When Is It Time to Book Profits and Rebalance?

My Colorado neighbor recently asserted he didn’t need a diversified portfolio of stocks, bonds and other assets producing single-digit returns, which is a reasonable expectation for a broad slate of investments offering downside protection. He boasted he could pick stocks himself and get 20-30% from high-growth tech companies. That would be an excellent strategy if his investments had the same risk level as a diversified portfolio—but they don’t.

In fact, the whole conversation sounded like a flashback to the tech boom and bust of 1999-2000, if not the old adage to sell everything when your taxi driver gives you stock tips.

Anecdotes like that have many investors debating where the biggest market gains of the past few years have come from, whether to book some gains and when to go a little against the trend.

Take for example the FAANG tech stocks – Facebook, Amazon, Apple, Netflix and Google. They make up nearly 15% of the S&P 500 and have dominated that index’s performance in recent years. Historically, when an index is so concentrated, the leadership changes—often in only a few years. Taking stock of markets that have had a good 5- to 10-year run allows investors to take profits and move on to greener pastures.

Here’s what’s important to remember:

• Diversify — Don’t get overconfident in your own abilities—be willing to book profits
  and stay diversified to best balance the reward and risk.
• Rebalance — Rational rebalancing of investments out of big multi-year winners toward other assets is a prudent investment practice, even though human nature often makes that difficult.