Financial Planning Dentist

“Rebalancing is both risk management and capital growth”

In this Article:

  1. the effect of our recent rebalancing
  2. a view of our process in action
  3. the result of active risk mitigation


Our rebalancing process is an important discipline we maintain in good times and bad. It helps us trim positions we may like, in favor of a long-term process we love. Rebalancing is the process of right-sizing a position in the portfolio to keep the risk in line with our expectations. It means we sell outperformers and buy underperformers. Which might seem counterintuitive – but works well over time, and allows us to sell high and buy low simultaneously. Minor course corrections can make a major difference. 

Our Process in real-time

Here is a chart of Netflix, a growth stock that we are encouraged by the outlook. We have a $600 price target on it and remain bullish. The bottom line is, we like the future of NFLX, but as a result of our investment process, we trimmed the position in many of the portfolios. As a result of its run-up from $480 to $545 we sold on 7/15 (marked by the white arrow) and took profits for our clients. So this “sell” was not the result of our fundamental thesis on NFLX, but rather a commitment to how we manage the portfolio. 

The stock has since sold off, and the fundamentals will continue to be reviewed, but this portfolio rebalance is an example of how the process can support our strategy, even when it runs contrary to our plans for an underlying stock.   

Risk Management Explanation

Reeling in stocks that outpace our expectations allows us to remove some risk in the overall portfolio, harvest gains for redeployment, and reposition capital into other lesser-performing stocks over a given length. Unlike other portfolio managers or robo-advisors that rebalance with a specific cadence (quarterly), our risk-centric rebalancing is based on a process of evaluating the broader index and an evaluation of risk alternatives. This process allows us to maintain upward momentum regardless of when it occurs. It also allows us to capture upside from the portfolio when risk conditions call for it.

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Investment Bias: Information

Information bias is the tendency to evaluate useless or the wrong information when determining value. It’s the belief that certain commonly held data points are helpful in understanding the value of an investment, when they may not be. The key in investing is not seeing the forest for the trees, but rather the price of lumber. There is so much information that seems valuable. That is the root of this bias. Similar to the logical fallacy “appeal to authority” the source of information can create its own gravitas and feel like a value. This feeling of value, because of the source of information is the bias. Investors are bombarded with largely useless information every day. Financial talking heads, newspapers, and stockbrokers, and it is difficult to filter through the collective biases and focus on information that is most relevant. This bias is the “value of valuable information.” One great example is the daily share price or market movements of a stock. This feels like valuable information, but usually contains no information that is relevant to an investor who is concerned about the value of a company. True fundamental valuation should be done without knowing today’s stock price. It honestly shouldn’t matter. Yet there are entire news shows and financial columns dedicated to evaluating movements in share prices on a moment-by-moment basis. In many instances, investors will make investment decisions to buy or sell an investment on the basis of short-term movements in the share price. This can cause investors to sell wonderful investments due to the fact that the share price has fallen and to buy into bad investments on the basis that the share price has risen. Little about the near term price movements of a stock, commodity, or bond has to do with the value of its cash flow. Ideally, investors would determine the price they are willing to pay for an investment without knowing its current price. Then when confronted with the price it is selling for, only decide if it is above, or below, its value. Investors would make superior investment decisions if they ignored daily share-price movements and focused on their own willingness to pay for income. Additionally, the Information bias tends to view pieces of information as digital, when it should be analoge. All information is not equally valuable, all the time. Likewise, information is not equally valuable across investments. An example, while the “costs of capital” metric is universally important to value investors, the output from the cost will range from business to business. So while this data point might be a leading indicator of the success of an investment in banks, it’s less valuable for technology companies. Considering all information as quantitative over qualitative is the equivalent to saying “I’ve listened to ten medical podcasts so why would I listen to my doctor.” This Information bias exists in the belief that all “information is good” and that “all information is equally valuable” causes us to have conclusions that are false or investments that don’t reflect our intentions. Essentially, we are borrowing other people’s biases and creating a consensus of bias.

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