Portfolio Rebalancing FAQ Part 2

Published: November 13, 2020 at 6:25 pm

Last Updated on November 16, 2020 at 12:56 pm

We continue answering frequently asked investor questions on portfolio rebalancing to help with practical implementation. The first part (question 1 to 13) is available here: Portfolio Rebalancing: We answer frequent questions investors worry about (part 1). Par 3 is linked below.

Q14: Rebalancing if it involves multiple assets will it be model-based (quantitative)? For instance, the risk factors of equity and equity mutual fund may be similar. A: The asset allocation itself yes for institutional investors. Rebalancing could just be sticking to that asset allocation. For retail investors, however, this is not of much relevance.

Q15: If immediately after rebalancing, there is wild movement of the market , say +_ 30%,. Should I rebalance again or wait for next scheduled rebalancing. A: That depends on where you are with respect to your goal. If years away, another rebalance may be ok. If close to the deadline then the objective would anyway be to have enough in safer assets.

Q16: Which is the best site to compare our fund’s common investments. Forgot about a site which a used to do that analysis. A: I only use my own excel: Automated Mutual Fund Performance Tracker (free download).

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Q17: How to time the rebalancing – market base/annual mode( may lose few bucks if too strict about annual)..for example, I like to have ( 60:40 d:e..as my debt is anyway heavy..) when do I trigger the rebalancing../tax harvesting Vs rebalancing. A: If at any time of the year you see a sudden change in the asset allocation by say +/- 5% you can rebalance at that time. While you rebalance you can combine capital gain and capital loss to reduce tax out got.

Q18: How do I reduce bias (I’d wish to eliminate but it’s not possible) in my overall portfolio management and rebalancing? In other words what would be ‘systematic’ rebalancing. A: Bias cannot be eliminated but it can be diverted. I can be emotionally biased about inflation and this would help me overcome the fear of volatility. I can be emotionally biased to the corpus required for my future need. This can help be rebalance better.

Q19: Like NPS, can an average investor implement an ‘autopilot’ method of rebalancing effectively – if it means annual rebalancing regardless of market status, on my birthday. Does such a method have any pitfalls? A: Of course! The autopilot option in NPS is the strategy implemented in “target-date mutual funds” abroad. We do not have those in India at the time of writing.

Q20: Is it a good choice to have an arbitrage fund to facilitate this rebalancing process? A: As a part of the debt portfolio, yes.

Q21:Do we need to take care of exit fees while rebalancing? While rebalancing if the market is up I need to pay exit load of 1% but I have more profit rather to wait for the period till exit load waive off. A: Even if you wait until enough units are free of load, there will always be taxes to consider. Rebalancing is done to lower risk and/or invest at a lower price. This has to be done without consideration of tax or load.

Q22: Many of the salaried guys including me, who started investing late, have a debt-heavy portfolio with hardly any equity component and have now reached a level of 25:75(E:D). The contribution will continue to be there in the debt portion due to EPF/PPF. How should one then plan the equity component i.e.the quantum of investment and what should be the time frame to reach to the desired proportion of 60:40(E:D)?In the interim, how do we resist the bias which may occur due to the market movement? A: The only way to resist short-term actions is to be biased with respect to the big picture: an asset allocation with enough equity is the only chance we have of beating inflation. How soon you set your equity allocation close to the desired value only depends on your income, your expenses, debt and will to implement.

Q23: How do we carry out decluttering of the portfolio? Should we do the same at the time of rebalancing or both should be dealt with separately? If yes, when and what’s the most effective way to do declutter the portfolio? A: You can declutter each time you rebalance or each time there is a loss or you can simply do a hack job and be done with it. No one knows which is better!

Q24: Can a portfolio with asset allocation and rebalancing minimize sequence of returns risk for someone withdrawing money in the distribution phase of retirement? (Assume I withdraw money annually during the rebalancing act). A: Yes. See: Forget tax and exit loads, this is why your portfolio should be rebalanced each year

Q25: If I have multiple funds in equity n debt…. When I need to rebalance ….which of my equity funds do I select to sell . Vice versa which debt funds do I select to sell n move to equity. What should be the criteria for fund selection? A: Same as Q23. Please see above. Non-performers can be removed at any time. Just that rebalancing is yet another opportunity. The criterion for add or removing securities is independent of rebalancing.

Q26: 1. What would be the ideal frequency on looking at portfolio rebalancing
2. Is there a benchmark on % of money kept in a fund or fund type?
3. Does portfolio rebalancing apply to new investors who started 1 or 2 years ago?

A: 1: once a year. 2: Not sure what you mean but the cash held in a fund should not be used for calculating asset allocation. 3: Yes it is for everyone.

Q27: 1. Is it okay to manage rebalancing by changing the future investment amount (if possible) for that month in equity such that the allocation reaches back to target without selling any equity/debt. 2. Can we use arbitrage funds for very long term goals like 15-20 years (rather than using epf/ppf)

A: 1: It will not be possible beyond a year or so. Please get out of this mindset and think like a rich person. 2. Yes.

Q28: If a person has a huge amount in debt and that amount is kept dedicated for buying a house which may happen anytime soon or maybe much later too.. is this amount to be considered as a part of debt ratio for other goals or it is considered to be completely separate! A: Any sum that you intend to use for one goal should never be tagged to another.

The rest of the questions will be taken up in the next part: Portfolio Rebalancing FAQ Part 3

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