“Re-balancing of Portfolio” is the term, which is widely used in the mutual funds industry, by the so called media-prophets & with most of the advisors with banks/ brokers/ CFP.
What does re-balancing means? And how does it applies to one’s portfolio?
As per Investopedia: Re-balancing is the process of buying and selling portions of your portfolio in order to set the weight of each asset class back to its original state. In addition, if an investor’s investment strategy or tolerance for risk has changed, he or she can use re-balancing to readjust the weightings of each security or asset class in the portfolio to fulfill a newly devised asset allocation.
In an ideal scenario on portfolio recommendation, which is based on tenure of goals & the risk tolerance score,
portfolio allocation should ideally remain same. But with changing economic conditions globally & local/ other factors, we see swings in various asset classes or funds on an annual basis. This triggers a psychological condition in our brain, aptly called as “Hope & Greed” or “AMIOS” (am I missing out something), which is further compounded with the constant hammering from the so called “Media-Prophets or the Predictors” of the world.
Portfolio re-balancing to my understanding & experience, should not be applied to current portfolio at all, and mainly for individuals, who wants to create wealth & not manage wealth. Most of us fall in the aspirant category, where we have not inherited wealth and through our monthly savings we are building wealth, to take care of our future Goals or Lifestyle, key being Retirement, Kid’s Education, Marriage, Business venture, 2nd Home etc.
On investments one has to follow two key philosophies:
Historical data: when we are investing, we invest based on historic data of an asset class or fund (one of the key factors) & discount swings which may come in-between the tenure of the Goal. If one can look into historic data on any asset class or fund, every 5 to 8 years we see many small swings & at least one major swing, but do we get swayed on that… than why now?
Risk tolerance score: Risk tolerance score is like your nature, therefore what you are, you more or less remains same throughout your life. One cannot suddenly or later can become aggressive from moderate or conservative or backwards.
Therefore, at Moneyforg.in we don’t talk about rebalancing, as otherwise we are going against our own advice. What we look forward to is a review exercise on a regular basis to explain markets dynamics & advice change only if:
Funds not performing: this is compared vis-à-vis peers & the benchmark. This may arise due to changes in fund manager or changes in a fund’s portfolio management, which usually is very rare.
Future investments: future investments in the form of SIP, which is based on research & we see a better opportunity with new funds.