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Hello everyone and welcome to episode 136 of the ET Wealth Wisdom Podcast
I am Tania Jalil
Dhirendra Kumar of Value Research has written a few columns for ET Wealth over the past month on why rebalancing one’s investment portfolio is the need of the hour.
In this week’s ET Wealth edition, he writes about what to do when equities outperform the fixed income portion of one’s portfolio.
In this podcast we take a look at what Dhirendra had to say about rebalancing his investment portfolio to avoid investment regret
He writes that at present, many equity (or equity mutual fund) investors find themselves in the middle of a situation where they wake up at night and wonder about the way stock prices have risen over the past few months. start worrying.
For many investors, the move since last February, when the coronavirus struck in earnest, has been an emotional roller coaster.
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?
He writes that his answer is that any answer in the short term is conjecture.
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 cannot go much further than this, he writes.
This is an evergreen answer because it is always true.
With regard 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 far from it.
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, writes Kumar.
Once or twice every year, you can ‘rebalance’ your 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 is what you expect most of the time—you periodically sell some equity investments and invest money in fixed income to restore balance.
When equity starts to lag, you periodically sell some of your fixed income and transfer it to equity.
This applies beautifully, the basic idea of ​​booking profits and investing in beaten assets.
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, Kumar writes that there is no need to make this whole business hyper-intellectual.
There is no practical difference between 35 or 40%.
My view has always been that there are only three possible equity-versus-debt allocations, he writes.
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, he 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.
He concludes by writing that if you get this right, it is of little importance whether the market will crash or rise sharply over the next few weeks or months.
You will avoid the remorse of doing the wrong thing at the right time.
And on that note that would be all for this week
Come back next week for more money knowledge