I started investing only 2Y ago, should I rebalance my portfolio?

Published: April 12, 2021 at 9:26 am

Last Updated on April 12, 2021 at 9:26 am

We had pointed out on April 7th that since the market has lost momentum, now is a good time to rebalance our portfolios if there is a need for it. I have just rebalanced my retirement equity portfolio for the first time in nearly 13 years (video below). In response to this, a viewer on YouTube wanted to know if he can rebalance his portfolio, which was created only two years ago.

Once you have an asset allocation in place (equity allocation and fixed income allocation) and start investing from day one as per this allocation*, rebalancing is a simple process. However, my interactions with investors suggest that many have a mental block and fear about rebalancing. They assume it is something complicated, or they are afraid of the associated taxes. Some also think that rebalancing should be done only with older portfolios, and young portfolios should grow untouched.

* starting from day one with the desired asset allocation is quite rare. Some young earners appreciate the importance of equity investing as soon as they start working pull this off. We shall not consider those with debt-heavy portfolios in this article. Their portfolio asset allocation is significantly different from their target asset allocation. There is no need for them to reduce their already low equity allocation by removing some capital gains.

Let us understand the process of rebalancing with a simple example. Let us say I invest Rs. 60 into equity in March 2020 and Rs. 40 in some fixed income. I got a return of 95% in equity after one year and a return of 7% in fixed income.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

This means my equity portfolio value today is Rs. 177 and my fixed income Rs. 43 (42.8). So from a starting asset allocation of 60% equity, 40% debt, the asset allocation is now, 117/(117+43) = 73% equity and 43/(117+43) = 27% debt.

So one good equity year has resulted in a 13% deviation in equity. The portfolio is now only one year old. Should I reset the allocation back to 60% equity (rebalance) or not?

I would recommend that young earners in the same situation with a portfolio just a few years old rebalance. It would make a big psychological difference to redeem some real profits from equity and shift them into fixed income.

For the present example, 60% of (117+ 43) = 96 and 40% of (17+43) = 64. So Rs. 21 from equity should be redeemed and reinvested into fixed income to reset the portfolio. It is okay to be approximate about this.

Many young earners worry about the best way to rebalance: each year or wait until there is a 5% or more deviation. That is, wait until equity allocation changes from, say, 60% to 65% or (as in the above example) or 55% or less. The answer to this question is, as long as you choose one method and stick to it, it is okay. Often the “best” part depends more on sticking to the plan than the plan itself!

Yearly rebalancing does not mean you rebalance like a robot. For example, from 60:40, if the portfolio changes only by 1% or 2%, it is ok to skip a rebalance that year. How much deviation is acceptable is something you need to decide.

Some people wonder if I start rebalancing from the first year of investing, will I not lose out on the power of compounding. There is no such thing as the power of confounding in equity, so there is nothing to lose out on! Equity returns will always be clumped: few good years will be followed by few bad years and vice versa.  The simplest smartest way to preserve gains is by regular rebalancing.

But if I rebalance, I will lose money to tax and exit loads? Yes, and if you do not rebalance, you will lose money to market forces. This loss is much more than what you “lose” by way of load or taxes. See: Forget tax and exit load; this is why your portfolio should be rebalanced each year.

So it does not matter if your portfolio is one year or five years old. Formulate a rebalancing plan and stick to it. This will make you feel accomplished – be it booking profit from equity or investing more into equity when it is “down”. Also, every rebalance will take you one step closer to your goal, provided you know your target corpus.

Additional resources on rebalancing

Rebalanced my equity MF retirement portfolio for the first time in 13Y

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)