Why I don't rebalance my portfolio

[i4value]

As a value investor, I buy when price < intrinsic value and sell when price > intrinsic value. I have a portfolio of about 30 stocks as studies have shown that the benefit of diversification is marginal when you exceed this number.

So I never had any periodic rebalancing plan as the portfolio is “updated” whenever I have the sell signal. I just replace what I sold with a new stock whose price < intrinsic value.

And I don’t rebalance within the stocks in the portfolio as they are held for the long term - 5 to 8 years- and I can’t think of any basis for rebalancing them over the short term.

The reality is that my portfolio is the “by-product” of my investment process ie I did not start off by saying that I wanted my portfolio to consists of a certain % of each sector, or market cap, etc. It was built from bottom-up.

On the other hand, if your portfolio was constructed based on some top-down concept, you would probably need to rebalance it to maintain the concept

For example, if your investment plan is to have 50% large-cap and 50% small-cap (for whatever reason), then you will probably re-balance this to keep the same ratio.
So having said that, you have to go back to the original goal or basis of your portfolio.

If there was some top-down logic to your portfolio, you need to re-balance use the original basis.

If the portfolio is like mine with is the end-result of some investment plan, I fail to see the need for some periodic re-balancing.

Having said that I do try when buying to ensure that I am not concentrated in one particular sector, market cap, or investment type (growth, net-net, turnaround, quality value). But I don’t re-balance periodically to maintain this diversity.

For more portfolio insights go to How to grow the stock picking portfolio value?

[dzwm87]

Even a bottom-up process will yield different payout outcomes. It can't be that every investment is deemed as a 50 cents on a dollar investment (i.e. double) at the same exact time. Different business quality will also have a different profile on a +100% upside. Throughout your holding period, your thesis and view can also change. Rebalancing allows you to adapt to all these changes in thinking/due diligence. Rebalancing also mitigate any emotional bias against loss aversion or "I will ride this one" when the stock is up.

Of course, rebalancing every single day or week or even months maybe too excessive depending on your time horizon.

[i4value]

I think rebalancing is used in the context of a regular review of your portfolio. During such review, if you find that the portfolio profile is not in line with the goals of the portfolio, you rebalance. I am talking in this context.

Of course at other times, if there is a stock that is overvalued, selling them to invest in other underpriced ones is something you do. But I would not consider this as a rebalancing exercise.

[weijian]

Unfortunately, I do not have the fortunate problem of needing to rebalance a 10x stock which has became a huge position in my portfolio (yet).

The bulk of people who have enjoyed XX,XXX% returns of the stock price are mainly the founders of companies. They were probably distracted enough by the daily struggles in the business/competition to ignore the "price action". So maybe it is not just about having "ownership" mindset, but having "distractions". After all, the kids who waited and got rewarded, mainly did so because they found something to distract themselves during the wait, and not because they had better focus. (Parents should know the concentration span of kids)

So rather than argue whether Prof was right on selling half of his Nvidia position, Prof did right by finding peace.

The Power of Expectations: Nvidia's Earnings Report and Market Reaction!

Looking back, I am at peace with the decision made in the summer of 2023 to shed half my Nvidia shares, and hold on to half. While I left money on the table, with the half that I sold, I have been richly compensated for holding on to the other half. I am going to count that as a win and move on!

https://aswathdamodaran.substack.com/p/t...ns-nvidias