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  • Ankur Kapur

How to monitor and rebalance your investment portfolio?

You need to analyse your portfolio periodically because the market and economic movements may cause your initial allocations to change.

Investment Monitoring and Rebalancing

Even in the most casual of workplaces, managers review their employees annually. And for good reason: Employers compensate employees for performing well, and employees need to know how well their supervisors think they're doing and whether they're on track to meet their career goals.


Similarly, your investment portfolio requires regular reviews too. You need to supervise it, just as your manager supervises you, to make sure it's on track and working to meet your goals. You need to analyse your portfolio periodically because the market and economic movements may cause your initial allocations to change.


The other factors that are likely to change over time are your financial inflows and outflows and future needs. If these things change, you may need to adjust your portfolio accordingly.

If your income has increased, you may now be ready to take on greater risk and your asset allocation requires that a proportion of your assets be held in equity.


Changes in personal circumstances and wealth

Changes in circumstances and wealth often affect your investment plan. Events such as changes in employment, marital status, and the birth of children may affect income, expenditures, risk exposures, and risk preferences.


Each change may affect an individual's income, expected retirement income, and perhaps risk preferences. The responsibilities of marriage or children have repercussions on nearly all aspects of a financial plan. Such events often mark occasions to review your overall financial plan.


Wealth or net worth is another factor that is central to an investment plan. Changes in wealth result from saving or spending, investment performance, events such as gifts, donations, and inheritances.


Increase in wealth allows investors to increase their level of risk tolerance, accepting more risk for greater returns. However conservative investors may be unprepared to increase their risk tolerance even with a substantial increase in their wealth.


Changing liquidity requirements

A liquidity requirement is an immediate need for cash for a specific event, either anticipated or unanticipated. You may experience changes in liquidity requirements as a result of a variety of events, including unemployment, illness, court judgments, retirement, divorce, the death of a spouse, or the building or purchase of a home.


If you have a major cash requirement in the near term, you may need to hold some part of your portfolio in a low-risk asset such as liquid bonds or fixed deposit.


Changing time horizon

Reducing investment risk is generally advisable, as an individual grows older and his investment horizon shortens; bonds become increasingly suitable investments for such scenarios. For example, as you tend to approach your goal, you should start allocating more towards less volatile asset such as bonds and fixed deposits to maintain liquidity and safety.


As you can see, there are quite a few aspects of your life, which are dynamic, hence you must assess your portfolio allocation regularly to make sure it matches your risk tolerance, time horizon and financial goals and needs.


If the situation requires you to rebalance your portfolio, you're essentially reducing some assets that have performed better than other holdings for the year and increasing others to get your asset allocation back in line with your portfolio objective.


For instance, if you're rebalancing a retirement account, which you'll need after 20 years, you may choose a more aggressive mix of equity and debt products, since you have enough time to make the money back should the market fall temporarily.


If your goal has a shorter time horizon, such as a down payment on your dream home in three years, you may want to invest this money very differently. In this case, you may want to take on less risk, since you won't have enough time to earn the money back should the market go south.


Let's say you've determined that you want to have a moderate asset allocation consisting of

- 50% of stocks and

- 50% of bonds


After a year, you might have 60% in stocks and 40% in bonds, because your stocks may have grown over the year. To rebalance, you will need to sell 10% of your stocks and buy 10% worth of additional bonds to bring your allocation back to 50/50. This is the basic concept behind rebalancing.


Generally, you should rebalance your portfolio at least once a year. However, this is a best practice and not an absolute law, which needs to be followed, and you can sometimes choose to not rebalance your portfolio.


For example, If an investment holding has changed by less than 5% (meaning your 50/50 became something more like 55/45), you might want to wait for some more time before you rebalance. That's because there are often fees (brokerage/commissions) to buy or sell assets that may negate or reduce the overall effect of rebalancing.

Monitoring and rebalancing your portfolio ensures that your portfolio is growing as per the plan and any deviation is fixed periodically.

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