- 1Ratings change when underlying factor data updates (prices, financials, short interest)
- 2Monthly rebalancing captures most of the factor premium while keeping costs low
- 3Upgrades to Strong Buy are potential buy signals; downgrades to Hold or below are sell signals
- 4Use a one-tier buffer to avoid whipsawing on borderline stocks
- 5Transaction costs matter — don't trade on every minor score fluctuation
- 6Disciplined rebalancing is the single most important driver of long-term factor returns
#What Triggers a Rating Change?
Our composite score is recalculated daily as new data flows in. A stock's rating can change when any of its six underlying factors shift:
| Data Type | Update Frequency | Factors Affected |
|---|---|---|
| Stock prices | Daily | Momentum, Low Volatility |
| Quarterly earnings | Every ~90 days | Profitability, Value, Investment |
| Short interest | Bi-monthly (FINRA) | Short Interest |
| Annual financials | Annually | Value (intangible adjustment), Investment |
The Most Common Triggers
- 1Momentum shift: A stock's 12-month return changes significantly — either a rally lifts it or a decline drags it down
- 2Earnings surprise: A strong or weak quarter changes profitability and value scores
- 3Volatility spike: A sudden price swing raises the volatility score (bad) or a calm period lowers it (good)
- 4Short interest change: A jump in days-to-cover signals growing bearish sentiment
#How to Handle Upgrades
When a stock is upgraded (e.g., from Buy to Strong Buy, or from Hold to Buy), it means the factor profile has improved.
Upgrade Action Plan
| Upgrade Type | Action | Urgency |
|---|---|---|
| Hold → Buy (3★ → 4★) | Add to watchlist; consider buying at next rebalance | Low — wait for confirmation |
| Buy → Strong Buy (4★ → 5★) | Strong buy signal; add at next rebalance if portfolio has room | Medium — act within the month |
| Reduce → Hold (2★ → 3★) | Not actionable — a 3-star stock is still average | None — don't buy |
| Avoid → Reduce (1★ → 2★) | Not actionable — still below average | None |
Before Buying an Upgrade
- 1Check the factor breakdown. Is the upgrade driven by one volatile factor (momentum) or broad improvement across multiple factors?
- 2Check sector exposure. If the stock's sector is already at your 30-35% cap, skip it.
- 3Check the score trajectory. A stock that jumped from 63 to 76 in one month may be momentum-driven. A stock that steadily climbed from 55 to 68 to 76 over three months has a more durable signal.
#How to Handle Downgrades
Downgrades are harder psychologically — selling a losing position feels like admitting a mistake. But disciplined selling is what separates systematic investors from everyone else.
Downgrade Action Plan
| Downgrade Type | Action | Urgency |
|---|---|---|
| Strong Buy → Buy (5★ → 4★) | Hold — still a good stock; monitor closely | Low — no immediate action |
| Buy → Hold (4★ → 3★) | Sell at next rebalance | Medium — sell within the month |
| Hold → Reduce (3★ → 2★) | Sell promptly | High — factor profile is deteriorating |
| Any → Avoid (→ 1★) | Sell immediately | High — multiple factors are negative |
The One-Tier Buffer Rule
To avoid whipsawing (selling and immediately rebuying), we recommend a one-tier buffer:
- Buy threshold: Strong Buy (5★) or Buy (4★) to initiate a new position
- Sell threshold: Hold (3★) or below to exit a position
This means a stock that drops from Strong Buy (5★) to Buy (4★) stays in the portfolio. You only sell when it falls to Hold (3★) or below. This buffer reduces unnecessary trading by roughly 30-40%.
Selling Without Emotion
Create a written rule before you start investing:
"I will sell any position that drops to 3 stars or below at my next monthly rebalance, regardless of whether I think it will recover."
This eliminates the most destructive behavioral bias in investing: holding losers hoping they'll bounce back.
#Monthly Rebalancing: The Practical Process
Why Monthly?
Our backtest rebalances monthly, and there's good reason:
| Frequency | Factor Capture | Transaction Costs | Practical Effort |
|---|---|---|---|
| Daily | Maximum | Very high — eats returns | Impossible for individuals |
| Weekly | High | High — still too expensive | Stressful and time-consuming |
| Monthly | Strong | Moderate — acceptable | Manageable for most investors |
| Quarterly | Moderate | Low | Misses momentum signal decay |
| Annually | Low | Very low | Too infrequent for factor strategies |
Monthly rebalancing captures approximately 85-90% of the available factor premium while keeping transaction costs to 0.3-0.5% annually (assuming reasonable commission rates).
The Monthly Rebalance Checklist
Set a recurring calendar reminder (e.g., first Saturday of each month) and follow these steps:
1. Review Current Holdings (10 minutes) - Open your portfolio and check the current rating of every stock you own - Flag any stock that has dropped to Hold (3★) or below
2. Identify Sells (5 minutes) - Sell any stock rated Hold or below (using the one-tier buffer rule) - Note the cash freed up
3. Identify Buys (10 minutes) - Review the current Strong Buy list - Filter for stocks in sectors where you're underweight - Rank candidates by composite score
4. Execute Trades (5 minutes) - Sell the flagged positions - Buy replacements with the freed cash - Aim to keep position sizes roughly equal
5. Record and Review (5 minutes) - Log what you bought and sold, and why - Note your portfolio's average composite score - Compare to last month
Total time: approximately 35 minutes per month.
#Transaction Cost Considerations
Every trade has costs — commissions, bid-ask spreads, and market impact. Here's how to minimize them:
| Cost Type | Typical Amount | How to Minimize |
|---|---|---|
| Commissions | $0 at most brokers | Use a zero-commission broker |
| Bid-ask spread | 0.02-0.10% per trade | Use limit orders, not market orders |
| Market impact | Negligible for small accounts | Trade liquid stocks (avg volume > 500K) |
| Tax drag | Varies | Hold in tax-advantaged accounts when possible |
The Breakeven Calculation
A rating change should only trigger a trade if the expected factor premium exceeds the round-trip cost:
- Average monthly factor premium for Strong Buy over Hold: ~0.3-0.5%
- Average round-trip cost (spread + any commissions): ~0.05-0.15%
- Net benefit per trade: ~0.2-0.4%
This is why we rebalance monthly rather than daily — the accumulated premium justifies the cost, but more frequent trading doesn't.
#What NOT to Do
| Mistake | Why It Hurts |
|---|---|
| Panic sell on a 1-point score drop | Score fluctuations of 2-3 points are normal noise |
| Hold a 2-star stock "because it will come back" | Hope is not a strategy; factor signals are predictive |
| Rebalance daily | Transaction costs will destroy your returns |
| Ignore rebalancing entirely | Factor signals decay; your portfolio drifts toward randomness |
| Sell winners just because they're up | If the rating is still Strong Buy, the factors still favor it |
#The Bottom Line
Rating changes are information — not emergencies. The systematic approach is simple:
- 1Check ratings monthly
- 2Sell what's fallen to Hold or below
- 3Buy the best-ranked replacements
- 4Keep sectors balanced
- 5Don't overtrade
Discipline beats intelligence in factor investing. The investors who follow this process consistently will capture the lion's share of the factor premium over time.
#Further Reading
Last updated: February 20, 2026