Is it the Time for Rebalancing your portfolio

Three days back the Sensex has touched 60000 points and still rising. So what should be the strategy from here, sell, hold or buy more. A lot of people are asking this question on the social media platform that what should they do, should they stop the SIP, move funds from mid caps and small caps to large caps.


The actual answer to this is that no one can give you suggestion on what to do, because this is not the simple question to answer. The question on what to do now brings up few more questions like will the market fell from here, will it rise, will large cap perform better than mid cap and small cap etc. The point is this is just a number and there is no significance to the life of an index. It might touch 70000 in coming days or it might fall to 50000, this is the very nature of the market to go up and to go down.

What we have to think is the long term (people in the younger age 20-45 year old's), the thing is we need not have to predict the market will it go down or up here. Our motto should be to invest as much as possible based on the goals. There is no need to stop the SIP because we do not want to time the market, because the opportunity is lost while we wait. And that opportunity is huge. Now the question is what should we do now.

This is the time to rebalance your portfolio, that is what is necessary now. Many investors do not safeguard their portfolio and thus when there is a bear market we feel the need of it. See the market correction is inevitable that means the market will surely come down, but no one knows when so now since the market is at the top we should rebalance our portfolio within our risk tolerance.

In one of my earlier posts, I have written about portfolio rebalancing,

Portfolio Rebalancing in simple terms is the risk managing strategy. As the time passes your asset allocation has to be changed as per the current market conditions as well as current financial status. That means suppose you have a Goal of retirement where you have started with 100% equity but after 5 years you wanted to take less risk as the retirement goal is fast approaching so what you will do is you move those equity asset to low risk debt asset securing your profit and thus now your portfolio stands at 80% Equity and 20% Debt.

Again lets say you started with same percentage of equity and debt ratio, and thus the asset class gives different returns so after a while your equity might give you 15% returns where as debt will give you 6% and thus the portfolio will be more of equity and less of debt. Thus if we want to keep that asset allocation same we have to to Portfolio Rebalancing.

As you can clearly see that today we are getting a good percentage in our equity investment like 20-30%, now its time to move or book profit in some of them (though its totally up to you) and keep the ratio of your portfolio according to your risk appetite. The problem is portfolio naturally get out of balance as the prices of the individual investments changes as per the market condition. Now this changes will lead to increase or decrease the risk level of your portfolio.

It is the human tendency that we think if the investment has performed well in the past it will perform well in the near future as well. But the think is we cannot predict the future, market condition is not in our hand but what we can do is to rebalance the portfolio so that we safeguard our investment.

What I have done?

I have recently rebalanced my portfolio by booking the profit in one of the equity schemes and adding that to the deb scheme. With the current market conditions my equity allocation went from 70% to 76% whereas my debt portfolio went from 30% to 24%. With the rebalancing I again moved my equity portfolio to close to 72% whereas my debt percentage to 28%. I have not done the full 70% equity is to not attract any tax in my equity profit booking. Though I will continue to see the market condition to know if there is any need for me to rebalance or not.

Though rebalancing should be done annually, but its not the hard and fast rule, and you can rebalance anytime because its your portfolio. But we should not over rebalance otherwise we will not get the profit which we would have got. Rebalancing does not mean that your long terms returns should be more, but the purpose of rebalancing is to keep your portfolio in line with the risk appetite.

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