Portfolio Rebalancing Strategies: 'Do You Know This Secret?'

Why Advisor need portfolio rebalancing?

Portfolio Rebalancing is a Game Changer idea for Financial advisors, you can call it “PRODUCT ENGEERING”, a mutual fund scheme gives same returns whether investor invest with Advisor A or Advisor B. Now the question is what extra a Advisor can do for his clients?

                                                          

Problem: 50% portfolio loss vanish 100% portfolio gain.

Rule No.1: Never lose money. Rule No.2: Never forget rule No.1. - Warren Buffett

The major Market corrections are cyclical keep repeating in 3-4 years, every time the market corrects shapely it take portfolio in the position of 3-4 years back, all the gain disappear which was accumulated in the bull run, now the question is how to save this gain.

Solution:

100% Equity Vs. Yearly rebalanced 70/30 Equity-debt

(Invested in Sensex for equity and invested in Glit fund for debt)

Really, Portfolio Rebalancing Optimize Return and Reduce risk? But how?

1.       Between the market rally from 2005 to 2007 the 100% Equity portfolio gave better returns but in market fall it went below the 70/30 portfolio.

2.       During the 15 years the rebalanced portfolio were less volatile, after 3^rd year the rebalanced portfolio never went below the 100% equity portfolio.

3.       Every time the equity gained, it shift some profit to debt and when equity fall, it buy units at cheaper rates.

Which Should be the right asset class mix for best returns?

Equity & Debt mix is depend on the risk profile of the investor but still if the question is what asset mix can give optimized returns, here we did back testing, the case is same as above example the last 15 years returns of Sensex and gilt, rebalanced yearly.

Below graphs shows that the returns from sensex and gilt fund (Asset mix in lower equity(0%/100%) to high equity mix(100%/0%) in past 15 calendar years and the value of Rs.100000 invested on 1 jan 2005 and redemption done on 30 April 2020.

 

Looking at the above back testing results, the most optimized returns got in 70/30 Equity/debt, the value of Rs.100000 has been reached to Rs.551864, but if advisor want to reduce more risk with little compromise with returns, opt for 60/40 asset mix.

Always Remember, Investor loves stability!

What are the Strategies you can follow?

Periodic Rebalancing

The most convenient way to rebalance a portfolio is to decide a time interval for example quarterly, Half Yearly or Yearly. Most of the advisor prefers a yearly rebalancing irrespective of market condition, in all the above examples the yearly rebalancing has been done.

 

Range Rebalancing

Advisor can set a target percent change in the portfolio for example a portfolio is set as equity/debt 60/40, when the market rise the equity portion will increase and the ratio get changed, it may be 70/30, here advisor can set a alert on 10% change, so whenever the portfolio get change of 10% it will ask to rebalance it.

How easy it is to rebalance the portfolio?

Step 1: Decide Asset Allocation ratio and Re-balancing Strategy out of Fixed interval and change percent.

 

Step 2:

Once advisor decided the equity/Debt ratio with investor and what strategies they are going to follow, after that all task has been handled by software, if advisor want to rebalance the portfolio on 5% change, the software will send a alert as the difference in the current and recommended touches 5%.

 

Step 3:

Software will itself generate the Buy/Sell amount, you need to go to sell option and enter the amount you want to switch to other asset class, after that all you need to click on RE-BALANCE NOW Button. The switch order will be placed on BSE/NSE.

 

FOR MORE INFORMATION VISIT @-https://www.redvisiontech.com/