Investment portfolio: How often should you rebalance it?

Updated: 02 Oct 2022, 01:00 PM IST
TL;DR.

Rebalance your portfolio to ensure that you have more winning stocks in your portfolio. The slow-moving and cyclical stocks must not take up too much space, or else you will lose out on the opportunity of gaining from your winners.

Don't rebalance your stocks too frequently

So many times, we hear investors seeking advice regarding when to buy or sell a particular stock. Many investors are unsure of when to enter or exit a particular stock. This has either led many to be aggrieved because of both real and opportunity losses. 

At the end of the day, it is all about rebalancing your portfolio in a way that your portfolio does not seem overweight in any particular sector. While it is good to be bullish about a particular sector, relying on it completely may result in over-dependence and unwarranted losses in times of adversity. 

Churning your portfolio means that you decide the weight of every company in your portfolio depending on your understanding of stocks and the market and then invest accordingly. This also means that stocks that stood high in your list might have been struck off by the end of this year. 

However, this can also translate to maintaining the status quo of the stocks or increasing their weight with the falling markets. Considering how the share prices of some companies move faster than others, it is not surprising that you may consider allocation and re-allocation of your stocks time and again. 

READ MORE: Should you rebalance your portfolio when the market is this volatile? We ask experts

Deciding stock rebalancing

Rebalancing is essentially rejigging to bring your current portfolio to its original weight. This kind of management is all about controlling risks to ensure that a weak stock does not add too much weight to your portfolio, thus, causing you unwarranted risks. This means that you can do away with overvalued and undervalued stocks. 

Before rebalancing your stocks, you must look into their fundamentals to check if something is amiss. However, if you are not sure of which stocks to pick and get rid of, you must seek the advice of a professional financial advisor to learn about the right proportion apt for your portfolio.

Rebalancing is simple. You just have to sell shares of the company occupying too much space and weight in your portfolio to lend space to those that are likely to do well in the future. 

How often should you rebalance?

There is no thumb rule regarding rebalancing frequency though financial advisors advocate the rebalancing process to be limited to only once a year. However, a lot depends on myriad situations like sudden changes in business policies, identification of new growth triggers for a company, merger and demerger of business houses, macro factors, and so on. It’s not that you have to change your portfolio drastically; just rebalance it by rearranging the weights of your stocks from time to time. 

READ MORE: Why should you rebalance your portfolios using index funds?

Is rebalancing necessary?

It is okay if you do not want to churn too frequently. But make sure that you have got rid of all the losers and have included only winning stocks in your portfolio. This way, you can include the stocks in the proportion they deserve. Make sure that your winner stocks are those that will continue to grow in the long run too.

There is no set rule regarding when you should buy or sell your stocks. You should be under no obligation to churn your portfolio just because others are doing it. Too much churning can cause you to sell some of your best stocks beforehand. Refrain from being too impulsive when it comes to stock rebalancing. 

Caveat

A lot many times investors complain about choosing the wrong stocks while rebalancing their portfolios. To reduce the possibility of errors, you must understand the business well and know why you bought the stocks in the first place. Track your companies regularly, especially, if they are cyclical stocks. You may not be an expert but can definitely act on market cues to decide if you must churn your portfolio or not.

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First Published: 02 Oct 2022, 01:00 PM IST