No. of Recommendations: 3
To rebalance you sell winners and buy losers & also-rans.
Anyway, it was easy enough to run your backtest. 50/50 S&P500 and BRK-A. Limited by BRK inception of 3/17/1980.
One portfolio never rebalanced, one annual rebalance.
Starting with $10,000, the B&H grows to $13.5 million, the annual rebalanced grows to $7 million.
CAGRs 17.4% vs. 15.7%
Clearly it is better not to reduce your exposure to a stock like Berkshire that ends up outperforming the S&P, from 1980 to 2025. The question is, is it a good idea to reduce your exposure to stocks that have gone up, overall, some of which will continue to outperform, and others which will fall back because they had become overvalued. Which of these 2 is the more important effect?
Although the maxim 'let your winners run' suggests that you should do that, and this will often work out well, over the universe of all S&P stocks, we know that the right answer is to rebalance. Why? Because the equal weight S&P has outperformed the cap weight S&P over all time periods that are sufficiently long. Not recently, mind you, but even now, if you go back X* years, the equal weight index outperforms. This means that, in general, it has been better to sell the winners and buy more of the losers, however much this might differ from our intuition.
DTB
*I will calculate what the exact number of years X is, but whatever it is the general point stands.
