How do defensive investors rebalance their portfolios?

Hey friend, great to see your interest in Graham's investment philosophy. This is an excellent question and one of the core disciplines for defensive investors. Let's talk in plain language about how to actually do "rebalancing."

Forget those complicated financial models—think of it like a seesaw you played on as a kid.

Core Idea: The Classic 50/50 Strategy

First, Graham’s most classic advice for defensive investors is to split your investment capital into two halves:

50% allocated to stocks
50% allocated to bonds (or bond-like equivalents such as cash, high-grade bond funds, etc.)

This is like balancing both ends of a seesaw perfectly level. This 50/50 ratio is your "baseline," the "steady anchor" of your investment world.

What is "Rebalancing," and Why Do It?

Markets are constantly fluctuating. Sometimes stocks surge; sometimes bonds outperform.

Scenario 1: A Bull Market

Suppose you initially invest ¥100,000: ¥50,000 in stocks and ¥50,000 in bonds. After a year, stocks surge, and your stock value grows to ¥80,000, while bonds remain at ¥50,000.

Now your total portfolio is ¥130,000. Stocks account for 80 ÷ 130 ≈ 61.5%, while bonds are down to 38.5%.

See how your "seesaw" has tilted sharply? The stock side is now higher and heavier. This means your portfolio risk has increased—you’ve unknowingly drifted away from that initial stable, "defensive" setup.

This is where "rebalancing" steps in.

The operation is simple: Sell a portion of the overperforming asset (stocks) and buy the underperforming one (bonds) to restore the 50/50 ratio.

Specific steps:

Your total assets are now ¥130,000.
Your target is 50% stocks and 50% bonds—¥65,000 each.
You currently have ¥80,000 in stocks and ¥50,000 in bonds.
Therefore, you need to sell 80,000 – 65,000 = ¥15,000 worth of stocks and use that money to buy ¥15,000 in bonds.
After this, your assets become: Stocks ¥65,000, Bonds ¥65,000.

The seesaw is level again!

You’ve likely noticed this operation naturally achieves what everyone tries but struggles with—“selling high and buying low.” You automatically sold some assets during market exuberance (when stocks surged), locking in profits, then allocated funds to the relatively "unfashionable" asset (bonds) at the time.

Scenario 2: A Bear Market

The reverse also holds. If stocks crash, your ¥50,000 stock holding falls to ¥30,000 while bonds remain at ¥50,000. Now, your portfolio’s stock allocation is too low, shifting your risk tolerance away from the original intent. Rebalancing means selling some bonds to "buy low" and acquire those cheaper fallen stocks, restoring the 50/50 split.

This forces you to buy with discipline amid market panic, instead of following the herd in panic-selling.

So, How Often Should You Rebalance?

There’s no single absolute answer, but here are two simple, practical methods:

Time-Based (Most Hands-Off)
- Set a fixed period—e.g., every six months or every year—on a specific date (like your birthday or New Year’s Day). Check your portfolio then and rebalance back to 50/50 if needed.
- Advantage: Super simple. No need to watch the markets daily. Helps overcome emotional biases. For most defensive investors, once a year is perfectly sufficient.
Threshold-Based (More Flexible)
- Set a "tolerance range"—e.g., rebalance when any asset class deviates by more than 5% or 10% from the target.
- For a 50/50 baseline, you might act when stocks hit 55% or drop to 45%.
- Advantage: Responds more promptly to significant market swings.
- Disadvantage: Requires closer monitoring; potentially more frequent trading.

Advice for Ordinary Investors:

For new defensive investors, I strongly recommend the first method: time-based rebalancing once a year. It’s simple enough to build discipline without the stress, trading costs, or anxiety of frequent adjustments.

To Summarize

For a defensive investor, rebalancing is like an "autopilot" for your investment journey.

Set Your Baseline: Start with Graham’s classic 50/50 stocks/bonds split.
Set Your Rule: Choose a fixed annual date to check and adjust.
Execute Mechanically: When allocations drift, sell the overweight asset and buy the underweight one to restore your baseline.

The core purpose isn’t chasing higher returns but:

Controlling Risk: Keeping your portfolio's risk level consistently within your comfort zone.
Taming Impulses: Using discipline to overcome greed and fear, avoiding chasing rallies or panic-selling.
Simplifying Decisions: No need to predict markets—just follow the rules.

This embodies the essence of Graham’s philosophy: "Margin of Safety" and "Predictable Discipline." Hope this explanation helps!