When a Winner Runs: The Rebalancing Question

Two stocks from the Filtered List, held for a few months, are up more than 80% and still rated 8 on the latest approved list. Is this the moment to take the profit and rotate into something fresh? The instinct says lock it in. The evidence, and the GIP framework, usually say let it work.

This briefing explains why rebalancing means different things for Filtered List holdings and Model Portfolios, summarises the academic research on selling winners too early, and gives a practical checklist with three sensible responses: hold, trim or rotate.

Key findings

• Rebalancing is a Model Portfolio concept, done once a year to restore equal weights. It is not a reason to sell a Filtered List holding.
• A Filtered List position is exited for one of three reasons: a 25% fall from its peak, dropping off the approved list, or the twelve-month review. A large gain is not one of them.
• In Odean's 1998 study of 10,000 brokerage accounts, investors sold winners about 1.5 times as often as losers, and the winners they sold went on to beat the losers they kept by about 3.4 percentage points over the next year.
• Momentum research (Jegadeesh and Titman, 1993) shows stocks that have outperformed over three to twelve months tend to keep outperforming over the following three to twelve months.
• $10,000 in the S&P 500 from 2003 to 2022 grew to about $64,844 if held throughout, but only $29,708 if the ten best days were missed.
• The one legitimate reason to act on a winner that is otherwise behaving is position sizing: trim to manage concentration, do not exit to capture profit.

What the paper covers

1. The question every successful investor eventually asks
2. The rule inside the programme: Filtered List versus Model Portfolio
3. Where the confusion usually creeps in
4. The disposition effect
5. Momentum: the other side of the same coin
6. The cost of sitting out
7. What the professionals say
8. A practical decision framework
9. The three sensible responses: hold, trim or rotate
10. What is almost never the right answer
11. The bigger picture and summary