When to rebalance

"The answer to the question about selling a really great business is: never. To sell off something that's a really wonderful business because the price looks a little high is almost always a mistake."

The answer to the question about selling a really great business is: never. To sell off something that's a really wonderful business because the price looks a little high is almost always a mistake.

The weights in a portfolio shift on their own over time, even if you do nothing: a stock that rises becomes a bigger slice than you decided, one that falls becomes a smaller slice.

There are two common ways to decide when to act. The first is calendar-based: rebalance once or twice a year, regardless of what happened in between. The second is threshold-based: rebalance when a position drifts a certain amount from the weight you assigned it, whatever time of year it is. Neither one is the only correct approach: what matters is having a rule decided in advance, instead of reacting position by position to every price move.

Rebalancing a position that has grown doesn't mean you've stopped believing in that company. They're two separate questions with independent answers: 'is it still a good company?' and 'is it weighing too much on my portfolio's overall risk?'. You can answer yes to the first and still trim the position for the second.

Buffett himself pushes hard in this direction when he talks about truly exceptional companies: never sell them just because the price looks a bit high. But even he draws a line between selling because you've stopped believing in a company and trimming a position because it's grown too large relative to the rest of the portfolio: rebalancing a winning position isn't liquidating it, and it's entirely compatible with still considering it one of your best ideas.