5 ways to re-balance your portfolio in 2021

The key component to a successful investment portfolio is diversification to help you reduce risk.

February 10, 2021 7:24 IST | India Infoline News Service
Nearly everyone was unprepared for the last year. Many stocks have plummeted in value, investment portfolios have been decimated, millions have lost their jobs, and people have consumed more of their retirement savings than expected. But we have learned a lot from the experience. And we can utilize that experience for making our portfolio bullet-proof. Especially when it’s time to rebalance your portfolio. Rebalancing won’t always result in a better performance than leaving your portfolio alone. But most studies suggest that in the long run, there is a benefit in terms of reducing the risk of big drawdowns (i.e. years where your portfolio loses a lot of money) without sacrificing much, if anything, by way of returns.

  1. Re-evaluate your portfolio: The first step is to know how much money is invested in your taxable and non-taxable accounts, including the retirement savings plans. In case you are married, add the balances of your spouse’s accounts too and assess how much of your holdings are distributed in stocks, bonds, cash, and other markets. Get a realistic picture of your level of risk tolerance, as the equity markets by nature are supposed to be volatile. Your risk appetite is a measure of how much volatility or market risk you can handle. As time goes by, the percentage split of your portfolio will diverge from your initial asset allocation. If your equity holdings rise faster than your bonds, say, then you’ll end up with a bigger chunk of your money in stocks than you had originally planned, which theoretically means your portfolio has become riskier. The point of rebalancing is to bring it back into line when it has diverged sufficiently from your original plan. Next, evaluate if your holding in these categories matches your risk profile and life stage. For example, if you hold 70% in shares, while your risk appetite is only for 50%, it is time to adjust your portfolio accordingly by selling your best-performing stocks and redirecting the money into other asset classes that are comparatively safer.
  2. Mitigate known risks: The key component to a successful investment portfolio is diversification to help you reduce risk. Just because you have a good investment policy in place does not mean that it will eliminate all risk, but a well-balanced portfolio may protect your assets against the rising and falling market dynamics that involve risk. For eg- When you are looking to reduce the burden of interest rate risk, a good way to accomplish this is to diversify your maturities. If interest rates fall, longer-term investments may pay a nice yield and become more liquid in the portfolio with an increased potential for capital gains. For stocks, this would mean avoiding concentration by dividing your capital between few companies that do not have complementary businesses and business cycles.
  3. There is no such thing as a ’sure bet’: If there is something we can take away from 2020, it is that nothing is infallible. Never invest in anything that you are told is a sure bet, with no risk and high returns. You risk losing everything as, in the world of investing, there is no such thing as a sure bet. If it sounds too good to be true, then it probably is! It is smarter to invest in those assets that you know well. Don’t just follow returns and popular recommendations. Dig deep, do the work, and then make investments aligned to your financial goals.
  4. Cash is King:  One of the most valuable assets to have during a time of uncertainty is cash. Balance sheet cash can be a lifeline to a business during a financial crisis when other forms of funding dry up. Meanwhile, having an ample emergency fund can sustain a household during an unexpected job loss or health crisis. Finally, investors will be happy to have some cash in their investment portfolios during a stock market crash, as that will give them the funds to buy stocks during the decline. Thus, having liquid funds as a part of your portfolio is important. Liquid funds provide a lot of flexibility in the time of uncertainty and crisis. While cash investments -- such as a money market fund, savings account, or bank CD -- don't often yield that much, having cash on hand can be invaluable in times of financial uncertainty.
  5. Stick to your strategy: Create a preliminary plan by selecting the types of assets and products that will help fulfill your goals. Investing should be about making decisions that are right for your situation, but keep in mind that diversifying your funds across asset classes and sectors helps spread the risk. Monitor your progress on a regular basis, review your investment allocation mix and make adjustments accordingly. If your investments aren’t yielding the returns you hoped they would, you might be tempted to sell them and reinvest elsewhere. If things are going well, you may want to cash out and move on to the next investment. While changing strategies can be a good idea, it’s better to base those decisions on analysis and in the context of your long-term investment plan rather than on speculation or instinct. Investments aren’t impulse purchases.  Before you change strategies, consider the pros and cons alongside your present circumstances and future goals. When you do – and you still want to buy or sell – you’ll know you’ve made an informed decision.

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