PORTFOLIO REBALANCING – Find out Why it is so Important?

Published by Sharekhan Education | December 7, 2020

PORTFOLIO REBALANCING – Find out Why it is so Important?

If you were to know that the road you are travelling on is going to lead you into a severe traffic jam that could jeopardize your schedule by 2-3 hours, would you not want to find an alternate to bypass that traffic jam? Of course yes! These days modern technology helps you do so. On the click of a button the GPS –maps shows you different routes to reach your destination in the shortest possible time. Not just this it also gives you traffic updates like traffic jams, bad roads, bad weather etc. Result- you make a course correction and save a lot of precious time.

Review of Portfolio:

To achieve financial success you need to follow a process which starts with defining your goals, knowing your risk tolerance, aligning your asset allocation to match both your risk profile and time horizon and finally selecting the right instrument i.e. that mutual fund or stock or fixed deposit etc… to start you on your financial journey. But remember investing your money in that mutual fund or stock or fixed deposit does not end your journey. There is more; the investing process does not end here. There are two more things that you need to do i.e. review-check if you are on right track or not & rebalancing your portfolio – take the necessary corrective actions.

Review is that GPS in your investing journey; it brings up the red flags and helps identify the hurdles that need to be handled and keeps you on track to achieve your goals. Review could be scheduled annually, half yearly or quarterly or maybe even monthly. It all depends on your portfolio volume, volatility and the assets held. A high value and more volatile portfolio may need a more frequent review; the decision should be yours. But do remember that after review, its time to take that course correction; it’s time to rebalance your portfolio. A review not followed by rebalancing would serve no purpose.

Importance of Portfolio rebalancing:

Portfolio rebalancing is that important and integral part of the investment process which will help control the risk and volatility levels of your portfolio. It will make you do the right thing; sell high and buy low. Portfolio rebalancing generally prevents your portfolio from becoming over-weighted in any asset class, thus preserving diversification across assets. It also does not let the market dictate the makeup and risk level of your portfolio; you remain in control.

Rebalancing is a course corrective step, an action that needs to be taken; thus it would be wise to watch out for the commissions, trading costs and capital gains that may arise when you redeem your mutual funds or sell your stocks.

When to rebalance portfolio?

Now when to rebalance is the next obvious question, isn’t it? The answer is very simple, whenever you review your portfolio and find noticeable changes or red flags that need to be corrected; like when your portfolio goes off track, your asset allocation is over weight in any particular asset class or when you are approaching your goals, that’s the time you need to rebalance your portfolio. It could be done once a year, twice a year or as frequently as your portfolio demands.

To wrap it up…

Portfolio rebalancing is very important for the health of your portfolio; if you are looking to achieve financial success and reach your goals in time, then make it an integral part of your investment process. It will help you stay in control.

Learn stocks trading course, derivatives and trading strategies from Sharekhan Education’s online Mastering futures and options trading course.

Happy Investing…