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How to rebalance and consolidate your investment portfolio?

Introduction:

The investment portfolio is a bunch of assets that includes stocks, bonds, gold, cash, real estate, etc. Investors seek a profit by combining these assets in a way that represents their risk appetite and financial objectives. If you are looking into building a portfolio with an objective, then it is also important to acknowledge the fact that building a portfolio isn’t a one-time activity. You should be able to monitor and review the performance of your portfolio periodically.

Portfolio rebalancing is similar to going to the doctor for a routine health check-up or having your car's oil changed in that it is routine maintenance for your investments. Suppose, you targeted an asset allocation percentage; 80% stocks and 20% bonds. When stock market is performing well, the percentage of your portfolio's money worth that is made up of stocks will rise as the value of your stock holdings rises. For example, if you start with an 80 percent stock allocation, you might increase it to 85 percent. Your portfolio will then be riskier than you expected. What is the solution? Sell 5% of your stock holdings and use the proceeds to purchase bonds. That is an example for rebalancing.

When should I rebalance my portfolio?

After understanding the notion of rebalancing, the next obvious question is, "When to rebalance my portfolio?". There are two basic approaches to rebalancing. You can either rebalance your portfolio at a regular interval (such as once a year) or just when it becomes unbalanced i.e. deviate from planned asset allocation. There is no wrong or right way to rebalance your portfolio, but once or twice a year should do unless your portfolio's value is exceptionally volatile.

Things to follow while consolidating portfolio:

Maintain a straightforward approach

If you intend to diversify your equity portfolios, make sure you have a strategy in place before you start investing. Although you can invest in various stock and mutual funds with a diversification perspective, try to avoid funds whose portfolio of holdings is overlapping with each other.

Do aim to limit the cumulative number of securities to a manageable number, let’s say 15-20, as an investor. That will help you to keep track of them and rebalance your portfolio effectively.

Also, make an informed investing decision. For example, if your portfolio includes index companies, it will be more convenient and wiser to invest in an index mutual fund which also invest in similar companies. You will get rid of all index stocks while still having exposure to them if you do it this way. You'll only have one fund to track.

Less is better

Examine your portfolio and see if you have too many investments just to diversify your portfolio. If it is not essential, you may reduce the number of securities in your portfolio to make it easier to handle. The objective of diversification is to reduce the risk, but after a certain point, portfolio risk will not reduce much by increasing the number of securities in the portfolio. An ideal stock portfolio may not have more than 15-20 stocks, but then please do remember that this also depends on your portfolio value, risk appetite, etc.

Remember that SIMPLE is often preferable to COMPLEX in the investing world because it helps you to make timely decisions.

Examine if your investments are in line with your investment strategy

Financial goals, risk tolerance, and investment horizon are the three foundations of suitable investments that help shape an investment portfolio personalised to each investor. That is critical to ensuring that all of your investments work together to help you meet your financial objectives. For instance, when a crucial financial goal is only a year or two away, you may choose to prefer the safety of your investments. At this stage, it may be necessary to align the investments as per the other mid-term and long term goals.

Multiple assets or instruments tend to clog up your portfolio and make it difficult to concentrate. As a result, make sure you get rid of any investments that aren't helping you meet your financial objectives or diversify/hedge your risks. Analyse your portfolios and weed out the ones that do not align with your investing strategy.

Clean up your portfolio at regular intervals

Let's talk about portfolio restructuring when we're on the subject of decluttering or weeding out unnecessary assets. Even if you hand-picked all of your investments to match your investing strategy, the stock market is competitive, and certain investments will become dead weight over time. It is essential to clean your portfolio from time to time to get rid of poor performing securities.

Conclusion:

A balanced investment portfolio consists of the right kind and amount of investments to help you achieve your financial objectives. A variety of factors can influence the quality of an investment portfolio. So please take a look at your portfolio frequently and rebalance it as per your investment objective.

Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. The contents herein mentioned are solely for informational and educational purpose. Investments in securities market are subject to market risks, read all the related documents carefully before investing.

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