Tim Guinness's firm uses 30 equal-weighted stocks to diversify risk. This forces a "one-in, one-out" policy, compelling the team to sell their least-favored holding to add a new one, thus overcoming the common investor weakness of being poor at selling.

Beyond yield premiums, illiquidity imposes a major opportunity cost: the inability to rebalance. When one asset class soars, liquid investors can sell and reallocate to cheaper assets. Heavily illiquid investors are stuck, forfeiting valuable strategic portfolio shifts.

Unlike typical investors who chase performance, sophisticated institutions often rebalance into managed futures when the strategy is in a drawdown. They take profits after strong years (like 2022) and re-allocate capital during weak periods to maintain strategic exposure.

The primary role of a small fixed-income allocation (e.g., 10%) isn't to generate returns but to act as a behavioral stabilizer. It provides a simple, mechanical rebalancing rule: trim equities if bonds fall to 5%, buy more if they rise to 15%. This forces disciplined "buy low, sell high" behavior.

Short-term performance pressure forces fund managers to sell underperforming stocks, creating a self-fulfilling prophecy of price declines. Investors with permanent capital have a structural advantage, as they can hold through this volatility and even buy into the weakness created by others' behavioral constraints.

Even if an investor had perfect foresight to buy only at market bottoms, they would likely underperform someone who simply invests the same amount every month. The reason is that the 'market timer' holds cash for extended periods while waiting for a dip, missing out on the market's general upward trend, which often makes new bottoms higher than previous entry points.

The goal of diversification is to hold assets that behave differently. By design, some part of your portfolio will likely be underperforming at all times. Accepting this discomfort is a key feature of a well-constructed portfolio, not a bug to be fixed.

Methodical Investments uses an annual rebalancing cycle as a strategic choice. More frequent rebalancing doesn't allow value theses to fully develop and be recognized by the market. However, waiting longer than a year risks the portfolio drifting away from its core value characteristics, losing its margin of safety.

The sign of a working diversification strategy is having something in your portfolio that you're unhappy with. Chasing winners by selling the laggard is a common mistake that leads to buying high and selling low. The discomfort of holding an underperformer is proof the strategy is functioning as intended, not that it's failing.