with new stocks. Or it can take the form of saying, well, I’ve got too many iron ore stocks, I better sell some and buy some coal stocks so my portfolio is balanced.

Tony doesn’t believe in rebalancing.

TONY : The quote that comes to mind is the Warren Buffet quote: “if you owned Michael Jordan, would you bench him because he’s had a good year?” And the answer is no, of course. We have rules around when to sell these stocks, and we can’t predict when they’ll turn, so we wait for them to actually turn before we sell them.

While it might feel sensible to sell a stock that you’ve made a nice gain on, take your profits, and replace it with something new, Tony’s experience is that isn’t actually sensible.

We really don’t know if the new stock will perform well or not. And we also can’t be sure that the old stock might not have a lot of growth left in it.

Plus, every time you sell something, you are incurring costs – brokerage and CGT, plus, of course, the brokerage you’re paying for the new stock that you buy. And it all adds up.

So Tony says that we “pick our weeds and water our flowers”, ie, get rid of the stocks that don’t perform well (but even then we wait until they breach one of our selling conditions), and keep the ones that are doing well, until, of course, they eventually breach one of the selling conditions.