Rebalancing

Rebalancing is a standard practice in which most of the experienced investors pay attention every year. Let's say we have planned to allocate our funds as 60% in Stocks, 30% in Bonds and 10% in Cash. Imagine the stock market returns has gone high last year comparative to the returns received from the bond investment. Now the allocation of our assert would not be like before, it might have changed like 65% in Stocks, 26% in Bonds and 9% in Cash. In this case, it is important to re-balance our fund allocation as we desire

The reason for allocating the fund or investing in different segments is to manage the risk or to handle the crisis appropriately. If we are not monitoring this balancing of our fund, then it gives no meaning when the percentage of investments vary over long term. It is not required to close all the stocks which we hold every year and re-invest in stocks to balance the funds

Let's assume we have a portfolio consisting of 9 stocks and we have received great returns this year. 5 stocks out of 9 gone out of our expectation and trading well. So we don't need to touch those stocks for re-balancing. Also remaining 4 stocks might have the future plans and 3 out of those 4 stocks can have the potential to give great returns in coming years. Hence we don't need to touch them for re-balancing. The remaining 1 stock which does not meet the expectation can be considered for rebalancing. Not necessary to close that whole stock, the percentage of that particular stock can be reduced for re-balancing

The similar process can be followed if the bond market returns are higher. The percentage return received from bond market is well known in advance, so the process is easy to sell few percentage of bonds and invest in other investing medium for re-balancing. Rebalancing kill the fear of losing and helps one to hold on to the positions long enough as they desire. However, this re-balancing should not be done very frequently. This should be given certain amount of time say like every year and not every month.

Have a Great Day

B G Nareshkumar