Reaping the benefits of Portfolio Rebalancing

Stock Market Investment Shot,9th December 2022

Stock Market Investment Shot,9th December 2022

The recent times have been in total chaos. In terms of the stock market, it was a super twisted roller coaster ride. Nifty50 total growth contribution in 2019 was 12.02%, which started taking a narrow slope in the coming months and hit a low rock bottom of -23.25% in March 2020. 

Although the market has recovered nicely in with the index posting a 15% total return for the year. This trend seemed to be continuing into 2021, with the index hitting a record high in late February.

We all know that the recovery in the markets has been quite uneven. Growth stocks have led the way, while value has largely lagged. For example, Bajaj Finance’s shares are up over 33.56% year-to-date, HDFC is up almost 22%, and many more stocks with astounding numbers (H2 B2 shares as they are nicknamed in the market).

With all of these whirling stocks among various asset classes over the past couple of years, you must be sceptical about your risk-taking corresponding to such an appropriate challenging situation. 

You must have been in touch with investment advisory services, you would know that it is a good time to consider rebalancing your investments.

Here are four benefits of portfolio rebalancing.

  1. Portfolio Rebalancing is like ‘Meditation’

When you meditate, you start focusing, meaning things start falling in track and your work execution takes a steady phase step by step.

Bottom line one becomes ‘Disciplined’!

Rebalancing helps establish a level of discipline in terms of not just staring at your portfolio but also taking collectives steps whenever and if necessary. This includes selling total or a part of your winners and investing that money back into asset classes that have underperformed.

This may seem absurd but one has to keep in mind that markets are dynamic and the leaderships rotates over time. During the first decade of this century, emerging markets equities were often among the top-performing asset classes. Fast forward to today and their performance seems to be somehow paralyzed.

Rebalancing can help save investors from their own worst gut-feeling nightmares and instincts. It is often tempting to let top-performing holdings and asset classes run when the markets seem to keep going up. 

Investors heavy in large caps, especially those with heavy tech holdings, found out the risk and feasibility of this approach when the Dot Com bubble burst in early 2000.

Ideally, investors should have a written investment policy that outlines their target asset allocation with upper and lower percentage ranges. Violating these ranges should trigger a review for potential portfolio rebalancing.

2. Helps to  keep a tab on your Financial Plan 

Having a plan with money doesn’t just help you right now, it gives you vision and hope for the end goal. In the same way, earning is just the beginning, investing and watching your money grow ensuring you meet your financial goals and objectives is the true accomplishment. 

Stock portfolio management has vital ingredients like target asset allocation and an investment strategy tied to your goals, and your timeframe for the money. Do not forget to add some spice, and risk tolerance.

Periodic portfolio rebalancing is not just crucial but it has over time become a necessity to maintain an appropriate asset allocation that is in line with your financial plan.

3. The Risk-Reward see-saw game

Asset allocation is about striking a balance between the two prime entities in the portfolio: risk and reward.

Let’s understand with the help of an example; If a portfolio consists of 10 stocks, it is evident that these 10 stocks don’t necessarily move in the same trend. Invariably some will perform better than others. This can cause your portfolio to be skewed towards an allocation that takes too much risk or too little risk based on your financial objectives.

During robust periods in the stock market equities will outperform asset classes such as fixed income. Perhaps your target allocation was 65% stocks and 35% bonds and cash. 

A stock market rally might leave your portfolio at 75% stocks and 25% fixed income and cash. This is great if the market continues to rise but you would likely see a more pronounced decline in your portfolio should the market experience a sharp correction.

And as we know the market can’t be timed, the only thing an investor could be prepared of is acting according to the dynamics. And what’s the other best option do you think one has got other than Rebalancing?

4. Validating Strategy from time to time

When considering portfolio rebalancing investors should also incorporate a full review of their portfolio that includes their individual holdings and the feasibility to continue with the existing investment strategy. 

Some common questions you should ask yourself:

1)Have individual stock holdings hit my growth target for that stock?

2)Relative performance?

3)Expense ratios?

4)Style consistency?

5)Have there been any recent changes in the key personnel managing the fund?

These are some of the factors that financial advisors consider as they review client portfolios.

This type of review should be done at least annually and we generally suggest that investors review their allocation every 30 days.

Portfolio Rebalancing under stock portfolio management, in the dawn of investment may sound counterintuitive, but it’s the best strategy that helps reduce downside investment risk and ensures that your investments are allocated in line with your financial plan. It also can help investors impose an important level of discipline on themselves. It also acts as a checklist for short term goals in order to achieve the long term ones.

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