In every market scenario, few investors become rich and others become poor. The rich and the poor are due to those who believe and do not believe in re-balancing.
Investment is always half-hearted unless rebalancing is done. Booking profits and converting notional profits into real profits is an art and science activity. Controlling, one’s greed and fear while rebalancing is very strange and complicated human behavior which is hard to be adopted by an investor. It has been found that often investor criticize the concept called long-term investments particularly when the market goes for a tailspin. Well for all those who burnt their fingers for them asset allocation and rebalancing are unknown words. Only equity and debt, but low and sell high are not investment concepts.
Investment is always for long term ride provided you know the concept of re-balancing just like changing of gear of a car. As you change the gear of the car at various points while traveling a long drive one also has to use re-balancing as gear to change the asset allocation. Every road is not a highway similarly every investment cannot just climb high and high.
Often, we find that there is the confusion that which investment to be sold and which one to be kept under hold. Well, asset allocation helps to resolve this gap. According to me the behavioral finance aspect of rebalancing itself is as difficult as doing new investments. We have witnessed that rebalancing has been taken as a blind tool where an investor sells his good apples and keeps his bad apples in the expectation that the price will go up. This behavioral aspect cannot be ruled in this case.
Rebalancing is not about selling the good apples and holding with bad ones. It is about asset re-allocation. Re-balancing introduces one to asset allocation concepts and how a long-term wealth portfolio is created through asset allocation.
Rebalancing is not a high-frequency activity. It is an act that is initiated when one asset class performance is more than the desired objective.
One of the first steps you need to take in investing is to determine the asset allocation appropriate for your particular financial goals. For example, let’s say you’re shooting for a well-funded retirement that’s set to start in 35 years. Given that long timeframe and your personal comfort level with volatility, you decide to take an aggressive investing approach and go with an asset allocation of 90% stocks and 10% fixed income for your retirement portfolio.
But because the market can move around so much each day, that allocation is bound to change over time, if left alone. So, to maintain the status quo (or breakdown) of your portfolio, you need to act. And that action is what we call rebalancing.
For re-balancing, there are two main approaches to this task. The first approach, and the one that we will focus on here, is the time-based approach, where you rebalance on a set schedule. The other approach is called the rebalancing band approach, which does not rebalance until an asset class moves outside of pre-specified bands. In other words, it lets the portfolio run until it drifts too far out of line, and then it brings that portion of the portfolio back into line.
Ø One’s which does not fit in the long term goal of investments and destroys other income assets those investments need a re-balancing.
Ø Taking decision of rebalancing get restricted to maintain the status quo and not acting upon to take proper action from inaction
Ø Market times and market sentiments kill
Ø Know the assets before investing.
Ø Invest in knowledge and then assets
Ø Financial planning and advisory keep avoiding these deaths traps which lead to loss of capital and create fear and lack of confidence for long term investing
Ø Good investment opportunities are lost due to a lack of confidence. Seek financial planning and you will be able to save from loss of confidence.
Ø Financial advisors protect one’s portfolio through his education on financial advisory and experience
Ø Hiring a well-educated financial planner is another important work.
Ø Don’t throw good money at the back of bad money. Since money lost is money has gone.
Ø Not taking a rebalancing decision is a decision itself that has its consequences also. Similarly, only savings in safer assets have their own risk hence invest with proper asset allocation based on your risk profile.
In this pandemic time, the global economic debt has swelled significantly and hence the equity market will have an extensive high volatile ride. Further, in many places, it's being found that the current equity market rally is based on few stocks hence the broader market participation is less hence those who are not aware of re-balancing will need more of the same. Asset allocation and rebalancing is the only tool for the coming decade to manage your investment portfolio.
By Atchuthan Srirangan