The power of asset allocation in equities, debt, gold, and real estate

Investing in financial markets is akin to a long and winding journey, where navigating various terrains becomes imperative to reach your desired destination—financial success. Central to this journey is the concept of asset allocation and the importance of periodic rebalancing.

Asset allocation refers to the distribution of your investments across various asset classes such as equities, fixed income, real estate, gold, and more. It's akin to dividing your financial resources into different baskets to manage risk and achieve your financial goals.

Imagine you've crafted a well-balanced portfolio with a specific allocation to each asset class, depending on your risk profile. Over time, market dynamics can cause this allocation to drift. For instance, when the stock market surges, your equity allocation may become overweight compared to other asset classes. Conversely, if interest rates plummet or gold prices drop, your portfolio might become underweight in these areas.

This is where the importance of maintaining your asset allocation comes into play. If your portfolio deviates significantly from your desired allocation, it's time to rebalance. It's important to note that your asset allocation depends on your risk profile. If you are a risk-taking individual, you can allocate 70% to equities, while a conservative person may opt for 30% exposure to equities. Here is a report from FundsIndia on how different portfolios have performed over the last 20 years.

Importantly, while equities tend to provide higher returns over the long term, the debt exposure of your portfolio lowers portfolio declines during market downturns. Hence, it's essential to maintain a balance in each asset class.

Also read: How to pay the lowest possible rate for Apple iPhone 15? Discounts, benefits, prices in other countries

Also read: Turn 8 years for saving your first crore into just 4 and 3 years for the second and third crores: Introducing the 8-4-3 Rule

Also read: Theme of reforms is to protect policyholders’ interests: Irdai Chairperson Debasish Panda

How to Rebalance Your Portfolio

Rebalancing your portfolio involves realigning your asset allocation with your original plan. Here are some strategies to consider:

If one asset class, such as equities, has significantly grown and become overweight in your portfolio, consider reducing your exposure to it. This may involve selling or redeeming funds or stocks that are underperforming compared to your other holdings.

For investors who regularly contribute to their portfolio, you can adjust your future contributions to different asset classes. If equities are overweight, reduce your monthly investment in them and allocate the same amount to other asset classes. This strategy allows you to maintain your long-term equity investments while gradually rebalancing your portfolio.

Before making any changes, be mindful of tax consequences. Selling assets may trigger capital gains taxes, so it's essential to evaluate the tax implications of your rebalancing decisions.

When to Rebalance

Rebalancing should not be a knee-jerk reaction to short-term market fluctuations. Instead, it should be based on substantial deviations from your target asset allocation. Regularly review your portfolio to assess whether it has drifted significantly.

In conclusion, maintaining your asset allocation through market cycles and periodically rebalancing your portfolio is a vital aspect of sound investing. It ensures that your investments align with your long-term financial objectives and helps manage risk. While rebalancing, be mindful of tax considerations and remember that it should be driven by significant deviations from your desired allocation, not by short-term market noise.