NOT MANY investors believe in rebalancing. Less than 10% respondents to an online survey said they rebalanced their portfolios regularly. Yet, it is the mantra that ensures high returns at low risk (see graphic).
Rebalancing is necessary because the returns from different asset classes can vary. The Nifty shot up 31% in 2014, but closed 2015 with a 4% loss. While returns from fixed income have been largely stable, gold has also given volatile returns in the past 10 years. Over time, the differential returns can significantly change the asset mix of your portfolio. Rebalancing restores the portfolio to the original asset allocation, thereby controlling the risk and the returns it will generate.
The rebalancing decision is not easy because it takes a contrarian call. Few investors would have reduced their equity exposure when the markets were making new highs between 2004 and 2007. If they had, their portfolios would not have bled so much in 2008. Similarly, how many would have put more in equities after the bloodbath? Those who did, made good gains when the markets bounced back in 2009. If you rebalance regularly, you will not have any regrets.
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1. BNP Paribas Long Term Equity Fund
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