Why it is the best time to Re-Balance your Asset Allocation?

Introduction:

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.

Conclusion:

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.