Investing isn’t something that’s a one-time exercise. Sure, you need to put a great deal of thought into selecting the investments that make up your portfolio. But once your investment portfolio has been ideally constituted, does that mean your job is done? Surely not. Your investment portfolio needs to be analyzed from time to time to check if it’s still ideally aligned with your risk-return profile

For instance, you invested in a mutual fund. The fund is up 50%. You are pleased and redeem your money. 

Before we discuss if it was a good idea to redeem and exit your mutual fund investment, we have to ask, why did you invest in the fund? Was it for a specific goal? Was it to create long-term wealth? 

If you redeemed because you reached your financial goals, then BRAVO!!!  On the other hand, if you are a long-term investor, then you probably need to rebalance your portfolio on a periodic basis. It is important for two reasons: risk management and improved returns.

As markets fluctuate, rebalancing your investments will require buying or selling some portion of your mutual funds so that your asset allocation is in line with your risk profile.

Why do you need to rebalance?

Rebalancing is probably one of the most overlooked aspects of Investing. 

If pedaling is like injecting savings into your portfolio (by far, the hardest part) and wheels are transforming it into returns then what is rebalancing?

As conditions change, gears help to keep the legs spinning at the pace you want.  The same goes on with rebalancing. Adjusting the gears so that you won’t injure yourself when facing an uphill battle or strong winds.

Over time your strength may not be the same anymore, at which point the gears you use may change more permanently.

Bulls and Bears - when you need to take action!

 

When should you rebalance your portfolio?

Now that you’ve understood the portfolio rebalancing meaning, it’s time to move on to the next big question – when should portfolio rebalancing be done? Typically, there are different triggers that make portfolio rebalancing necessary.

Here’s a preview of some such scenarios or situations when you need to revisit your portfolio and check if it’s still aligned with your goals.

Market Condition

A standard rule of thumb is to rebalance when an asset allocation changes more than 10%. You can refer to my article- How am I investing in current times 

Changes in your risk profile

When you first constituted your investment portfolio, you may have been an aggressive investor who was open to taking more risks. But with time, your risk profile could have undergone changes. You may have become less tolerant of risks, reducing your risk taking capacity. In such a case, with changes in your risk profile, portfolio rebalancing becomes necessary.

A new financial goal on the horizon

Over time, new financial goals may be added to your objectives. When you start a family, for instance, you will have to make room for additional goals like paying for your child’s college education. When new goals like this are added to your investment objectives, you may need to revisit your portfolio to ensure that it’s capable of meeting these new targets. If it’s not so equipped, portfolio rebalancing can help.

Fast-approaching retirement

When you’re nearing retirement, it becomes increasingly essential to ensure that your investments are properly aligned to meet your retirement goals. Rebalancing your investments may be necessary to help you achieve that target corpus you have in mind. So, if you find yourself just a few years from the big day, check your portfolio and use portfolio rebalancing strategies to adjust the asset allocation, if needed.

 

Portfolio rebalancing strategies: How to rebalance your portfolio?

Rebalancing your portfolio will depend specifically on your investment needs and goals. However, a few simple steps can help you understand the process better. 

1. Have a target asset allocation in place. Factor in your life goals, your risk appetite, and your retirement goals to make your asset allocation aligned with your investor profile. 
2. Constitute your investment portfolio based on your required asset allocation.
3. Revisit your portfolio every six months or every year to check if the assets therein continue to adhere to the original target allocation.
4. Also, revisit your asset allocation target periodically to ensure that it is in tune with your life goals.
5. In case your target allocation is not met, you may have to purchase new units of some assets or sell off existing units of other assets as needed, till the right asset allocation is achieved once more.

Wealth Cafe advice: 

Rebalancing is an important part of managing an investment portfolio and is typically needed just once per year. Through rebalancing, you can keep the risk level of your portfolio consistent and perhaps even enhance your returns. Essentially, rebalancing will help you stick to your investing plan regardless of what the market does and also help you maintain your original asset-allocation strategy. When rebalancing, though, you have to be careful not to trigger excessive taxable income in taxable accounts. 

If you’re unsure about how to rebalance your portfolio, it’s always a good idea to seek the help of a financial advisor. We are SEBI registered investment advisors and can help you make sound investment decisions - you can reach out to us at iplan@wealthcafe.in, in order to help you make a financial plan for yourself.