What happened

During the February 2026 software selloff, I sold most of my VOO position (7→2 shares) and all of VEU to fund purchases of MSFT and SPGI at steep discounts. The S&P 500 trailing P/E was ~29x (historical median ~18x), making cap-weighted VOO expensive beta. I kept RSP (equal-weight, PE ~20x) as the remaining core position.

The rotation thesis was correct: buying wide-moat companies during a sentiment-driven selloff, funded by selling an overvalued index. But the magnitude was too aggressive — Core ETFs fell from 28% to 18%, and Stocks rose to 63%.

The insight

The direction of a rotation can be right while the magnitude is wrong.

The dangerous pattern is:

  1. I see an overvalued asset and an undervalued opportunity.
  2. The valuation gap is real and defensible.
  3. I conclude: “swap as much as possible.”
  4. The portfolio becomes concentrated in a sector bet I didn’t plan for.

The real risk is not the thesis — it’s that every rotation feels uniquely justified in the moment. If I allow large-scale rotations whenever I have a “good reason,” the Core will never be stable.

The rule (one sentence)

Valuation-based rotation out of Core is allowed, but must be gradual, explicitly justified, and must preserve a minimum Core floor.

Implementation

Conditions for rotating out of Core ETFs:

  1. Written justification with a specific valuation metric (e.g., “SPX PE ~29x, well above 20-year avg of ~16x”).
  2. Identify the destination and why it offers better risk/reward at current prices.
  3. Minimum Core floor: at least one core ETF must remain ≥10% weight. (In Feb, RSP at 10.5% fulfilled this.)
  4. Gradual execution: spread the rotation over at least 2–3 weeks, not a single week.
  5. Sector concentration check: the destination positions must not push any single sector above 25%.

Without all five conditions met, default to the original rule: new cash only.

Anti-patterns:

  • “VOO is just the market — I can always rebuild it.”
  • “This selloff is a once-in-a-cycle opportunity — I need to go all-in.”
  • “I’ll swap 5 shares now and it’ll be fine.”

Retrospective: what I should have done in Feb

  • Sell 2–3 shares of VOO (not 5), keeping Core at ~22–25%.
  • Keep VEU for diversification; the upside is limited but it serves a structural role.
  • Build SPGI to 7 shares over 3 weeks (not 11 shares in 5 days).
  • Accept that participating less in the opportunity is the cost of maintaining structure.

Case study