Asset allocation, periodic rebalancing crucial for a healthy portfolio


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


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 take an unbiased look at his portfolio for trimming. Currently, the inflationary scenario we are headed towards, as well as possible lackluster first quarter results due to the second wave, could put some pressure on some short-term stocks, although long-term stock drivers term remain intact.

To navigate this confusing scenario, he must focus only on the following two things with utmost discipline:

Asset allocation based on its risk profile and adequacy and periodic rebalancing.

This will serve as an anchor point in case of uncertainty and doubts about what is happening in the market. For example, if, based on his risk profile, he is comfortable having 70% of his portfolio in equities and the market rally has led to his risk profile breaking with equities reaching 80%, then he needs to take active steps to reduce the equity portion of his portfolio and diversify into other asset classes. Even within equities as an asset class, he needs to consider periodic rebalancing between categories, which will then address his concerns about small caps, mid caps, etc. The satellite part of the portfolio must be evaluated according to the opportunities and the returns achieved.

To go even further, he can see if he has already made significant returns in this category as well as what his urgent needs are. On the other hand, if he is just beginning his investment journey and makes periodic investments, he may view this uncertainty and a possible market correction as an opportunity to average his costs.

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