Asset rebalancing is primarily a way to avoid regret. I know many people will read that sentence and disagree, probably strongly. I get a lot of pushback on social media and email whenever it comes to certain financial techniques (like SIPs, for example) as a psychological tool for investors to guide their thinking. Investors like to think of themselves as rational beings (the famous species Homo economicus) who make all decisions after logically evaluating every evidence on merit. Nothing could be further from the truth. So I’ll stick to my guns.

At present, many of us share (or equity mutual fund) investors find ourselves in the middle of a situation where we wake up at night worrying about how stock prices have risen over the past few months. For many investors, there has been an emotional roller coaster since last February, when the Chinese virus seriously struck. First nervousness, then relief, then euphoria, then over-excitement and finally increasing restlessness. Could this be true? Will the equity markets move higher and higher on their way to a longer-term strong and deep bull run, or is doom near?

My answer is that in the short term, any answer is guesswork. In the long term, equity prices will move higher. To explain why I am saying this, I will just say that this is exactly the answer I gave to someone in mid-2004 when I was asked that now that the Sensex has reached 5,000, definitely It can’t go much higher than that. This is an evergreen answer because it is always true.

However, back to asset allocation and asset rebalancing. The only solution to the above problem is to have a pre-determined asset allocation and not let yourself get too carried away by it. Let’s get back to the basics. Asset rebalancing means that instead of viewing the equity-versus-fixed question as a black-and-white binary option, you should view it as a shade of gray. Once every year or so, you’Balanced‘ Yours portfolio. This means that if the actual balance has turned away from your desired one, you must transfer funds from one to the other to regain that percentage.

When equities are growing faster than fixed income — which you expect most of the time — you periodically sell some equity investments and invest the money. fixed income in order to restore the balance. When equity starts to lag, you periodically sell some of your fixed income and transfer it to equity. It is beautifully implemented, the basic idea of ​​profit booking and Investment In the beaten property. Essentially, things go back to a mean, and this means that when equities start to lag, you have moved some of your profits to a safer asset.

However, there is no need to over-intellectualize this whole business. There is no practical difference between 35 or 40%. I have always held the view that there are only three possible equity-versus-debt allocations. These are: 1) a lot of equity; 2) a lot of fixed income; and 3) the balance of equity and fixed income. It sounds hopelessly vague, doesn’t it? In fact, it has all the precision you need. In practical terms, I would define it as 25%, 50% and 75%. However, you can adjust it if you feel it should be something else. One who starts earning with very few liabilities in life can aim for high equity. As life progresses and you’re getting closer to retirement, or have some other trouble you’re noticing, move towards balance. Then, as your earning life ends, shift to the other side.

If you get this right, it matters little whether the market is going to crash or bounce in the next few weeks or months. You will avoid the remorse of doing the wrong thing at the right time.

Read also:
Why rebalancing investment portfolio is the need of the hour; how to do it

Read also:
Sensex at all-time high: Is it time to rebalance your investment portfolio?

(The writer is CEO, Value Research)