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Portfolio Rebalancing Strategies for 2024 – A Handy Guide for Investors

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Table of Contents

What is Portfolio Rebalancing?

What is the Importance of Portfolio Rebalancing?

When to Go For Portfolio Rebalancing?

How Often to Opt for Portfolio Rebalancing?

What Are the Different Ways to Rebalance Your Portfolio?

Conclusion

The art of investing often resembles the art of juggling. In both cases, there is a need to maintain careful control and balance – so as to meet objectives. Portfolio rebalancing is an important skill aimed at maintaining balance in investment portfolio and achieving desired outcomes. With the help of this method, it is possible for investors to manage their financial resources effectively and ensure proper alignment with their risk tolerance and own investment objectives. Read on to know all about portfolio rebalancing and how important it is for proper management of investment portfolio.

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What is Portfolio Rebalancing?

Asset allocation includes spreading your investments across various classes of assets, such as cash equivalents, bonds and stocks. On the other hand, Portfolio rebalancing means making strategic adjustments to investment portfolio – so as to maintain desired asset exposure.

With the passage of time, fluctuations in the market can result in deviations from your initial allocation. This may lead to your investment portfolio being exposed to lower or higher risk levels than intended initially. Portfolio rebalancing aims to restore your investment portfolio to its intended target allocation.

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What is the Importance of Portfolio Rebalancing?

There are many important purposes served by Portfolio rebalancing.

Risk Management

Portfolio rebalancing lets you manage the risk level in your investment portfolio. It ensures that your portfolio stays aligned with your risk tolerance.

During Bull market situations, specific assets may become a burden and the associated risk may be higher. On the other hand, in Bear market situations, some assets may turn out to be lighter and the potential returns may get diminished as a result.

Goal Alignment

Portfolio rebalancing makes sure that your investments stay aligned with your financial objectives. It can prevent too much deviation of your investment portfolio from your intended goals, such as saving funds for some major purchase or for retirement planning.

Return Optimization

With portfolio rebalancing, market inefficiencies can be leveraged to optimize your returns. It includes buying assets that are comparatively underperforming and selling off the ones that are over-performing. Thereby, it helps improve your long-term investment returns. But it is essential to keep in mind that same kind of results may not always be obtained from the repeated use of this strategy.

When to Go For Portfolio Rebalancing?

The timing of portfolio rebalancing depends on your individual investment strategy. However, you may consider some common triggers

Time-Based

Many investors prefer to stick to semi-annual or annual rebalancing schedule. These regular intervals help maintain consistency in your investment portfolio.

Threshold-Based

You can also rebalance your investment portfolio when your asset allocation deviates from your prefixed target by a specific percentage – like 5 or 10%. This approach allows for flexibility as well as adjustment in case of fluctuations in the market.

Life Events

Major events in life such as significant purchases, retirement or changes in financial objectives call for a need to go for portfolio rebalancing, to align with your new goals.

How Often to Opt for Portfolio Rebalancing?

Optimal portfolio rebalancing frequency depends on your own situation and preferences. As far as rebalancing is concerned, here are some important factors that you need to consider

Risk Tolerance

It is important to customize the frequency of portfolio rebalancing. Do you have a lower risk tolerance? It may be wiser for you to rebalance more often, so as to be able to maintain a conservative mix of assets.

On the other hand, if you have a higher risk tolerance, less regular rebalancing maybe enough for you.

Tax Implications

During portfolio rebalancing, it is important for you to keep the potential tax consequences in mind, especially in case of taxable accounts. Carrying out trading frequently can result in capital gains taxes. This can have an effect on your overall returns.

Keep in mind that there are various tax slabs in India for short-term capital gains and long-term capital gains and you need to be mindful of this.

Transaction Costs

While determining portfolio rebalancing frequency, you should consider transaction costs – like fees associated with trading.

With frequent rebalancing, you have to pay these types of charges. Naturally, it is important to incorporate these into your decision making process.

Market Volatility

When there is major market volatility, you might need to carry out portfolio rebalancing more often – in order to manage risk effectively. With this approach, you can make sure of the alignment of your investment portfolio with the asset allocation that you desire.

You have to take these factors in careful consideration while taking decisions about how frequently you should carry out portfolio rebalancing.

What Are the Different Ways to Rebalance Your Portfolio?

You can achieve portfolio rebalancing through different methods, each having its own benefits

Traditional Rebalancing

It includes the sale of assets that have performed quite well and using the funds to purchase assets that have not fared that well. It helps ensure that your investment portfolio is aligned with your target investment mix.

Cash Flows

Redirect incoming cash flows, such as interest payments and dividends, toward underweight asset classes. With this approach, you can ensure balance with no sale of investments existing already.

Strategic Contributions

Make extra contributions to underweight asset classes, at the time of adding new funds to your investment portfolio. It can help your asset allocation to be aligned with your targets over a period.

Also read: How Has the Indian Stock Market Performed in the Last 10 Years?

Tactical Rebalancing

Adjust your asset allocation on the basis of market trends or changes in economic situations. This will help you benefit from market opportunities. However, using this approach needs you to have an in-depth understanding of the dynamics of the market.

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Conclusion

To sum up, portfolio rebalancing is an important aspect of maintaining the health of an investment portfolio. It helps in risk management, aligning investments with objectives and potentially improving long-term returns. With an understanding of the different techniques, advantages and risks related to portfolio rebalancing, it can be easier for you to make informed decisions. You can make sure that your investments stay on the right track. Keep in mind that you have to approach rebalancing with enough forethought and align it with your particular financial goals.


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