The main question arising in such a scenario is that over the course of the year, the value of each security within your portfolio would have changed. Thus, it becomes vital to rethink about your portfolio’s asset allocation in accordance with your risk tolerance level and desired level of returns.
Now, as the year commences, it could be time to rebalance your portfolio by reallocating assets to better align with your initial objectives after a volatile year for the stock and bond markets.
Portfolio Rebalancing is an important aspect of stock investment management. This is because your asset allocation may no longer match your risk tolerance as we move forward. Many investors employ “calendar-based timing”, like quarterly or annually or "as needed" approach to rebalancing that is triggered by rules set in advance.
Simply said, Portfolio Rebalancing is routine maintenance for your investments, similar to getting your car's oil changed or getting a full body check-up once in a year.
Using the same analogy, it is simple to assume that portfolio rebalancing is buying some bonds while selling some stocks or vice versa. It helps ensure that the asset allocation of your portfolio generally reflects the level of returns you're looking to attain and the level of risk you're comfortable with.
Why is Portfolio Rebalancing important?
The weightage of each asset class in your portfolio will vary over time based on the performance of your assets, which will modify the risk profile of your portfolio and this in turn will necessitate periodic rebalancing.
Rebalancing is a crucial procedure to make sure your portfolio is constructed in a way that aligns with your investment plan and risk profile.
You can maintain your actual asset allocation plan and put any adjustments you make to your investment approach into effect by rebalancing your portfolio. Rebalancing essentially helps you to adhere to your investment strategy. This, in turn, assists you to adhere to your risk tolerance levels, regardless of how the markets perform.
When to Rebalance your Portfolio?
Your transaction expenses, personal preferences and tax concerns, such as the capital gains or losses that will be taxed at a short-term or long-term rate, will all affect how frequently you should rebalance your portfolio.
The frequency at which you will rebalance your portfolio will also vary with your age. For instance, you might not want to rebalance your portfolio as frequently when you are relatively young, say in your 20s and 30s and need to maximise your earnings.
In general terms, once a year is enough; but varying periods can also be appropriate if certain assets in your portfolio haven't increased significantly.
Methods to Rebalance Portfolio
One of the best methods to rebalance your portfolio is to begin with a master allocation for equities, debt, and liquid funds of 60:30:10. You often specify a tolerance of +/- 5%.
You can rebalance your portfolio to return it to the original master allocation when any component of it breaches the 5% threshold. This strategy is beneficial as it enables you to automatically monetize earnings on many asset classes.
Another method is to rebalance your portfolio based on the emerging trends in the market. For example- equities may be available at low valuations and this indicates that you must strategically rebalance your portfolio.
Also, the tax efficiency aspect must be kept in mind while portfolio rebalancing. Let us say that a large amount of Dividend Distribution Tax (DDT) is imposed on equity fund dividends. Thus, it is essential to rebalance and shift from dividend plans to growth plans of equity funds.
Portfolio Rebalancing is a part of your investment strategy and one must ensure that their investments are in line with long-term wealth creation. There is no right or wrong method to rebalance your portfolio but you must decide the frequency at which you should rebalance your investment portfolio so that it is in line with your risk tolerance and goals.
Rebalancing your portfolio aligns it to a large extent. The best strategy to evaluate and rebalance your portfolio depends on your risk appetite, financial goals and investment plan.
So, as we bid adieu to this year, let the Portfolio Rebalancing Begin!
If you need any assistance with portfolio investment, rebalancing portfolio and portfolio diversification, you can connect with mastertrust. Get expert knowledge on all the aspects of stock outlook and improvise your portfolio returns for the next year with us.