Rebalancing your portfolio of investments

If your portfolio of investments is tilted heavily either towards equity or fixed income investments, it is advisable to make suitable changesso that it becomes a more balanced portfolio that provides proper diversification. The portfolio should be rebalanced so that it has an optimum blend of investments in equities, fixed income instruments, commodities and real estate. So, how does one achieve such an optimum blend in asset allocation? Here are a few simple tips:

If your portfolio is heavily tilted towards, say, equity investments, your portfolio is exposed to maximum risk as equities are by nature highly volatile and any adverse price movement in stocks would lead to erosion in the value of your investments. To mitigate this high level of risk, it would be prudent to book profit in those stocks that are close to their peak levelsand have provided substantial returns on your investments. Also, you should get rid of those stocks that have not moved much from the purchase price or have moved below your purchase price and are not likely to move up. These are dud stocks and your portfolio would be better off without them as they drag down the overall returns on your equity investments. Your portfolio needs to be cleansed of such dud investments. The proceeds from these sell-offs can be utilised for investments in debt instruments, such as debt mutual funds, bank fixed deposits, company fixed deposits, bonds, etc. You can also buy gold from the proceeds to provide more stability to your portfolio. Such rebalancing would reduce the risk arising from stock market volatility and provide stability of income to the portfolio.

However, if your portfolio is heavily tilted towards fixed income investments, your portfolio needs equity dose in good measure to add that zing your portfolio. A portfolio that is heavily tilted toward fixed income investments lacks the punch of great returns that is the hallmark of equity investments, albeit at higher risk. You need to understand that equities have always delivered higher returns than any other asset class over the long term. Hence, it would be advisable to utilise proceeds from matured investments in FDs, CDs, bonds, etc. to buy good quality stocks.If your investment horizon is long term, you can leverage stock market volatility to accumulate fundamentally strong stocks and, thereby, rebalance your portfolio.

However, while undertaking the rebalancing exercise, you need to take into account your risk appetite, income level and, most importantly, your age to determine the proportion of allocation in different asset classes.