Should you do Portfolio Rebalancing?
"Selling your winners and holding your losers is like cutting the flowers and watering the weeds." Peter Lynch
I was sharing this with some of my investment mentees recently. There is a popular concept called portfolio rebalancing where every set period of time, you will sell winners and rebalance your portfolio back to a set proportion for each stock. I can see the wisdom in that as a risk management tool.
However, where I disagree is if you sell a stock just because it has gone up in price and now represents a larger proportion of your portfolio. If you are constantly doing that, what you essentially do is chop off the tall poppy and "cap its performance". If you do that constantly, you will never hit a home-run performance with any stock. Longer term, you will cap the growth of your portfolio by "punishing" the great companies and encouraging the poor ones instead.
Don't water the weeds and chop off your flowers.
Look forward to admiring your beautifully curated flower bed!
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