Rebalancing keeps your portfolio on a steady course

Rebalancing keeps your portfolio on a steady course

 

Periodic rebalancing is healthy for your portfolio and investors can do it through mutual funds As you would have heard, maintaining a diversified portfolio is essential according to the basic principles of asset allocation based on one’s risk appetite. But one problem is that how to maintain that appropriate allocation when the markets are constantly on the move and prices of asset classes such as equities and debts change regularly.

 

One’s portfolio and value of funds is unlikely to remain the same after some period of time. It turns out that investors have to update their portfolios to redistribute their asset mix as per one’s original asset allocation – and it is known as rebalancing, which is a very crucial feature for the long term wellbeing of your portfolio.

 

Why rebalancing is critical

 

If you look back in 2008 when the financial crisis broke out, equities were on a decline. A good rebalancing strategy would have accumulated and invested heavily in equity assets. During that period however, everyone’s original portfolio would have been heavy on debt and lighter on equity. Rebalancing at that time would have made you to gather equities when it was at value prices.

 

Again in 2013, when the markets were gloomy and the slowdown affected equity prices, you would have invested in equity funds if you practiced rebalancing diligently and according to your asset allocation. Hence rebalancing would have added more equity assets at bargain prices. In short, rebalancing can help you get into asset classes just when there is a distress in equity or debt portfolio.

 

Again a good rebalancing strategy could help you to book your gains if an asset class gives runaway returns. Rebalancing brings your portfolio to its original mix of equity and debt.

 

For example, as each individual’s asset allocation is different) if your original target was to have 70 percent allocated to equities and 30 to debt, an out performance in equities may take your portfolio to 80 percent equity and 20 percent to debt. To rebalance the portfolio would entail booking gains in equity assets and shifting to debt, and getting your original mix back

70-30 again.

 

Automating rebalancing

 

Rebalancing is a process that is fairly simple, but yet it requires a strict discipline and systems in place for you to be able to execute it seamlessly. Asset classes don’t stay at the same value all the time. Nevertheless, timing an entry into any asset class when its prices are down is not easy. By rebalancing over long periods of time, one can manage the volatility of asset classes to one’s advantage and get a favorable experience in the portfolio.

 

How do you set up an automatic system for you to rebalance? Here one can invest in a balanced advantage or dynamic asset allocation funds, which rebalances its portfolio regularly. Here the funds use intrinsic value of equities, a model that helps to cut exposure to equities as they begin to get overvalued (and vice versa) and to re-balance to other asset classes.

 

The rebalancing strategy helps the fund achieve the goal of investing in equities when markets are cheap and booking profits when markets are rising, thus limiting risk and aiming to provide reasonable returns. Since equity prices dictate your rebalancing strategy, and not your emotions or timing, rebalancing can be possible with these funds.

Happy Investing