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Join date : 2012-08-12
Age : 31
Location : Bangalore
|Subject: An efficient way to manage risks Tue Sep 04, 2012 9:48 pm|| |
An efficient way to manage risks
Rebalancing the portfolio is a very powerful and efficient way of managing risks.A portfolio that is periodically re-balanced can give more sustained growth than one which remains untouched.A typical investor invests in one asset class and often compares this with other investments which have outperformed during that particular year.In addition,they aspire to see each and every investment grow every year,which is almost impossible.
Currently,markets are witnessing volatility for an extended duration.In this kind of a market,rebalancing could be a preferred strategy to control investorsexpectations.For rebalancing,what matters most are the portfolio size and the investment horizon,preferably of five years and more.Before rebalancing,one should also consider the cost involved because this has a bearing on the returns.Of the several rebalancing strategies,two are very popular: Active or tactical rebalancing,and threshold and range rebalancing.
In active rebalancing,portfolios are churned to reach the original target allocation,based on analysis of the current market trend.Depending upon the opportunities available in the market,this always focuses on a target-based return from the portfolio and that target return will never be exceeded.The threshold and range rebalancing refers to when an asset class rises or falls more than the target percentage,and that asset is rebalanced to the maximum pre-set percentage.For instance,the equity part in a portfolio is set at 20% (plus/minus 5 percentage points) and due to a sudden uptrend in the market it goes to 30%.In such a case,stocks will be sold to bring the level to 25%,and not to 20%.
Like some of the investment strategies,rebalancing is relatively complicated.So it is always better to seek professional advice.
The author,a certified financial planner,is
director,My Assets Consolidation,Chennai