# Rebalancing a porfolio of individual stocks



## darien44 (26 December 2020)

Hi all, I would like to know when it makes sense( if ever) to take some profits if an individual stock becomes too large a part of one's porfolio.

For example, suppose we start with a 100k porfolio containing 20 different companies. Each stock then represents 5% of the total portfolio.

Let's say company B grows massively and now makes up 15-20% of the  total porfolio. 

Under what circumstances should you take some profits? I know Peter Lynch and others talk about the negatives of selling down winners and rebalancing, but is there a reasonable middle way?

Would it depend on the fundamentals of the company or is there a hard limit on how much of a percentage you would have invested in one indiviudal holding?
Thanks


----------



## So_Cynical (26 December 2020)

There are stocks that turn out to be superstars and of course we have no idea at the time so a portfolio of 5K positions where rebalancing occurs can cost a lot of big profits, there are not many superstars and having one can lead to quite spectacular out performance.
The flip side often happens as well, stocks running way ahead of where they should be and a rebalance can catch that temporary profit.


----------



## Dona Ferentes (26 December 2020)

With 20 stocks held, you will likely only get the index, over the longer term, because things will average out, as @So_Cynical  says. You could allocate half to ETF or LIC and concentrate on, say, 5-6 that you get to know and understand: this could allow for better decisions.

Run with the winners, sell the losers.
Develop a plan and hold to the conviction.


----------



## Smurf1976 (26 December 2020)

Dona Ferentes said:


> Run with the winners, sell the losers.



A key point that can't be stressed strongly enough.

Pull the weeds out and keep the flowers.

If something ends up as a substantial % of the portfolio though, well you'd want to be very sure of what you exit plan is. What's the trigger to sell?


----------



## systematic (26 December 2020)

For me this is another one of those, 'I can tell you my answer but it probably won't help you because it's system dependant, at least in my world.'
So, in my book...I haven't seen that kind of a rule help. Having it could help for behavioural reasons, or disaster risk management reasons (I'm sure none of us wants a stock to become 90% of our current portfolio value, only to go bankrupt overnight). 
The rule I've seen someone else use that I like (I just haven't used it), is something like when the stock becomes 15% of current portfolio, sell it back to 10%. With a 20 stock portfolio, I don't think that's a big deal. In other words, if I'm going to use a rule like that, I want it to be loose, not tight. Similar idea to a stop loss.
But again, I suppose I'm trying to hold stocks for a reasonable amount of time - so that only makes sense.
Still, for me I only see those rules helping sharpe's / volatility etc, and that's not of great interest to me.  That's another reason why the answer depends so much on what you're trying to achieve. Where I say, 'help' in this post...you've gotta know my goal (chasing CAGR), whereas your goal might be something else.
I've held 5 stock portfolios (fully invested) and so, obviously, the percent of portfolio that a run away stock can get to can be pretty ludicrous. But it was fine for me at that time. So, like all things...it depends. However, to at least try and be of _some_ help; I'd steer someone with similar investment style (holding for months, not days) to assume that such a rule might assist in the 'risk management' or 'behaviour management' side of things, but probably not produce any better raw returns.


----------



## Dona Ferentes (27 December 2020)

systematic said:


> .... is something like when the stock becomes 15% of current portfolio, sell it back to 10%. With a 20 stock portfolio, I don't think that's a big deal. In other words, if I'm going to use a rule like that, I want it to be loose, not tight. Similar idea to a stop loss.
> But again, I suppose I'm trying to hold stocks for a reasonable amount of time - so that only makes sense...



Tend to agree with that. As the initial post was rather nebulous, (and hasn't returned to comment, so far) then general , if pithy, replies do come in as *Grist to the mill. *The only thing I know about about investing is that nothing works absolutely. But I'd say successful investors are those engaged in building knowledge, gaining experience and recognising that truisms (compounding, risk management, etc) and systems (TA, FA) can deliver superior returns and/ or preserve capital.


----------

