Portfolio Re-Balancing – why is it important and how you can do it



Over the course of the year, the market value of each security within your portfolio earned a different return, resulting in a change in the allocation pie. This might change the investor's risk profile. While in the short term this may not have an adverse impact, such changes in risk profiles can have a far-reaching impact in the longer run. Portfolio rebalancing is a strategy that allows individuals to keep their risk level in check and minimize risk.

What is re-balancing?
Re-balancing is the process of buying and selling portions of your portfolio in order to set the weight of each asset class back to its original state. In addition, if an investor's investment strategy or tolerance for risk has changed, he or she can use rebalancing to readjust the weightages of each security or asset class in the portfolio to fulfill a newly devised asset allocation. Assume an investor's portfolio worth Rs 1,00,000 is invested in equity funds (40%), Bond Funds (40%) and liquid funds (20%). In other words, Rs 40,000 will be invested in equity funds, Rs 40,000 will be invested in bond funds and Rs 20,000 will be invested in liquid funds. Let's assume that in Year 1, equity funds deliver 50% return, bond funds loose 2% and liquid funds give a modest 4% return. Overall, the portfolio has returned 8%, but that's more due to the equities.
In year 2, assume equity markets fall. So assume, equity funds fall by 10%. Also assume that Bond funds on the other hand rebound and return 9%, while liquid funds continue with 4%.
Now assume two scenarios, viz. one where the above investor switches back to his original asset allocation, and the other where the investor doesn't reallocate his assets as per his original allocation and ignores the change.


while the rebalanced portfolio appreciates to Rs 1,20,480, the value of the ignored portfolio actually falls to Rs 1,18,360. As can be seen, the ignored portfolio got swayed by the equity return in Year 1 and therefore chose not to go back on the original asset allocation, not knowing that equities as an asset class can be quite volatile in the short run. A fall drop in the equities in Year 2 was enough to result in the ignored portfolio to under-perform the rebalanced portfolio. Re-balancing strategy is, therefore, the optimal strategy.

Benefits of portfolio rebalancing

Disciplined investingRe-balancing is a vital part of investment policy - there can be no asset allocation target without the discipline to preserve that target.
Reduces riskA plan may incur higher risk if no rebalancing policy exists. This is true particularly for equity allocations, which can rapidly rise in a bull market. For instance, portfolio rebalancing ensures that in rising equity markets, the asset allocation doesn't get skewed towards equities and the portfolio correctly reflects the investor's risk profile. It also ensures that the portfolio is adequately diversified.
Buy low, sell highRebalancing is a mechanism for sensible timing - the process naturally buys low and sells high. This strategy ensures that the portfolio returns are enhanced. A clear re-balancing policy avoids the risks of ad-hoc and costly portfolio revisions.
Balanced Funds – a better way to portfolio re-balancingOne way to rebalance the portfolio is to do it ourselves. In other words, investments can be made in equity and debt funds separately and then adequate re-balancing can be done depending on how the equity and debt markets perform.
Another simple way to ensure portfolio re-balancing is to invest in Balanced Funds. Here, the fund manager does the re-balancing and not the investor. Usually, all balanced funds invest around 65-70% in equity markets and the rest in debt and money market instruments as per their stated asset allocation mix.
So when equity markets keep rising consistently, Balanced Funds are mandated to book profits and bring their equity allocation back to their stated levels. This way, balanced funds carry a low downside risk as when equity markets fall, balanced funds take a lesser hit than diversified equity funds, as their exposure to equities is low.
Thanks to HDFC Bank

From Parag Parikh


Key to any good investment is discipline and the ability to control your emotions.
Don’t get in at peaks: Stock markets are not always the barometer of the economy, or even of a company. With globalization and hot fund flows, they have become glorified casinos and don’t always reflect the true worth of its constituents. Bear in mind that momentum works both ways – you could crash as easily as you soar.

