Asset Allocation and Rebalancing Portfolio

• Portfolio’s target asset allocation of stocks, bonds, Fixed Deposits, PPF, NPS, Mutual Fund and cash can be thrown off by the inevitable ups and downs of the markets
• Regular rebalancing can help keep your portfolio aligned with your target allocation and may help protect you from trading based on emotion.
You invest for specific goals, whether it’s to pay for a child’s college education, start your own business or have enough money for a secure retirement. And those goals, along with your comfort with risk, help you decide on a target asset allocation— the percentage of stocks, PPF, NPS, Mutual Funds, bonds and cash that will make up your portfolio.

But markets change. They sometimes seesaw rapidly in periods of volatility (usually shorter-term in nature) or perhaps march steadily up or down over longer periods of time. After you’ve carefully established the allocation that’s right for you, shifting market prices will likely alter it in ways you hadn’t intended.

“Consistently rebalancing your portfolio can help protect you from trading based on emotions,”

Rebalancing is about keeping your eye on the big picture — your goals, your tolerance for risk, your investment time horizon and your liquidity needs — and not being seduced or scared off by the swings of the financial markets.
Consistently rebalancing your portfolio can help protect you from trading based on emotions.

The benefits of taking action
Ultimately, thinking through what might happen to your portfolio in all market conditions — not just periods of positive returns — can help give you the motivation to rebalance when needed.
Consider selecting one of two methods for rebalancing to help keep your investments aligned with your goals and risk tolerance.

Two ways to rebalance
There are two main strategies for rebalancing. Although no particular investment methodology can guarantee success, both approaches can be effective. The important thing is not how you rebalance your portfolio, but picking a method and sticking to it.

Periodic rebalancing
You could choose to check your investments every six months to see if they need rebalancing, for instance — but consider doing so at least annually.

“Tolerance band” rebalancing
This method also helps you rebalance your portfolio to align with your intended asset allocation, but is based on a percentage change in your allocation. More frequent monitoring would be needed than if you were using the periodic rebalancing approach.
• You rebalance when your asset allocation changes by a specified percentage that you’ve previously chosen.
• Setting a specific threshold at which you rebalance could help you make considered investment decisions even in a rapidly changing market.
• During volatile markets, the tolerance band method can be more expensive than periodic rebalancing since you could be buying and selling more frequently and potentially incurring more in trading costs. Those costs will vary, however, based on the composition of your portfolio.

Adjust — and rebalance — as your goals change
Whichever rebalancing method you choose, keep in mind that as your investing goals and time horizon change due to life events, such as the birth of a child or the approach of retirement, you may want to rethink and potentially adjust your target asset allocation. Then, continue to monitor your investments and rebalance using one of the two methods discussed above.