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Asset allocation, periodic rebalancing crucial to healthy portfolio

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I am a 27-year-old young investor. over the past year, I have seen the massive lows of covid crash and then the ensuing rally has led to all-time highs. I have made significant gains on my portfolio but now I am worried whether I should book profits or stay invested. This is a new territory for me. What should I do?

– Rakesh

Answer by Tarun Birani, founder and chief executive at TBNG Capital Advisors

Given the elevated valuations in some of the mid and small-caps, he is right to analyse in terms of whether he should have a dispassionate look at his portfolio for trimming. Presently, the inflationary scenario we are heading towards along with the possible muted Q1 results due to second wave could put some pressure on some of the stocks in the short term, though long-term equity drivers remain intact.

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

Asset allocation based on his risk profile and suitability and periodic rebalancing.

This will act as an anchor when there is uncertainty and doubts around what’s 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 run-up has led to the breach of his risk profile with equity reaching 80%, then he must take active steps to reduce the equity allocation in his portfolio and diversify across other asset classes. Even within equity as an asset class, he must look at periodic rebalancing across the categories which will then address his concern of small-cap, mid-cap, etc. The satellite part of the portfolio should be evaluated based on opportunity and returns made.

To go even more granular, he can look at whether he has made significant returns in this category already as well as what his emergency requirements are. On the other hand, if he has just started his investment journey and is making periodic investments, he can look towards this uncertainty and a possible market correction as an opportunity to average out his cost.

(Queries and views at mintmoney@livemint.com)

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