What is rebalancing?
Rebalancing is the process by which an investor restores their portfolio to its target allocation.
Rebalancing brings your portfolio back to the desired asset mix. This is done by divesting in
underperforming assets and investing in the ones that have the potential to grow.
The primary objective of portfolio rebalancing is to establish better risk control, and ensure that your
portfolio isn’t singularly dependent on the success or failure of a particular investment, asset class,
or fund type.
How can you rebalance your portfolio?
Step 1 – First and foremost, make an asset allocation plan based on your income, retirement age,
and other factors. Create an asset allocation structure, but consult an expert if you’re unsure.
Step 2– Determine your current asset allocation by determining where and how your present
investments in stocks, cash, bonds, or any other type of investment are arranged. After that,
compare the asset allocation target with the current status and make adjustments as necessary.
Step 3 – If your asset allocation aim does not match your existing portfolio, devise a rebalancing
strategy. This phase can be difficult since you must pick which securities to keep and in what
Step 4 – Keep in mind the tax implications, particularly for capital gains. Holding on to your stocks for
more than a year can help you avoid paying short-term capital gains taxes. In the case of debt funds,
short-term capital gains will be taxed according to the individual’s tax bracket. The tax rate on
long-term capital gains is 20% with indexation. If you need to cut back, start by selling the securities
in your tax-exempt accounts. You can reduce the amount of capital gains taxes you pay this way.
Step 5 – Review your portfolio at least once a year or maybe once in six months to assess your
position but rebalance it only when you feel that the allocations are significantly out of the track to
reaching the target.