Chapter 4: Portfolio Construction
Can you rebalance to often
The issue with rebalancing too frequently is that it can shift your allocation away from your winning stocks, which can reduce the potential gains you might see from those winners. Given the principles of momentum and growth, you generally want to avoid this because it could limit your ability to capitalize on stocks that are performing well.
How do you find that balance
The right balance for you depends on how much risk you're willing to take. Like many other aspects of investing, this is a compromise between risk and reward. The less you rebalance and the higher the percentage of your portfolio you allow your stocks to grow, the greater the risk—but also the potential reward. Conversely, rebalancing more often and capping the percentage your stocks can reach reduces risk but also limits potential gains.
To illustrate this concept, we've created a chart below. It shows how adjusting your rebalancing frequency and the percentage limits on your stocks impacts both risk and reward.
The rebalancing scale
Higher Risk & Gains
Lower Risk & Gains
Every third year
Every other year
1 time per year
1+ times per year