Asset allocation, periodic rebalancing crucial for a healthy portfolio


I am a 27 year old young investor. Over the past year, I’ve seen massive lows in the covid crash, and then the rally that followed led to all-time highs. I have made some big gains on my portfolio, but now I am wondering if I should make a profit or stay invested. It’s new territory for me. What should I do?

– Rakesh

Response from Tarun Birani, Founder and Managing Director of TBNG Capital Advisors

Given the high valuations of some of the mid and small caps, he is right to analyze whether he should have a calm look at his portfolio for the trimming. Right now, the inflationary scenario we are heading towards, as well as the possible mixed first quarter results due to the second wave, could put some pressure on some stocks in the near term, although the drivers of lower stocks may put some pressure on some near-term stocks. long term remain intact.

To navigate this confusing scenario, he needs to focus only on the following two things with the greatest discipline:

Asset allocation according to its risk profile and its adequacy and periodic rebalancing.

This will serve as an anchor point in case of uncertainty and doubts about what is going on in the market. For example, if, on the basis of his risk profile, he feels comfortable having 70% of his portfolio in equities and the acceleration of the market has led to the breakdown of his risk profile with equities reaching 80%, then he must take active steps to reduce his portfolio’s equity allocation and diversify into other asset classes. Even within stocks as an asset class, he should consider periodically rebalancing between categories, which in turn will address his concerns about small and mid caps etc. The satellite portion of the portfolio should be assessed on the basis of opportunities and realized returns.

To go even further, he can determine if he has already achieved significant returns in this category as well as his emergency needs. On the other hand, if he has just started his investment journey and makes periodic investments, he may view this uncertainty and a possible market correction as an opportunity to average his cost.

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