INVESTOR LETTER #135
Portfolio Rebalancing
A portfolio doesn't stay balanced forever. Some investments grow much faster than others, while some fall behind. Over time, your portfolio can look very different from what you originally planned. Portfolio rebalancing is the process of reviewing your investments and adjusting them so your portfolio continues to reflect your strategy, conviction, and risk tolerance.
INVESTOR NOTE
A business owner thinks in decades. A speculator thinks in minutes.
Your Portfolio Has a Life of Its Own
Imagine planting five trees of the same size. After a few years, one grows much taller than the others. Your garden now looks very different from when you started. The same thing happens in investing. Winners naturally become a larger part of your portfolio.
What Is Portfolio Rebalancing?
Portfolio rebalancing means adjusting your investments after they drift away from your original allocation. This may involve adding to smaller positions, reducing oversized ones, or reallocating capital to better opportunities.
Success Can Create New Risks
A stock that originally represented 10% of your portfolio might grow to 35% over several years. While that's a sign of success, it also means one company now has a much greater impact on your overall wealth.
Don't Rebalance Just Because Prices Moved
Not every price change requires action. Great businesses often deserve to become larger positions as they continue to perform well. Rebalancing should be based on thoughtful analysis, not on automatic rules alone.
Let the Business Guide the Decision
Before reducing a successful investment, ask whether the business has become weaker or simply more valuable. If the company continues to grow with strong fundamentals, holding your winners may be the better choice.
Review Your Conviction
Rebalancing is a good opportunity to reassess every holding. Has management changed? Has the competitive advantage weakened? Is the valuation still reasonable? Your portfolio should reflect today's conviction, not yesterday's.
New Opportunities May Deserve Capital
Sometimes rebalancing isn't about trimming winners—it's about shifting money toward businesses that now offer better long-term opportunities or more attractive valuations.
Don't Turn Rebalancing Into Trading
Constantly buying and selling to maintain exact percentages can create unnecessary taxes, transaction costs, and emotional decisions. Rebalancing should happen when there's a meaningful reason, not every small market movement.
Keep the Long-Term Goal in Mind
The purpose of rebalancing isn't to make your portfolio look neat. It's to ensure your investments continue to match your long-term strategy, risk tolerance, and understanding of each business.
Sometimes Doing Nothing Is the Right Choice
There will be times when the best decision is to leave your portfolio exactly as it is. Great businesses often reward investors who allow them to grow rather than constantly trimming every successful position.
A Portfolio Should Evolve With You
Your knowledge, financial goals, and investment opportunities will change over time. Portfolio rebalancing isn't about chasing perfection—it's about making sure your portfolio continues to reflect your best thinking. Review it periodically, make changes thoughtfully, and let your long-term strategy guide every decision.
INVESTOR PRINCIPLE