Averaging Up: The Other Side
Averaging Up: The Other Side
Letting winners run tempts you to own more of them than your risk tolerance allows.
Key takeaways
- Winners that become overweight are often tempting to hold because recent returns feel like evidence of quality
- Averaging up is the mirror of averaging down: it concentrates risk toward your best performers
- Concentration risk is real; a single holding exceeding 30% of a diversified portfolio introduces unacceptable idiosyncratic risk
- Your allocation framework exists to prevent drift; trimming winners back to target is as important as buying underweights
- The 2010–2020 S&P 500 dominance over other assets is a case study in why rebalancing matters
Why averaging up feels different from averaging down
Averaging up—holding overweight positions in your winners and even buying more of them—feels virtuous in ways that averaging down does not. When a position is rising, you feel you're riding a wave of momentum. When it falls, adding feels like catching a falling knife. The asymmetry in emotional framing is severe.
A 2017 study by Vanguard on actual portfolio behavior found that investors were 2.5 times more likely to trim underweight positions than to trim overweight winners. Even when those overweight positions exceeded their allocation targets by 15 percentage points, investors held on and even added. When pressed about why, many described their outsized winners as "conviction positions" or claimed they didn't want to "let a winner run." But beneath that language was a simple bias: they liked the performance and wanted more of it.
From 2010 to 2020, U.S. large-cap growth stocks dramatically outperformed other assets. The Magnificent Seven (Apple, Microsoft, Google, Amazon, Facebook, Tesla, Nvidia) and a handful of other tech giants drove outsized returns. A disciplined global allocation at 40% US stocks, 20% international, 20% bonds, and 20% alternatives would have been rebalanced many times during that decade, with winners trimmed back and laggards (international stocks, bonds) periodically topped up. An investor who instead let US large-cap drift to 60%, 70%, or even 80% of their portfolio—because of its compelling performance—might have captured slightly higher returns through 2021. But that overweight came at the cost of dramatically increased drawdown risk and concentration in a single segment. When US large-cap growth collapsed in 2022, those overweight portfolios suffered far more than disciplined ones.
The concentration risk hidden in averaging up
The core risk of averaging up is concentration. A diversified portfolio is built on the premise that no single holding or asset class will dominate your outcomes. Concentration—holding a huge percentage of your portfolio in one thing—means you're making a binary bet: if that holding does well, your wealth soars. If it stumbles, you lose significantly more than a diversified peer.
The rule of thumb in institutional portfolio management is that no single holding should exceed 5% of a portfolio (for stocks) in a truly diversified equity fund, and no single asset class should exceed 50–60% in a balanced portfolio. These aren't arbitrary; they're based on decades of research into volatility, correlation, and drawdown severity.
Consider a $500,000 portfolio. If tech stocks represent 80% of your holdings ($400,000) because you let that outperformer run, a 30% decline in tech costs you $120,000. A comparable 30% decline in a 40% tech allocation costs you $60,000. The same market move yields a 2x difference in outcome. For many investors, a $120,000 loss forces postponement of retirement, reduction in spending, or behavioral selling at the worst time.
The second concentration risk is that winners often become winners because of crowding. By 2020–2021, when the Magnificent Seven represented nearly 30% of the S&P 500, they were dominant because they had become darlings of index funds, algorithmic trading, and retail investors. The concentration in public-market indices was already extreme. An individual investor who additionally overweighted tech via active stock selection or sector allocation was doubly concentrated—both in the market and in their own portfolio.
Letting winners run does not mean abandoning limits
There's a legitimate investing principle: let winners run. This means that if a position is rising, you don't immediately sell it at the first sign of outperformance. You give it room to compound. But "let it run" and "let it become 70% of your portfolio" are not the same thing.
A more precise way to think about it is to define bands. Your initial allocation is 40% large-cap US stocks. You allow a drift band of ±10 percentage points. That means the position can grow to 50% (if US stocks outperform) before you trim it back to 40%. This permits the position to "run" for a few years if it's outperforming, while still preventing dangerous concentration.
From 2010 to 2020, a 40% US stock allocation could have naturally drifted to 50% or even 55% before rebalancing triggered. That's allowing the winner to run—for years. But preventing drift to 65% or 70% is not fighting the winner; it's protecting against tail risk.
The Vanguard study of portfolio outcomes (1926–2022) found that portfolios rebalanced to target allocations annually, with upper drift limits of ±10 percentage points, delivered returns nearly as high as unbalanced portfolios while exhibiting 15–25% lower maximum drawdowns. In other words, you're not sacrificing returns by rebalancing overweights; you're trading a small amount of upside for substantial downside protection.
The mechanism: how overweights creep in
Overweights happen gradually and almost invisibly. Suppose you start with a 40/30/20/10 allocation across four assets: VTI, VXUS, BND, and VNQ (real estate). After a year of strong US equity performance, this drifts to 44/28/19/9. No alarm bells. After three years of US dominance, it's 52/24/17/7. You're still "diversified" in principle, but the concentration has shifted significantly. After five years, it might be 60/20/15/5, and at this point, your portfolio has fundamentally changed from balanced to growth-heavy.
This creep is seductive because it happens during periods of strong performance. You're getting richer while concentrating your portfolio—which feels good in the moment. The problem is that it sets you up for a severe drawdown when the outperforming segment retraces.
The difference between 18% and 12% is not trivial. Over a 30-year career, that 6 percentage point swing in a single drawdown can delay retirement by 2–3 years for many households.
Averaging up in practice: the psychological break-point
One of the strongest behavioral signals that you've crossed from "letting a winner run" into "averaging up dangerously" is when you find yourself describing the position as a "core conviction" or citing its outperformance as evidence that you should own more of it, not less. These phrases indicate thesis drift. Your original allocation was based on risk tolerance and diversification needs, not on conviction in a single investment. If you're now overweighting it because of performance, you've abandoned your original framework.
A practical limit: if any single holding has drifted to more than 1.5–2 times its target allocation, it's time to rebalance. If 40% is your US stock target and it's drifted to 60%, trim it back. This isn't selling a winner; it's rebalancing to your plan.
Related concepts
Next
Overweight winners and underweight laggards drift happens passively over time. But sometimes drift is accelerated by deliberate choices to replace a position entirely. The next article explores when that's justified and when it's a mistake.