There are several approaches that individual investors and advisors alike might take to portfolio management. One of those is rebalancing. In simple terms, rebalancing is simply selling a portion of something that is up and re-positioning the proceeds into something that is down (or perhaps merely up relatively less). It is a longstanding, tried and true approach to both portfolio management in general and risk management, in particular.
Now that we are in the middle of September with a steady stream of portfolio gains booked into most peoples’ accounts, it might be worth your while to consider taking a few profits from those things in your portfolio that have done particularly well of late and using the proceeds to be a value investor who buys things that are currently out of favour.
Some people offer suggestions as to what should be sold and bought. I won’t, because everyone’s holdings are different. Some people will offer suggestions as to what the thresholds ought to be. I won’t, because there is no obvious right answer. Trading more reduces both risk and return while increasing transaction charges. Doing so less frequently typically leads to the opposite outcome.
Ultimately, the discipline of rebalancing might borrow a catchphrase from Nike. It doesn’t matter all that much whether it is done annually, semi-annually or on a 10% contingent model or on another, possibly even ad hoc, model. What matters is that every once in a while, while in the process of reviewing your portfolio, you re-balance. Just do it.
