How to do portfolio rebalancing ?

In the last article on the series on portfolio rebalancing, we are going to check on how to do portfolio rebalancing. You must have read the earlier two pieces on when you should do portfolio rebalancing and mistakes to avoid during the same.

If not, please hop over to the articles and spend some time there now.

Coming back to the basic question – how to do a portfolio rebalance ? To answer this basic question, you first need to find out which investment products you hold. In most of the cases, the portfolio rebalance will be between stocks, mutual funds, fixed income instruments, real estate and commodity like gold or silver not to mention insurance.

How to do portfolio rebalancing across asset classes

Stocks

First things first, You need to align your stock investments with long term goals. Only will then will you be able to justify the “Time in the market is everything” tag.

In order for you to rebalance, fix a percentage of how much you need to invest in stocks directly. In fact, you need to go a step further and fix a percentage in each sector. Once you begin to breach these limits, you can begin to either pull out m0ney or pump in more money.

Keep the following in mind when you do portfolio rebalancing with stocks.

1. Performance – In my mind, the performance of a stock should be the overriding reason for you to make a rejig. Well, it’s another question whether you are the right person to do the assessment. I am assuming that you are since you bought into the stocks yourself.

2. Diversify – Make sure that when you have the opportunity to rebalance, you actually diversify. This means you need to spread your money across (a) different market capitalization stocks – large-cap, mid-cap and small cap; (b) sectors (c) growth and dividend themes among others.

Mutual Funds

Like with stocks, you will need to define a percentage of your investments that are meant to be parked in mutual funds, both equity and debt. Once that limit is touched, you will need to move out or in of mutual funds.

1. Mutual Fund diversification – As with stocks, you need to diversify here too. You need to ensure that you diversify across various sectors and market caps. Not just that, your money should be spread evenly across different fund houses. Do not take too much of exposure to one fund house.

2. Debt/Equity – How much do you park in debt and how much in equity ? Since mutual funds offer you both options, ensure that you drive the decision via your basic asset allocation. As long as you stick to it, it will be easy to assess where to draw the line.

3. Changing MFs – If your mutual fund jumped the ship and changed its mandate, you might have to abandon ship as well. This is because you bought the MF initially based on its mandate and objective. While this is a reason to move on, others like fund manager change or change in holdings of the mutual fund could be other reasons as well.

Insurance

Doing a portfolio rebalance of insurance policies that you hold can be a very interesting exercise. Depending on what you have in your basket, you might need to take a decision.

Try your best to first see whether you can continue. Remember that endowment policies and Unit Linked Insurance Plans (ULIPs) are front loaded as far as charges are considered and getting out of them will mean a loss to you. But yes, if you have done financial planning and your cash-flows lead you to believe that the premiums you are paying towards these are causing an impact to saving for your future financial goals, then by all means, get out of the dud policies.

If you decide to continue with the insurance policies, ensure that you are an active investor. Use the free switches in a ULIP to move out and in of equity and debt to manage your money better. I have seldom seen investors exercising this option even though they are available for free !

If you have bought insurance policies that you cannot justify being with, then by all means surrender them. Be aware of surrender charges that you might need to pay.

Real Estate

You can’t be rebalancing your real estate class every now and then. Being such an illiquid investment avenue, you will devote too much time to roll over just one residential unit. The costs and pain associated with property buying and selling is too much of an overhead as compared to other products like stocks and mutual funds, where everything can happen at the click of a mouse.

If you have all your money into property, then it’s time you sell some to push your money into other asset classes. Remember the “all your eggs in the same basket” philosophy ? Other reasons for you to move out of property could be when the goal you bought it for has materialized.

Don’t be married to real estate investments. It is not an easy product to own especially if you have too many of them. Taxation and capital gains make it much more difficult. Do real estate portfolio rebalancing if you think the time is right.

Gold

I advise gold investments via Gold Exchange Traded Funds. And only to the extent of 10% of your portfolio.

So when gold investments go over and above this, sell a part of it to bring it inline with the original allocation. Note that the prices of gold can move up or down in the short term and play havoc with your asset allocation in a big way. Just be patient and do not get affected with the short term movements.

Remember that you invested in gold as it a good hedge against inflation and not because you like yellow colour.

I guess that is it for the portfolio rebalancing article series. I will close it down here now and would love to hear from you folks what are you tips and tricks on this and whether you know anything more on how to do portfolio rebalancing.