Portfolio rebalancing—the process of readjusting investment allocations to maintain your target risk level—is crucial for long-term financial success. As market fluctuations naturally shift your asset mix over time, regular rebalancing helps manage risk, maintains your investment strategy, and often results in selling high and buying low. Understanding when and how to rebalance can significantly impact your investment outcomes and keep your financial goals on track.RetryClaude can make mistakes. Please double-check responses.

When you first constructed your financial portfolio, you probably looked at various things such as your financial goals, age and risk tolerance. The intention was to come up with the most suitable asset mixture for you; this could have been a specified equity-to-bond ratio.

However, since financial markets are dynamic, the initial allocation may change as some investments perform better than others over time. Portfolio rebalancing refers to the periodic evaluation and modification of an individual’s investment basket to keep it at the required risk level for long-term financial gain.

This article examines what portfolio rebalancing means, why it matters, and when this process should be done.

Portfolio rebalancing refers to the process of adjusting the proportions of assets or removing or purchasing some stocks/assets in your investment portfolio back to their predetermined levels, i.e. as per your investment goal.

For instance, let’s say that your initial allocation is targeted at 50% stocks, 30% bonds, and 20% real estate. But, further on, if equities outperform and represent 60% of the total value while bonds decrease up to 20%, with no change in the real estate holdings, then rebalancing will include trimming stocks and purchasing more bonds to restore the original goal. This is done so that one’s portfolio can have the desired level of risk as well as the expected potential return.

Periodic portfolio rebalancing may be required because each asset class’s market value changes over time due to the various potential returns they earn. Hence, this can make your choice deviate from what was initially targeted or wished for, thus making it subject to more or less risk than intended. Therefore, you will need to periodically rebalance your investment account to facilitate this reallocation.

Moreover, if you have altered your investment portfolio or even have changed risk tolerance levels, then you may consider using this method so that you can change weights on all securities in a given security basket as per your investment goal.

Advantages and disadvantages:

Ready to optimise your investment portfolio? Contact Dezerv today to discuss personalised portfolio rebalancing strategies.

Rebalancing the portfolio makes it possible for you to execute whatever adjustments you may make in your asset allocation plan and remain on course. Here are some benefits of rebalancing a portfolio:

Portfolio Rebalancing Example: For example, imagine an investor with a 60/40 portfolio, where 60% is in equities and 40% is in bonds. In a stable economic environment with moderate growth and stable inflation, the investor might expect equities to return 12% and bonds to 6%. By periodically rebalancing the portfolio to maintain the 60/40 split, the investor aims to achieve a balanced risk-return profile, potentially yielding an average annual return of around 10% with reduced volatility.

Let’s use an example to illustrate how rebalancing can enhance long-term potential returns by seeking to sell high-performing assets and buying lower-performing ones.

For example, an individual wants to invest ₹20,000 in the ratio of 50:50 in the Nifty 50 TRI index and the Indian Government Bonds. The following table will demonstrate how the ratio changes over time without rebalancing the portfolio, exposing the investor to unforeseen risks.

The example illustrates how a portfolio that initially targeted an equal split of equities and government bonds (50:50) could go significantly off course over time if not adjusted periodically to compensate for different investment performances.

Portfolio rebalancing may be triggered by investors in three significant ways:

You can decide to do a portfolio rebalance after one month, three months, six months or even every year. It depends on you. Nonetheless, remember that waiting for a long time to rebalance your portfolio can lead you to miss the opportunity to take advantage of the dynamics of the market.

For e.g., from its peak of ₹12,430.50 in January 2020 to its lowest point of ₹7,511.10 in March 2020, the Nifty fell by almost 38%. After hitting its lowest point, the Nifty increased 86%, ending 2020 with a 15% gain.

Is your portfolio aligned with your financial goals? Don’t wait! Rebalance your portfolio with Dezerv’s expert knowledge and data-driven insights.

Let’s break down portfolio rebalancing into simpler steps:

Case Study:

Suppose you want to rebalance your portfolio; let’s check how to do it.

(The above scenario is for educational purposes only, and investors should consult their financial advisor before investing)

Do you find rebalancing complicated? Dezerv offers customised portfolio management services that suit your financial needs. Book a call now!

Any investor who wants to seek long-term financial investment and aims for growth, in the long run, should make it a practice to readjust the contents of their portfolio.

Once you understand why it is important, and adopt a systematic way of handling it, then you may be able to wade through the ups and downs in the market, minimise risks as well and aim that your investments align well with your future money targets.

For both beginners and seasoned investors alike, regular adjustments are what keep a robust, diversified portfolio in place for many years.