Getting Your Portfolio in Better Shape

I have a technique that I call "portfolio reshaping" to go along with my better-known (to my readers) practice of "portfolio rebalancing." Reshapings are relatively new to me and have been slowly developed over the last three years. Rebalancings happen often, but reshapings, only quarterly.

Typically, I swap out of names that have appreciated vs. their fundamentals and trade them for names that are cheap vs. their fundamentals. The idea is to compare the entire portfolio with the replacement candidates all at once to make the best aggregate shift. This removes emotion for two reasons: One, there are a lot of candidates vying to get in. Two, I forget who recommended the idea to me, so I rely only on my own analytical ability.

Why not reshape more frequently? I sometimes make more frequent moves if circumstances demand it, but there is a genuine advantage to making portfolio moves in bunches rather than one by one. It forces you to think about the construction of the portfolio on the whole, rather than whether you like a given company or not.

Also, since I try to keep the names in my portfolio relatively constant, my trades are usually swap trades. This again is a discipline. Too many managers say, "I like this, toss it in." I say, "Hmm ... I like this, but do I like it more than what I would have to sell to fund it?" The second question forces you to improve your portfolio. The first makes no such demands and can lead to hyperdiversification.