First Principles Thinking
"Don't Put All Your Eggs in One Basket"
As can be seen by the link below, thinking about this topic goes back a very long way. Can be found in Don Quixote. Might have actually originated with actual eggs. if you drop the basket and all the eggs in the basket break, it would have been better to have divided said eggs into more than one basket! 😊
Way back in the day, this thinking might have simply applied to owning several stocks instead of literally just one. Nowadays this thinking might and typically does have wider applications.
Also please see the link below titled This Is Not the Way. Inside the post there is a brief video live interview of Brandon Smith.
Rebalance vs. Diversify
I would say staying diversified is the goal. Rebalancing is a way to implement the goal. In Take Some Profit Now (my title because the author called it "Evasive Action" which I feel is less useful. He offered his specific ideas on how to implement.
Sell enough shares of your big winners to equal what you originally paid for them.
Would this idea be meaningful to you? I feel the obvious answer is, it depends. If you are 60 years old and you doubled your net worth investing in the items the author mentioned, (doubling is my own simplified example,) then by selling enough to recover what you paid, you recovered and kept intact your net worth. Then you are (hypothetically) free to let your profits run. Undiversified. But you preserved capital.
My Own Idea
Sell enough shares of your big winners to be able to retire when you wish / FIRE - "Financial Independence Retire Early" ....
- In 5 years
- You pick the time frame and your assumed safe Rate of Return.
Might this apply to you? Again, if you are 60 years old and you could sell enough of your big winners to retire tomorrow, why not? But if you are 30 and could only be able to retire in 5 years, while this is not a recommendation, I do see the attraction of letting it all run until you could "retire tomorrow," i.e. FIRE.
Take Some Profit Now continued
The author also makes a number of other recommendations. I mention these not as my own recommendations. The author is an MD, not an FA so Freedom of the Press means that broad freedom applies more to him than to us folks who live with regulations. Broadly speaking, he is recommending moving more into choices that are less popular aka "out of favor."
Might this be a good idea? I don't know because my crystal ball is cloudy. But it is an example, several examples, of diversification.
Why is this emotionally difficult?
Much of risk management can be counterintuitive. Or delayed gratification aka "The Marshmallow Test" or Eat Your Vegetables. (Not to malign vegetables. Insert the food item you know is good for you but you don't care for. Fictional President Bartlet didn't like green beans.)
"Never Stop Buying Lottery Tickets" - Survivorship Bias - financial insider writer "snark"
I was actually born and raised In WV, so I used to hear this idea as, "Sometimes even a blind hog can find an acorn." Could also be knowns as "Don't confuse luck with skill." Also, "History is written by the victors."
"Survivorship bias occurs when only the winners are considered while the losers that have disappeared are not considered." -- Source: Investopedia
It is my heartfelt guess that many people who have been moderately or even very successful investors in some form or other might have difficulty articulating exactly what Survivorship Bias is and how it might apply in a specific situation - to other industries as well as finance.
Joe Kennedy supposedly took the opposite advice given him by a shoeshine boy
"In 1929, JFK’s father Joseph Kennedy Sr. picked up on one of those subtle signs and didn’t just get out at the top, he scored a massive windfall on the way down as well. While sitting in the shoeshine chair, Kennedy Sr. was alarmed to have the shoeshine boy gift him with several tips on which stocks he should own — yes, a shoeshine boy playing the stock market.
This unsolicited advice resulted in a life-changing moment for Kennedy Sr. who promptly went back to his office and started unloading his stock portfolio. In fact, he didn’t just get out of the market, he aggressively shorted it — and got filthy rich because of it during the epic crash that soon followed."
Source: Business Insider