Ask Colin

If one of the stocks I hold goes up a great deal, should I sell some to rebalance the portfolio?

The way I look at it is this: One of the risks that we have to manage in investing is specific risk - the risk associated with a single stock. That risk is managed through initial position size and diversification.

My rule is to risk no more than 1% of equity on the initial position and to commit a maximum of 6% of equity to any one stock.

The problem is that if the stock doubles in price, all else being unchanged, it approaches 12% of the portfolio.

Theory says that you ride the winning trades. However, my difficulty with this is that my diversification is shot - which means higher risk - and it is psychologically difficult to hold such a large position.

My strategy is to take some of the position off and rebalance the portfolio. However, this is not a generally agreed procedure. You will have to think this one through according to your tolerance for risk and how much risk you are carrying elsewhere in your trading plan.

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