In the last over 18 months of Coronavirus, economies across the globe got highly affected. However, even when the GDPs are negative, the stock market is soaring high.
In this one and a half years, only in February and March 2020, as you can see in the graph above, the stock market almost crashed and trading was even halted in March 2020 for a day due to a massive fall in the prices.
However, the market soon started recovering and now in October 2021, it has reached a new high altogether. From 27,590 as of 3rd of April 2020, Sensex is now around 59,900 as of 7th of October, 2021. So, is this the time to rebalance your portfolio or let it remain like it is? Let’s find out how rebalancing can help you to make the most out of this all-time high stock market.
What is the Rebalancing of the portfolio?
Rebalancing a portfolio means adjusting the weights of the assets in a portfolio by buying and selling to re-reach the target allocation levels or re-match the risk appetite of the investor. When you invest or build your portfolio, you must have certain risk and return ratio in your mind, and accordingly, you invest in assets classes.
For instance, an investor in his 30’s can allocate more in equities and less in debt as he has the age by his side to take more risk and even recover if his investment plan fails. However, an investor in his 50’s should choose more debt over equities to reduce the risk as much as possible.
So, say, for example, your original asset allocation is 60:40 that is 60% of your portfolio is constituted of equities, and the remaining 40% is debt instruments like bonds or debentures. This allocation gets affected by the market movements and the weights of each asset in your portfolio changes and that may increase the risk factor of the portfolio. So, to bring back the original asset allocation levels, you need to rebalance your portfolio.
Why it is important and especially in a time like this?
Timely rebalancing of the portfolio is necessary to keep a check on the portfolio and also to maintain the desired level of risk which you can afford to take. Rebalancing is also important to see if your portfolio is becoming dependent on a single asset which increases the risk immensely.
In a time like this when the markets are at an all-time high, rebalancing is quite important. As the equity market is soaring and the weight of the equity assets in your portfolio is also increasing drastically, the risk is also getting amplified.
According to many eminent analysts, and economists, this ever-increasing market is due to liberal monetary policy and induced liquidity in the market. Central Banks across the globe are easing their monetary policies so that the people can cope with the financial woos in Covid-crisis. However, this increased liquidity is helping investors pour excess money into equities which are making the stock market surge so prominently. So, rebalancing your portfolio is essential to cope with upcoming market corrections.
How to rebalance your portfolio?
There are three basic steps of rebalancing your portfolio which includes –
- First, you need to have an asset allocation plan in mind. You may want to stick to your previous or original asset allocation levels or change them according to your investment goals or retirement plans, income, age, and other factors.
- Then you need to compare whether the desired asset allocation level of your portfolio matches the real asset allocation level or not. Suppose you want to invest 50% in equities and the remaining 50% in debt. However, due to this increasing stock market, the weight of equity assets in your portfolio is nearing 60%.
- Once you find the difference, now you need to sell some of the equities and invest the money in debt instruments to rebalance the portfolio. Similarly, if you want to invest more in equities, then you can buy more equity assets, selling the debt portion of your portfolio.
Rebalancing is all about fixing your portfolio to get the best possible returns. As the market moves every single day, it is obvious that the weights of the assets in your portfolio will change over time. So, to retain the original asset allocation levels, you need to rebalance them whenever required. However, it may seem easy to rebalance your portfolio but in-depth knowledge about the market, economy and having analytical knowledge is necessary. You can also turn to Tata Capital Wealth for assisting you in rebalancing your portfolio.