How To Rebalance Your Portfolio The Right Way To Get Higher Returns? | Step-by-Step Process

When the equity portion of your investment portfolio has increased significantly in value, conventional wisdom recommends rebalancing your portfolio to match your target asset allocation In this video, we explain to you with examples how rebalancing can help you generate better returns and, what is the right way of rebalancing the portfolio.

Topics Covered:
00:00 Introduction
01:02 HOW TO REBALANCE YOUR PORTFOLIO THE RIGHT WAY?
09:33 HOW TO REBALANCE YOUR PORTFOLIO?
13:27 HOW OFTEN SHOULD YOU REBALANCE THE PORTFOLIO?
14:41 ETMONEY OPINION

Rebalancing is the process of buying and selling parts of your portfolio with the objective of setting the weight of each asset class back to its original state

Why Do Rebalancing?
A rebalanced portfolio would not have been less impacted by the fall in equities but would have also been compensated for that loss with a spectacular performance on the debt front.
Rebalancing can reduce a portfolio’s risk exposure and at crucial times, bring a major uplift to the portfolio’s performance.

👉 HOW TO REBALANCE YOUR PORTFOLIO?

There are three types of rebalancing triggers that investors can use ..

1. Time trigger i.e. you set a schedule like a month, a quarter or once a year
2. Threshold trigger - which happens when the portfolio deviates from its target asset allocation by a predetermined percentage like 5%, 10% or 15%
3. Combination trigger - which combines time and the threshold trigger. In our opinion, it is this third strategy i.e. the combination of time and threshold that works best when it comes to rebalancing. And the workings of this are pretty simple you generally monitor your portfolio on a set time schedule but you are also flexible in terms of allowing an unscheduled rebalancing if the allocation deviates from tolerance target

The steps that need to be taken care:
Step 1 is for you to have an asset allocation plan and the best resource you can find for this is the asset allocation video on the ETMONEY Youtube channel.

Step 2 is to create a rebalancing plan wherein you can define the time trigger and the threshold trigger.

Step 3 is the actual tracking of your portfolio and the execution of a rebalancing exercise

As a part of execution, there a couple of areas that one needs to take care of:
1. You’ll need to know which funds you would like to retain and which ones you would want to redeem.
2. cost implications of rebalancing- the tax implications like capital gains and also other fees like brokerage, exit loads etc.

👉 HOW OFTEN SHOULD YOU REBALANCE THE PORTFOLIO?
The frequency of rebalancing is a matter of choice Our suggestion here is that investors should everyday investors should rebalance their portfolio once a year

Along with convenience, an annual rebalancing also allows you to use the tax structures smartly which can be done in two ways ..
a) you can use tax loss harvesting to get rid of the weaker securities
b) you can delay the sale of some equities to beyond one year which reduces your capital gain from 15% to 10%

In addition to time, one should also be careful of the tolerance limits which preferably should be within the 5 to 10% range

👉 ETMONEY OPINION
On the face of it, rebalancing might seem counter-intuitive. After all, it requires investors to sell parts of an asset class which has done well in the past year and to replace it with an asset whose recent record has been relatively poor.

Now this argument might hold in a trending market but when the tide turns, the rebalancing strategy is more than capable of reversing the situation which can then lead to massive performance gain and better risk control

Our take on rebalancing ..
• Treat rebalancing as a process much like how you invest in a disciplined manner using SIPs
• Understand that rebalancing is more of a risk control tool which means, over the long term it can bring about significant reduction in volatility .. but it might also slightly reduce your returns but overall you’ll end with a better risk-adjusted return on your portfolio

#ETMONEY #Rebalancing #MutualFunds

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[AnnelieseGretel]

Nobody can become financially successful over night. They put in background work but we tend to see the finished part. Fear is a dangerous component, hindering us from taking bold steps we need in other to reach our goals.

[saulgoodman]

I love how you actually show the differences than just say "this is what Warren Buffet does", or "financial experts suggest this"

[kamalthakur]

Always knew Importance of asset allocation but the example that showed how only 2 years can make difference to CGAR of long 15 year period was an eye opener. Thank you and pls keep up the great work !!

[rvarma]

I have heard and have been advised by many wise investors about portfolio balancing and rebalancing which is so crucial in smart Asset Allocation. I didn't have the knowledge of how to go about it. This video is so beautifully timed!! It was much needed at this hour! Thank you for doing this! It's clear, precise and well explained by Shankar sir!! 🙏👍

[sharathbhat]

The research, examples and presentation is top class. Thanks for this insightful video on making us understand the broader picture

[subramanyannv]

This is the best video on investment philosophy I came across - both within ET Money or elsewhere. Most grateful to the team.

[nr]

Good demonstration. While I agree, rebalancing is good, but just for the record, If 100 was invested in equity with zero in debt, it would have resulted in 465.8 which is higher than rebalancing. There are some famous investment theories which suggest in the long run, equity investment in decent and relatively safer index products, will beat the lower risk debt rebalanced portfolios. Also in the above example, 462 is without taking into consideration of rebalancing costs. with that cost, I think it would be in the range of 400-430.

[indmis]

I love your videos... they have knowledge, experience, data, and excellent articulation both graphically and verbally.

[anshumansenapati]

It's amazing to see how the channel has taken out time to read and answer each comment carefully! Awesome job guys!

[DrKallalPramanik]

Very relevant topic. Thank you. Can you please consider the cost and capital gain tax implications while simulating the performance of the rebalanced vs non rebalanced portfolios?

[neelamvalecha]

Good Professional advice…one has to worry about tax, correct update on the assets that one wants to shift/choose, exit load where applicable. Good job done ✅.

[prateekvyas]

Thankyou etmoney for so detailed explanation on rebalancing. 🎉 Request you to let us know what kind of debt funds we can choose while rebalancing . There are many kind of debt funds . Choosing wrong fund will clutter the purpose of rebalancing ? Or any debt fund will work?

[SaurabhSingh-in]

Great video. I have seen so many videos on rebalancing but nobody explained it by using data. Simply amazing. I do have a question. Do you suggest to sell some part of my equity at the end of every financial year (March) to invest the same amount in PPF(April)? It will save my capital gains tax upto 1 lakh and I can use that money for deduction under 80c?

[sagarraju]

@Shankarnath- great presentation brother as usual, wonder how do you make all complicated content look so simple, your voice & delivery makes all the difference, there's a teacher part too hidden in you
Just a suggestion:
AUMs are different from retail investors
So, going by time trigger for annual rebalancing, in case
While rebalancing, instead of selling & buying & rebalancing the equity debt ratio, it invites capital gains & exit load too, "why don't just rebalancing the investment the coming year to make the ratio again to 60:40
Or doubling investments to the tool which had a drop the last year?
Can it be worthwhile to think of?
Thank you & regards

[ganeshseshan]

Good Video on Rebalancing. Can you please do a video on the top performing debt funds.

[ekansh_a]

Beautiful video! Gave me a great insight into the topic.

[basavarajpadanur]

Good video overall, do you have an excel which can give us which mf to rebalance in equity and debt. But I liked the idea of buying weeker assets when we get bonus and rebalancing portfolio, instead of selling and buying.

[priyankagorkhe]

Thanks a lot. I randomly came to this platform, v hrlpful plz keep up

[prakashraghunathan]

Thank you sir for the good presentation and also video.A very comprehensive analysis.

[abhijeetchokada]

Eye opening strategies with proof . Thanks