How You Can Do Long-term Rebalancing With This Simple Method

In the previous blog HERE, I wrote about using 4 simple criteria to select stocks and then just do your buy own strategy.

In this article, I did a modification. Instead of buy and hold, you rebalance every year and the purpose of rebalancing is to find stocks that meet the same criteria and then rebalance them into equal weightage.

If you do this annual exercise, the chart shows that the performance not only gained positive returns but it actually out-performed the S&P 500 hands down too.

You will notice that whether you rebalance or you just buy and hold, it produces the similar returns. If it produces almost the same return, you may wonder whether does it make sense to rebalance as it is too troublesome to do so.

Yes, the rebalancing does produce benefits because you do not end up with a concentrated portfolio.

As on the 2022, there were 38 stocks that actually met the criteria. So should you use this method of rebalancing every year and expect good results.

Unfortunately, rebalancing every year is hard to implement especially for stocks.

In addition, not everyone has the tool to do filtering and find such companies that can meet the requirements.

Moreover, there is no criteria in relation to the qualitative aspect of the companies that you are investing. This means that the subjective aspects of the companies are not included in the selection of stocks. Hence, you could end up investing in stocks that are actually in the sunset industry.

To give you an example – mass media. We know that companies that it is in the physical content creation like newspaper are companies in the sunset industry. If you have such a company in your portfolio, you could have easily avoid investing in it.

Similarly, if you know of a company that is in the sunrise industry, you tend to favour them.

So, the lack of qualitative aspect in the stock’s selection is problematic.

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