1. Asset allocation portfolio depends upon its goal, its tenure and priority, and rebalancing refers to modifications in this portfolio based on a review.
2. Ideally, an investor should do a portfolio rebalancing review once in 12-18 months, and if done more frequently, it amounts to timing the market defeating its whole purpose.
3. Rebalancing is totally different from the bad practice of churning where:
a) Frequent changes are made in a portfolio by replacing one product with another,
b) Financial advisors advise these changes to enhance their own commissions, and
c) Investors tend to suffer losses, high costs and taxes when their portfolios are churned.
4. Asset rebalancing ensures:
a) Realignment of overall portfolio composition to changing needs and risk preferences,
b) Right response to situations where equity prospects are dubious but fixed income investing looks attractive,
c) Viewing equity vs. debt question not as a black and white binary choice, but as a shade of grey, and
d) Avoiding overemphasis on safety and income in early years of retirement which may be poorly aligned to the need in later years.
5. When equity is growing faster than fixed income, you should periodically sell some equity investments and invest the money in fixed income so that the balance would be restored.
6. When equity starts lagging, you should periodically sell some of your fixed income and move it into equity.
7. Regular rebalancing—and not complete switching—is the right response to fluctuating fortunes of equity and fixed income investments.
7. Regular rebalancing—and not complete switching—is the right response to fluctuating fortunes of equity and fixed income investments.
8. Restoring the original asset mix in your portfolio not only reduces risk but also enables long-term wealth creation.
9. Your desired asset allocation will also change over the years, depending on your retirement needs and goals, and this would also require rebalancing the portfolio.
10. There are 3 cost aspects to be careful about in asset rebalancing:
a) Cost of monitoring required,
b) Cost of exit loads and charges, and
c) Tax implications, change in government policies and laws.