For any investor, proper asset allocation remains an essential component of financial planning.
In the creation of a portfolio, the allocation of different percentages to assets depends on the goals and risk profile of an investor. However, most investors tend to stumble when it comes to following asset allocation.
Even in the case of those who follow it diligently, with time, the allocation alters as some assets outperform while others underperform. Rebalancing of portfolios regularly is missed by quite a few investors.
The core objective of portfolio rebalancing is to ensure better risk control. It is more of a risk-minimising strategy.
It is essential to reassess and minimise the risks in a portfolio. Rebalancing a portfolio helps investors stay on track with their investment strategy and, therefore, need to be religiously followed.
Rebalancing of portfolio ensures that the investor is not dependent on the success or failure of any one particular investment, asset class, or fund type.
Moreover, the portfolio continues to remain aligned with investment goals. Also, this way, the portfolio remains aligned with financial goals at all times. As an investor’s risk tolerance or investment strategies change with time, rebalancing the weight of the asset class in a portfolio can be undertaken through reassessing and devising a new asset allocation.
To undertake the process of rebalancing, draw an asset allocation plan taking into account factors like income, expected time of retirement and risk appetite.
Then, take corrective actions after assessing the current asset allocation. Identify where and how the current investments are placed in cash, stocks and bonds, among others.
In case the asset allocation target does not align with the current portfolio, chart out a rebalancing plan.
Remain mindful of any tax implications, especially in terms of capital gains. As a healthy investment practice, rebalance the portfolio at least once a year. Also, reach out to a qualified advisor in case of any confusion at any stage.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.