Things to avoid while Re-Balancing your Portfolio!

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“Mistakes are an important part of Life, Avoid them during Portfolio Re-Balancing”

What is Portfolio Re-balancing? Rebalancing is the process by which an investor restores their portfolio to its target allocation or brings your portfolio back to the desired asset mix. Rebalancing can be industry or sector-specific or in combination. This is done by divesting in underperforming assets and investing in the ones that have the potential to grow. The portfolio is rebalanced from time to time so that investors can gain maximum return from the investment.

Need and benefits of Re-Balancing

Asset re-allocation is called for when new needs arise or your risk appetite either sharply increases or reduces. Re-allocation or re-balancing basically Safeguards the investor from being overly exposed to undesirable risks. While there is no required schedule for rebalancing a portfolio, most recommendations are to examine allocations at least once a year or frequently if the markets are too volatile. Rebalancing gives investors the opportunity to sell at high level and invest at low level. It helps us to track and maintain our financial returns and expectations. A habit of rebalancing will help to achieve the desirous level of return.

Mistakes we commit

1.Emotion-Driven Investment Decision Making

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We all have personal preferences for certain sectors or stocks that influences our decision making process. Whereas it is important that these personal choices should not come in the way of your portfolio re-allocation or re-balancing otherwise it will defeat the basic purpose of the exercise, which is supposed to be the objective.

2. Following the Crowd

When you do this, you are deploying a part of your money in a gamble that you stand to lose against all odds. You are also playing around with your future financial aspirations and your goal based investing strategy could possibly go for a toss.

3.Ignoring Tax angle

“The more often you rebalance, the more emotional you are likely to become. Then you’re just churning your portfolio and creating costs.”

Rebalancing too often could result in a lot of transactions. So long as your portfolio as a whole satisfies your asset-allocation goal, it may not be necessary for every account to be re-allocated. Because it has tax implications associated with it. For example if you are exiting equity funds too early it will cost you STCG or existing debt fund early will have higher taxation.

4.Take Support from an Expert

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It is always better to seek expert advice when it comes to rebalancing. Expert can provide you a holistic picture and fine tune your decision. You can share further data with the advisor and he/she can add a personal touch to the entire rebalancing process. The advisor will be in a position to bring in a broader perspective as they deal with multiple clients.

5.Too rigid about your Financial Plans

Once the financial planning is done, the next step is to build your portfolio as per that. The problem arises when we tend to become too rigid about our approach to our financial plan and forget the fact that financial plan is made on the basis of certain assumptions. For example, we may have assume Inflation would remain 6% over 10 years. But average inflation changed at the end of 5 years so this will require changes to your investment portfolio but more important you will also have to change the assumptions of your financial plan, which is the base.

6.Worrying about Losers

Investors do not like to sell what they bought. If the product is delivering a profit, they want to hold on in the hope of more returns. If the product is giving negative returns, they want to still hold on in the hope that it will bounce someday. Worrying about the laggards in the portfolio instead of booking profits from the winners is a mistake. Your focus in rebalancing should be actually on current winners and potential losers. That is where the risk comes from. Rebalancing is an outcome of risk. When you rebalance your portfolio that is what you need to focus on.

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Experience and knowledge are required to understand how frequently the portfolio needs to be rebalanced and if it’s actually required. Sometimes Rebalancing leads to cutting off the performance leg of stocks. The stocks may be removed from the portfolio before they fully come into their bullish stage. The whole idea is to find a system that works for you, be disciplined in your approach, and stick to a pattern that minimises risk while maximising returns.


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Adroit Financial

Adroit Financial

SEBI Registered PMS Advisor - INP000005349
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