Is this the right time to rebalance your portfolio?

A balanced portfolio can potentially deliver better risk-adjusted returns, ensuring smoother sailing towards your financial destination.

In 2023, Indian equity markets were the clear winner. The Nifty 100 index gave a return of around 18 percent, but mid-cap and small-cap indices gave returns of around 38 and 42 percent, respectively. On January 23, the S&P BSE Sensex tumbled by 1,000 points, or 1.47 percent. That's just a single day's fall. All these sharp movements, especially when markets rise the way they did in 2023, warrant a review, maybe rebalancing and shifting your asset allocation back to what is necessitated by your risk profiling and financial goals. Then, on days like January 23, when equity markets fall, your portfolio falls sharply. So, is it time to consider rebalancing your portfolio?

Why rebalancing matters: Safeguarding your financial journey

Rebalancing goes beyond mere adjustments in percentages; it's akin to recalibrating your financial compass. Here's why it's a crucial practice:

Maintaining your risk compass

Asset allocation is not a random number; it mirrors your unique risk tolerance. It draws the line between thrilling adventures and sleepless nights. A skewed portfolio tosses that line overboard, potentially exposing you to more risk than you bargained for. Rebalancing acts as a gentle tug back towards calmer waters, ensuring you stay true to your risk appetite and comfort level. It helps you reach your financial goals without unnecessary white-knuckle moments.

Locking in profits, seeding new opportunities

Consider equity's stellar performance as a bountiful harvest. Rebalancing allows you to reap the rewards by selling a portion of those high-flying stocks and funds, capturing profits in the process. Yet, it's not just about taking money off the table. The proceeds become seeds for new opportunities. You can reinvest in asset classes that may have lagged, such as debt or gold, creating a more diversified portfolio poised for future growth. It's akin to harvesting your windfall and using it to sow the seeds for a fruitful future.

Discipline against emotions

Chasing hot streaks in the market can be intoxicating. But the market, much like a fickle lover, can turn cold unexpectedly. Rebalancing injects a much-needed dose of discipline, preventing you from being swept away by emotional investment decisions. A measured approach keeps you grounded and prevents you from overcommitting to any single asset class. It ensures your portfolio weathers both sunny days and stormy nights.

Also read | Equity markets under pressure: Should you tweak your MF investment blueprint?

Your long-term returns get enhanced

Over time, a balanced portfolio can potentially deliver better risk-adjusted returns, ensuring smoother sailing towards your financial destination.

It keeps your risk exposure in check, preventing you from sailing into uncharted waters with an overloaded equity boat.

And it helps you avoid knee-jerk reactions and impulsive decisions, keeping your investments on a steady course.

Also read | 5 ways to strengthen your personal balance sheet

When rebalancing doesn’t work

Transaction costs: Buying and selling might incur some fees and taxes, but think of it as an investment in your portfolio's long-term health. If you particularly sell an equity mutual fund before a year, then you have to incur short-term capital gains tax.

Potential missed gains: If a particular asset continues to soar, rebalancing might mean selling a part of the potential winners a little too soon.

Timing dilemma: Deciding when to rebalance can be tricky. Too often, and you incur unnecessary costs; too infrequently, and your risk exposure might increase.

Also read | 5 investment tips for 2024, irrespective of where the market is

Four tips to stay on the right path of investment:

Review regularly

Schedule half-yearly or annual check-ups for your portfolio, just like you do for your health. This allows you to assess the drift and make the necessary adjustments.

Time it wisely

Avoid rebalancing with every market hiccup. Focus on significant drifts, like a 5-10 percent deviation from your ideal allocation.

Seek professional guidance

If the complexities of rebalancing seem daunting, don't hesitate to seek the advice of a financial advisor. They can help you determine the best approach for your unique situation and navigate the nuances of portfolio adjustments.

Rebalancing is continuous; not a one-time exercise

The bull market might be tempting, urging you to ride the wave with an overloaded equity ship. But rebalancing is like being a wise captain, constantly adjusting the sails, ensuring your portfolio stays balanced and reaches its destination. It's not just about riding the current; it's about achieving your financial goals with a steady hand and a seasoned perspective.

So, as we navigate the highs and lows of the financial landscape, don't let the euphoria of one asset class distort your carefully crafted balance. Embrace the power of rebalancing and navigate the ever-changing market with a balanced approach and a clear view of your financial horizon, especially in the new year when caution is warranted amidst unprecedented gains.