Expect to have feelings of regret if you follow one of the basic strategies of managing an investment portfolio.
The strategy is rebalancing, which means making changes in your portfolio every six to 12 months to get back to your target mix of stocks and bonds. Inevitably, this will mean selling some of your holdings that have done the best and buying more of what hasn’t done well. An insight into the potential for regret in selling winners comes in a query from a reader who owned shares of Apple Inc.
“I held about 500 Apple shares in my portfolio,” he wrote. “As a percentage of the portfolio, the Apple shares grew to 15 per cent, so I sold some shares so as to bring this percentage down. That was in mid-2019. Since then, Apple shares have continued to grow. Was is a mistake to sell the shares?”
Some may argue that it’s smart to let your winners run, but my answer to this reader’s question is no. Not letting your winning stocks or funds take over your portfolio is what rebalancing is all about. It’s a bit like insurance. By selling some of those Apple shares, this investor bought himself some protection against a major pullback in the price of Apple stock. A correction for Apple would hit a lot harder if the shares were a dominant part of the portfolio. Reducing Apple’s footprint is a way of containing the risk of the whole portfolio posed by this one stock.
The cost of this insurance is missing out to a limited extent on future gains in Apple. But it’s not like this investor is missing out entirely because he retained his core position in the stock. If the share price keeps rising, he’ll soon enough have to rebalance again.
The rebalancing process offers hope for investors like this one who miss out on gains because of rebalancing. When they sell some of their winners, they free up money to invest in the laggards in their portfolio. It’s a chance to buy low into a stock, fund or asset class that may be undervalued and thus has a chance to outperform.
Rob Carrick