Performance vs Rebalancing

Imagine you started the year 2020 by investing Rs. 100 with the following asset allocation:

• Equity: Rs. 60 (60%) split equally between large, mid, and small-cap stocks.
• Debt: Rs. 20 (20%)
• Gold: Rs. 20 (20%)
• Total: Rs. 100 (100%)

Now, let’s say you just left these investments for four years. At the start of 2024, your portfolio would have doubled to Rs. 201 and would be as follows:

• Equity: Rs. 144 (72%)
• Debt: Rs. 26 (13%)
• Gold: Rs. 31 (16%)
• Total: Rs. 201 (100%)

An obvious message is that staying invested through one of the most tumultuous lifetime events (the COVID pandemic) has yielded excellent results – showcasing the importance of patience. But that is not what I want to highlight; there is a less obvious but equally important point. Even though you made absolutely no changes to your portfolio in the past four years, your asset allocation has changed significantly.

Even though you made absolutely no changes to your portfolio, your asset allocation has changed significantly.

• Equity, which used to be 60% of your portfolio, is now 72%.
• Debt has fallen to 13% from 20%
• Despite a tremendous run, Gold has also dipped from 20% to 16% of your portfolio.

Your portfolio, double the size of what it was, looks quite different from what it used to be. That’s because it has gotten skewed with time simply because various investments have performed differently. It is, therefore, important to periodically analyse your portfolio and rebalance it accordingly, based on your requirements and risk profile.

So, in this example, you can sell some equity, reinvest the proceeds in debt and Gold, and get back to the original 60-20-20 ratio or any other ratio you would like, basis your risk profile. This is wise – not doing so would imply that you are deviating from your ideal allocation and getting heavily skewed towards one asset.

Equally, you might want to make the best use of such opportunities to book some profits for other purposes – a down payment on a house, paying off other debts, investing in alternate asset classes, etc. Moving some profits out of equities will rebalance your asset allocation while meeting some of your other priorities.

What you choose is up to you, but staying on top of your portfolio is essential. We often get lost in celebrating or bemoaning how specific stocks, investments, or assets are doing and lose sight of an equally important picture – how they are doing relative to each other.

When it comes to your portfolio, performance is just one side of the coin – rebalancing is the other.

Rishi Piparaiya?has held senior leadership positions in wealth management, strategy, sales and marketing with leading financial services organisations, including Citi, Aviva and Banco Santander. He left his corporate job at the helm of his career to pursue his passions. He is now a?bestselling author,?world traveller?and?angel investor. His latest book,?Three Pigs to Financial Freedom, demystifies financial planning and offers an incredibly easy system to manage your money for a comfortable, worry-free life.