REBALANCING YOUR PORTFOLIO

 Some asset classes perform better than others.

 What many don’t realise is the impact on the portfolio mix.

 If equities are assumed to rise 12%, debt gives 7% and gold moves up 5 % a year, a
portfolio that has 60% in equities, 35% in debt and 5% in gold will have more that
70 % in equities in 10 years.

 Therefore, rebalancing your portfolio is a must.

 This is not a problem if the equity markets continue to rise at an even pace. But the

portfolio will see a more pronounced decline of the stock markets tank.

 Besides who was willing to out 60% in equities 10 years ago should logically
allocate less to this volatile class as he grows older.

 It is recommended that investors should rebalance it at least once a year.

 Rebalancing is also advisable in case of a major market development, where a

particular asset class moves up or down by more than 10 – 15 %.

 Back testing studies show that rebalanced portfolios deliver better returns in the
long run than static portfolios that don’t make any changes.

 The rebalancing decision is not an easy because it requires a contrarian call. The
investor has to jettison (throw or drop from a ship or aircraft) the assets that are
doing well and buy more of the underperformers.

 When the senex rose above 42000 earlier this year; very few would have thought
of booking profits in stocks.

 Investors who were disciplined enough to do that were not so badly hurt by the
decline that followed.

 This is where the role of the financial advisor becomes critical.

 Left to himself the retail investor may not take the right decision. But a financial
advisor might be able to nudge him in the right direction.
 Investors who do not have a financial advisor should have a written investor policy
that spells out their target asset allocation with upper and lower percentages.

 If these levels are breached, it should trigger a portfolio review and maybe even
rebalancing. The key is to religiously follow the rule without exceptions.

 Rebalancing not only restores the asset allocation but also controls the risk in the

portfolio.

 More importantly it lowers the volatility of returns, which helps investors boost
confidence in the market.

 When the markets recede, he is less likely to panic and more likely to remain
invested or even buy more.

 Investors who do not follow this simple rule are likely to lose their balance.