Time to take profits from investments and rebalance your portfolio

Roller-coaster rides in stock prices have rocked investors off their chairs. While the smart ones may take advantage of these fluctuations, the average retail investors may have found the going tough. However, a rule-based approach to asset rebalancing can work for you.

How frequently should you take profits?

Many of us keep looking at our portfolios on a daily basis. The current lockdown has given many of us enough time to do that. It is better to have a rule-based approach.

Rule #1: Track your asset allocation. Exposure to volatile assets such as stocks and, in the recent past, gold can distort your portfolio’s allocation pattern. Keep your emotions away from money management. Rebalance your portfolio at a regular interval, but not too frequently. Amol Joshi, founder of PlanRupee Investment Services, says, “The essence of asset allocation lies in asset-rebalancing.” “It allows you to benefit from the moves in asset prices,” he adds.

Rule #2: If markets rise exponentially, take some profits off the table. Typically, an annual portfolio check-up is good enough. But what should you do when markets rise sharply? For example, the Nifty 50 index fell to a low of 7610 on March 23, 2020 after a hitting a high of 12362 on January 14, 2020 – a correction of 38 per cent in just 49 sessions. But, the Nifty rose to 11408 on August 19, 2020 – a gain of 49 per cent in 102 sessions. Gold prices too are on fire. The yellow metal as given 33 per cent return since January 1, 2020.

“We rebalance our asset allocation if an asset class gives expected returns for two years, in a very short span, say two-three months,” says Joshi. For example, if you assume that equity funds will give you 12 per cent returns in a year, but you get 25 per cent returns in a month or two, rebalance your investments. Sell your equity funds to get back to your stated asset allocation. Use the proceeds to buy other assets.

Parul Maheshwari, a certified financial planner, prefers to review investment portfolios half-yearly. “If allocation to an asset class has deviated from the stated asset allocation by 20 per cent or more, it makes sense to rebalance,” she says. Do not read too much into day-to-day moves in stock markets. In volatile times, 5 to 10 per cent moves do happen almost always. Instead, focus on your asset allocation. “Rebalancing should be done for deviation of 20 per cent on the upside as well as down-side. If asset prices flash-crash, do not hesitate to rebalance,” Parul adds.

Too much rebalancing gets costly

Keep in mind the costs when you rebalance your portfolios. Every time you sell your mutual funds, you could incur exit loads and there are tax incidences as well. “Investors focus too much on absolute index levels. Instead, investors should focus on the valuation of their portfolios. Percentage moves in their portfolios are important and a rule-based approach to rebalancing in volatile times can help you take advantage of volatility,” says Vishal Dhawan, founder and Chief Financial Planner, Plan Ahead Wealth Advisors.

Don’t focus on one investment

Investors need to keep track of all asset classes. Currently, returns on Indian stocks, global equities, gold and good quality bond portfolios are increasing, so your asset allocation should be your guide. “Do not act only on one asset class in isolation just because you think it has moved up or down,” Dhawan adds.

Investors who cannot do this should consider including multi-asset or balanced advantage funds in their overall portfolios, to benefit from drastic changes in asset prices in volatile times.