Rebalancing Rules and Sell Rules for a First Portfolio

Why sell anything that’s working? Because the portfolio you own a year from now won’t be the one you built: prices move at different speeds, the fast parts get bigger, and without a rule the mix drifts wherever the market pushes it. Rebalancing is the rule that pushes back.

What drift looks like

The saver from the earlier lessons set an 80/20 target, with 80% in a broad core fund and 20% in single stocks, and a year later the core has grown to $13,000 while the satellite, helped by a couple of good picks, has reached $4,500.

Nobody decided to hold a quarter of the money in single stocks. It happened. The stocks did well. Now the portfolio carries more of the risk you meant to keep small.

Rebalancing restores the mix

To rebalance, trim whatever grew past its target. Add to whatever fell short. Here the satellite is too big.

Trim the satellite stocks that grew most. The $1,000 goes into the core fund.

Selling a winner to buy the thing that grew slower feels backward. It’s the whole point, though. Rebalancing sells some of what has grown too large for your plan and buys what has lagged, and it keeps the risk of the portfolio at the level you chose when you were thinking clearly, instead of the level a good run happened to leave you with.

When to rebalance

Pick a trigger and write it down. The usual choices:

• A calendar date, once a year, on a day you’ll remember.
• A band around each target, say 15% to 25% for the satellite.

You can combine them, checking once a year and acting between checks only if a band breaks, and the saver’s satellite at 25.7% would trip a 25% band as well as the yearly review. Still adding money? Send new contributions to the underweight part. That can rebalance without a sale.

In a taxable account, selling can create a tax bill. Situations differ, so check your cost basis before a sale.

Sell rules for single stocks

Rebalancing handles the mix. A stock in the satellite also needs its own exit, set before you own it, because the moment you most need a sell rule is the moment you’re least able to write one. Keep the list short enough to remember.

Thesis broken

When you bought each stock you wrote one line saying why. If that reason stops being true, the stock goes, whatever the price has done. Say you bought a hypothetical company for its growing subscription revenue. Then it reports two straight quarters of shrinking subscribers. The reason is gone.

Cap exceeded

The previous lesson set a cap and a trim line. A position past the trim line gets cut back to the cap. This one is mechanical, and that’s its strength.

Review date

Put a date on each stock, perhaps a year out. On that date, reread the thesis. Decide again as if buying fresh today. A stock you wouldn’t buy now is a candidate to sell.

What is missing from the list

A price fall on its own. A stock can drop 20% while the business carries on exactly as before, and if the thesis still holds and the position sits inside its cap, the rules say you hold, however unpleasant the red number on the positions page looks.

The finished plan

Put it on one page: the dated piles from the first lesson, the core and satellite split, the cap and the trim line, the rebalancing trigger and the sell rules. That page is the portfolio.

The case for a sell rule argues the point further, and Build It, Then Break It lets you run an allocation through hypothetical rough years to test whether your rules hold up. For choosing the satellite stocks with more care, What’s It Actually Worth? teaches valuation.