You must have already known the importance of Rebalancing your Portfolio in our previous discussion.
Today we are going to understand how rebalancing is actually done!
Doesn’t that seem interesting?!
Rebalancing is a periodic activity.
But how often should an investor rebalance?
Well, as interesting as the whole concept of ‘Rebalancing’ is, the answer to the above question is equally spellbinding!
There isn’t a ‘one-word specific answer for this!
Rebalancing an investor’s portfolio depends on several factors like tax norms, brokerage costs and holding time. Some say rebalancing should be done twice a year while some debate one in 45 days.
Why is this so?
The main differentiating debatable factor is because of the nature of asset class. If it’s equity dominated portfolio, an investor should definitely try to rebalance at least twice! Being the most volatile segment, rebalancing often might incur losses to the main portfolio and also in the form of transaction (brokerage fee) costs.
How does an investor rebalance their portfolio?
Since we are well versed in the fact that there is no ‘specific and special’ master plan, there can be multiple schemes and approaches used in devising a plan to rebalance a portfolio.
One of the easiest ways I use to rebalance my portfolio is by, entering the initial rate at which I bought the assets against their current market value and the cost incurred for this transaction. I make it a point to rebalance my portfolio every six months, therefore after 6 months, I compare the current market values to the historical ones.
If necessary, I make appropriate changes, I rebalance my portfolio (sell some, buy some or hold). But as my portfolio evolved, my portfolio needed more attention in terms of strategy, therefore I adopted some of the blueprints listed below: These rebalancing types are definitely interesting but because your money is involved in it keeps you engrossed!
Calendar Rebalancing
It’s all in the name! …isn’t it?
As in the name, this involves the periodic balancing of the portfolio.
This could be once in 45 days, monthly or quarterly or bi-annually or once is 5 years for some. For instance, When I first started rebalancing, I would prefer to rebalance my portfolio monthly, I would block my calendar every 2ns day of the month and do the needful. Initially, it was the most hassle-free method but not optimum with my portfolio.
This monthly plan is most suited for securities with fixed interests as their values do not fluctuate and while we rebalance, we already know what to expect!
Mix Strategy
Rebalancing can be total or partial. In this type of rebalancing, every individual security is allotted a percentage of deviation. It is usually in the range of 5% to 10%.
When the target is achieved, the investor simply rebalances the portfolio.
It’s an instant trigger!
This strategy is goal-oriented and not periodic, the time horizon for achieving the goal can be expected by there are times when the target is achieved much ahead of the expected time. Therefore, this strategy is preferred when the proportion of equity in a portfolio is higher than other asset classes. This strategy proves to be more efficient than calendar rebalancing. Another advantage of the Mix strategy is that it helps retain the initial asset allocation that was decided.
In this way, the risk and return of your portfolio automatically get balanced.
Fresh funds
Just like I mentioned rebalancing can be either partial or total. The fresh fund is a total rebalancing strategy with the help of fresh funds.
How is it done?
It is not necessary that the investor strategizes on the funds he added at the starting of his investments, it is highly possible that the investor might keep on fuelling his portfolio. When the investor parks additional funds, strategically he/she plans of rebalancing.
For instance, if the proportion of one asset in your portfolio is increasing, these additional funds now also known as fresh funds can be invested in the other assets to maintain the risk-return parameters of the portfolio. This strategy is one of my favourites because it makes an investor disciplined. If you are a trader this is a strategy because you will be constantly on a hunting spree for quality stocks.
Quantity definitely follows!
Taxation limits
This is the most important strategy because whatsoever the conditions are tax payment is crucial. Tax should be the primary factor for every investor who is considering investing, with proper financial planning one will definitely reap the benefits!
Conclusion
Financial Management might seem like a punishing task but if applied wisely for your personal finances an investor might no longer need to worry. With the survival for the ever-increasing inflation, there is an ocean of financial products available in the market. But there are chances of getting lost in this maze and getting blank.
Starting your own equity Demat account and thereby rebalancing it at regular intervals is advisable to beginners and to the ones who think the probability of getting lost in this maze is high. But the surprise element is there is another probability that you can invest, someone else takes charge of your rebalancing and you can sit and relax.
Jarvis, an Artificial Intelligence understands the market sentiments, analyses, monitors your portfolio, understands your risk appetite and makes sure your goals are achieved! On top of that, it suggests an appropriate asset allocation based on the parameters and factors which we had discussed above!
Can Jarvis help me out with my portfolio? A big, fat, gigantic, definite…YES!
How do I ask for Jarvis’s help?
Navigate through our website, click on contact us, our executive will help you out with the further process!
And Boom! …. You are ready!
So, what are you waiting for!?
Until Next time…