Hi all, how does everyone rebalance in practice? I have a habit of removing stocks that fall out of my criteria on a weekly basis, seems that Stockopedia recommends every 3 months. I find it hard to hold on to stocks that are no longer in my criteria for such a long period of time (i.e. if they fall out of the criteria quickly). How does everyone handle this? Perhaps I need to grow my patience and just re-jig allocations every 3 months?
I think for most people re-balancing would be changing the size of a position in a still attractive investment depending on price changes usually to keep within certain limits of portfolio. Which means that you don't hold too small an amount for it to have no impact on your portfolio performance or too large amount that you get caught out by negative 'unknown unknowns.' This should be fairly easy just decide good portfolio limits and stick to them.
However what you are really asking is what strategies do people use to sell. The two are related but not always synonymous. Your question also implies that a company that meets your screening criteria is a great investment but as soon as it fails your criteria (say by going up by 1%) then it isn't. The real investing world is far more of a continuum so developing a strategy that reflects that is key.
I guess a truly systematic way would be to forget screening but rank every stock in the market by your judgement of it's upside potential based on your preferred criteria and how risky it is (note I don't mean it's volatility but things like the size of the company, how much debt it has, the quality of the management, how much it relies on 1 asset or product, how likely it is applying aggressive accounting etc.) and then weight your portfolio accordingly within the portfolio limits you've set. However it's unlikely you could do this with any degree of accuracy for the whole market. However it's worth bearing in mind this concept and treating your screening criteria as a way of identify companies which may have significant upside or be low risk for further judgement.
Your ideal portfolio weightings would then be large for low risk, high expected return, small for low risk/low expected return or high risk/high expected return and zero for high risk/low expected return (e.g. fail your screening criteria.) Then a change of price or outlook for a company may move it from large to small weighting or to zero or vice versa but not always just hold or not.
The speed you execute this strategy should be tempered by trading costs and how much uncertainty you have in your judgement of either risk or potential upside.
Although it is hard to exactly follow those principles I try to have a good idea of whether I should have a large or small position when buying a share based on the risk/reward, I top-slice or top-up based on those criteria but sell completely only when I consider a share to have no upside and no momentum. So I'll keep holding a share that doesn't seem great value if it keeps beating expectations and the SP is going up - otherwise I have a tendency to sell too soon.
Hope that gives you some ideas to think about,
Danger
