Why it is the best time to Re-Balance your Asset Allocation?2 min read
In this blog, we will be discussing asset allocation rebalancing and why it is the best time to re-balance your asset allocation.
As per Investopedia, Asset Allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goal, risk tolerance, and investment horizon.
Further, Asset Allocation Rebalancing is the process of realigning the weightings of a portfolio of assets. The process involves periodically buying or selling assets in a portfolio to maintain the desired level of asset allocation.
Asset Allocation Strategy & Current Market Situation:
- One should implement Constant Weight Asset Allocation Strategy.
- Here, you allocate % of the allocation to the various asset classes like Equity (60%), Debt (25%), Liquid Fund (5%), and Gold (10%).
- If following this Constant Weigh Asset Allocation, one should re-balance this at least once a year.
- The Covid-19 Pandemic has provided some cost-saving measures to the companies, but the revenue of the companies has not grown much
- which has led to improvement in earnings of the overall market.
- One should re-balance the asset allocation as and when it is needed.
- This asset allocation re-balancing should be done similarly with all the asset classes.
- Should be done when the particular asset class has met your desired expectations of returns at any point.
How to do Re-Balancing?
- Suppose, your initial allocation in Equity is 60%, and currently, it is at 70%-75%, then one has to take 20%-25% of the allocation in Equity. Or follow the Do It Yourself (DIY) technique and invest in Index Funds.
- And these allocations in Large Cap Funds or Index Funds will help you out in booking profits.
- As there may be a thought process that your investments in Mid-Cap Stocks & Small-Cap Stocks can grow much more in the future. Hence you don’t want to disturb these allocations.
Asset Allocation is subjective and its solution differs from person to person. It is not only an investment strategy to follow. which is a key component in Investing Journey.
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