rebalancing

Buying, Selling, and the Third Thing 

When to buy, when to sell—some believe those are the most important decisions when selecting investments.

But far more consequential for our clients? The portfolio management protocols we use to manage your positions, all the things we might be doing in between the first purchase and the last sale.

This is called rebalancing.

Textbook rebalancing means periodically restoring a holding to a set percentage of the total portfolio value. This means adding shares when prices are lower and paring back when prices are higher. You may see these many, smaller transactions in your accounts when we go through our quarterly trading cycles.

Rebalancing is not about jumping in or out of a position. You may notice over time that we’re generally aimed at buying low and selling high within single holdings. The goal of this discipline is to try to improve overall returns of any holding across the long run—no matter when exactly we got in or when we get out.


Even clients with tenures as short as six or seven years may see holdings where the “net dollars invested” goes negative: as in, the holding has yielded more cash from the sales along the way than ever went into the purchases. And this could be true for shares that might still hold substantial value at the end of their ride.

What may be even more worthwhile, however, are those cases when our timing was “off” in the first place: when to buy. As an example, more than a decade ago our research indicated that copper production was likely to be short of global needs for many years. We identified a copper producer that was, at that time, down by two-thirds from its all-time peak. A bargain, we believed—but then it became an even better bargain.

That is to say, the stock fell. And fell. And fell.

Our outlook did not change, however. We still saw merit in our estimation about the state of copper production globally. So we bought, and bought, and bought in our rebalancing process.

By the time the stock recovered to our original purchase price, we had taken out more than we had ever invested on behalf of clients. Even a misidentified “bargain” can become a historical gain in a portfolio.

The search for good companies to buy is key to what we do. Sorting out when to eliminate a holding is also important. But the work in between—setting and adjusting our percentage allocations and rebalancing periodically to restore those allocations—is where we hope the true value of our work might emerge.

Rebalancing is a great example of the type of activity we mean when we talk about “ongoing portfolio management” and “investment research,” the things that go into our ongoing advisory work.

Rebalancing can help try to mitigate an otherwise disappointing selection, as our average cost per share declines when we add less expensive shares. And it can help us make sure we book profits if we happen to get in on a shooting star. No guarantees either way, but our protocols and discipline have the chance to make both more likely.

Clients, if you would like help reviewing your overall returns by holding in AccountView, call or email us.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

Investing involves risk including loss of principal.

No strategy assures success or protects against loss.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

Want content like this in your inbox each week? Leave your email here.

Play the audio version of this post below:

Buying, Selling, and the Third Thing: Rebalancing – 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

Re(balancing) Act
photo shows a golden scale out of balance

We’ve got something that may sound like a riddle at first, but this situation captures an idea that we apply here in the shop. 

Suppose you took some of your money and split it equally between two stocks, both trading at $20 per share.  

Let’s say that after a year or two, one of the stocks rose to $30 while the other fell to $10. 

Another year or two later, they leveled out again, and both stocks were back at $20. But your investment has not been a wash. How? 

It might appear that your holdings are right back where you started. There is, however, a simple portfolio management strategy that can help us take advantage of back-and-forth movements.  

Imagine if you had rebalanced your holdings in the two stocks when one went to $30 and the other went to $10. If you had sold off a third of your $30 stock and put the cash toward the $10 stock, you would wind up having twice as much of the cheap stock as you did of the expensive stock—and bringing both positions back to the dollar amount they were when you originally bought in. 

But now when the high-flying stock gives up its gains, you already took some out, so now the price decrease affects a smaller portion of your portfolio than if you’d held onto all the shares. Similarly, when the depressed stock recovers, you get to enjoy the ride up with more shares than you took on the ride down. 

Using rebalancing, this situation would leave you sitting on a net profit of one-third of your original investment—even though both stocks are back at the same price they were when you first bought them! 

Rebalancing works because it applies the simplest investing axiom: “buy low, sell high.” When you rebalance your portfolio, you are selling a little bit of the higher-priced stuff in order to buy a bit more of the lower-priced stuff.  

Trying to “time the market” is a fool’s errand; rebalancing takes the guesswork out and turns it into a matter of arithmetic. 

As always, there are no guarantees: in the above scenario, if the cheap stock kept going down from $10 to $5 and the expensive stock went from $30 to $60, you would look awfully silly (… although not as silly if you had sold out of the one entirely!). 

Stocks do not go up forever or down forever: We generally expect a lot of back and forth. By taking on the risk of missing out if there ever is an extended period without back and forth, we have a chance to use the back and forth to our advantage. 

Clients, when you have any questions about what this means for you, please call or write. 

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. 

Investing includes risks, including fluctuating prices and loss of principal. 

Want content like this in your inbox each week? Leave your email here. 

Time to Get Off the Ride

We’ve all heard the basic maxim of investing: “Buy low, sell high.” And at 228Main.com, we have talked repeatedly about the perils of buying high or selling low. Just last week we asked, “Where are you on the ride?”

It is true that buying high or selling low can easily hurt you, and to avoid acting rashly, you do need to be able to recognize where you might be in a cycle.

The flip side may be true, too: you also need to be able to make timely moves when the time is ripe. Our philosophy focuses on value investing, and we are fortunate enough that you, our clients and readers, have internalized many of these notions. (So you know that we are not talking about “timing the market.”)

So the “buy low” part is relatively easy: hunting for bargains is fun and exciting! It is easy to look at a company trading at depressed prices and imagine the possibilities, even as you know that they may not necessarily come to pass.

The other part—”sell high”—is more difficult. A holding that has treated you well can be hard to get rid of. It is easy to get greedy and let it keep riding in the hopes of further returns.

But what goes up must come down. The more inflated prices get, the less sustainable they are. When prices enter an unsustainable bubble it is wise to protect your gains by selling while the selling is good.

This does not have to be an all-or-nothing process, though. You might still believe in a company’s long-term story even if prices look unrealistically high right now, in the short term. In this case it might make sense to hedge your bets by only selling part of your holdings. This lets you pocket some gains while keeping some exposure in case of future growth.

This becomes especially important when you have a high-flying investment. If certain holdings are outperforming the rest of your portfolio, they may swell up to become oversized relative to the rest of your holdings. Over time you may find yourself with too many of your eggs in one basket; periodically rebalancing away from a hot streak can help spread your risk around.

Of course, there are no guarantees. None of these strategies are magic. But letting your investments ride with a few big winners can leave them vulnerable to a big tanking at even a hint of bad news. Heck even totally decent news can spell a crash for a hot stock that’s being held up by unrealistic growth expectations.

How do we know when it’s time to get off the ride? Clients, when you have questions or concerns about your holdings, please call or email as always.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.