How often should we re-position sector allocation in a year for our portfolio? Is it once or twice a year? Quarterly? I'm not talking about big sector changes but small adjustments such as trimming tech and adding to other sectors. Some of these market rotations happen quickly in the market. Its not a question of IF a correction will happen, but more WHEN and how to be prepared for it. What is the best way to capture upside vs downside protection? What are some key metrics to look at in our individual names? Gains have been good the last few years and I've been around to experience many crashes over the last 25 years since University and have learned a lot about holding quality long term compounders. Thank you!
There is no perfect answer on when to rebalance. There are typically two approaches an investor will take. The first is calaendar rebalancing where one simply rebalances over certain periods. This could be monthly, quarterly, semi annually or annually. We would pobably side with a frequency of quarterly/semi-annual to limit 'over trading' an account unneccessarily (monthly) or not doing it enough (annually). The other approach, which we tend to prefer, is percentage of portfolio rebalancing, where an investor rebalances as weights hit an upper range in a portfolio. This can pertain to an individual security, sector weight, geography or asset class. Essentially, when an uper target for wightings are hit, you trim that area and add to the areas that are underweight.
The trick with percentage of portfolio is of course knowing the best percentages to set for ranges and unfortunately a lot of this comes down to personal comfort and preference. Some ideas around this are to allow the ranges to be wide enough, so winners have room to run and so you are not constantly trimming a winner, but not so wide that the total portfolio becomes a bet on the stock. Also, more volatile stocks typically need to have wider ranges so rebalancing decisions aren't continually being triggered.