BROKER CALLS


12:34:14 - Market is highly volatile, traders are advised to buy fundamentally sound cash scrips
12:17:01 - Our Relinace Industries SL triggered
11:29:30 - Buy Bharti Tele Ventures for 2 days at Rs407 with SL of Rs404 and tgt of Rs 416 - Deepak
11:29:29 - Buy Bharti Tele Ventures for 2 days at Rs407 with SL of Rs404 and tgt of Rs 416 - Deepak
11:20:15 - Our Dwarkesh sugar Sl triggered - Pritesh
11:20:14 - Our Dwarkesh sugar Sl triggered - Pritesh
11:14:02 - high risk trade buy apil cmp 381.5 with a sl of Rs 375 target 390 and 393 - Biren
11:14:01 - high risk trade buy apil cmp 381.5 with a sl of Rs 375 target 390 and 393 - Biren
11:10:00 - Buy Reliance Indus at Rs854 with SL of Rs849 and tgt of Rs863
10:45:22 - Rajesh Exports secures order worth Rs1.78bn from UAE
10:42:47 - Buy Srf at Rs360 with Sl of Rs355.50 and tgt of Rs368, 372 - Pritesh
10:17:13 - BUY JKCEMENT CMP 187.5 WITH A SL OF rS 183 TARGET 195 AND 198 - Biren
10:16:52 - Mphasis BFL cancels proposal to buy back shares
10:16:00 - Buy Dwarkesh Sugar at Rs273 with Sl of Rs269 and tgt of Rs281 - Pritesh
10:08:47 - BUY DHAMPUR SUG CMP 250.5 WITH A SL OF RS 245 TARGET 260 AND 263 - Biren
10:06:53 - Our BTST call of hindalco has gained by over 2% to Rs200
10:06:51 - Our BTST call of hindalco has gained by over 2% to Rs200

15:11:27 - Sensex down by over 300 points
15:10:34 - Mastek reports Q3 profit of Rs173mn and sales in the quarter ended March 31 were Rs1.8bn
15:10:33 - Mastek reports Q3 profit of Rs173mn and sales in the quarter ended March 31 were Rs1.8bn
14:43:24 - Shree Renuka Sugars approves raising overseas investment limit to 49%
14:42:41 - Shree Renuka Sugars to buy Power plant for Rs397.2mn
14:41:38 - Asian markets end weak, Nikkei Index down 256 pts, Hang Seng Index down 165 points
14:34:16 - TCS to partner Deutsche Bank - Reports
14:05:59 - Reliance Petroluem in talks for stake sale to global companies
14:05:07 - Reliance Petroluem shares may list in 1st week of May
14:05:06 - Reliance Petroluem shares may list in 1st week of May
13:43:58 - Nifty has lost 58 pts at 3420, support for the Nifty is expected at around 3390 levels
13:35:16 - Aarti Drugs form venture to sell drug ingredients on China
13:23:29 - ACC Q1 other income at Rs537mn (up 28.7%)
13:23:28 - ACC Q1 other income at Rs537mn (up 28.7%)
13:07:53 - ACC results includes figures of Bargarh Cement Ltd, Damodhar Cement & Slag Ltd which are merged with the Company with effect from April 01, 2005,
12:58:28 - ACC Q1 revenue at Rs13.81bn (up 19.5%)
12:55:53 - ACC Q1 profit at Rs2.35bn (up 41.5%)
12:55:52 - ACC Q1 profit at Rs2.35bn (up 41.5%)
12:34:20 - Market is highly volatile, traders are advised to buy fundamentally sound cash scrips
12:14:41 - India's February Industrial production rises 8.8% on year
12:14:40 - India's February Industrial production rises 8.8% on year
12:06:15 - Apollo Tyres will sell shares to raise funds and buy rivals
12:04:44 - Apollo Tyres Board approves Rs4.5bn fundraising plan
12:00:56 - i-Flex secures order from 3 banks in Chile
12:00:55 - i-Flex secures order from 3 banks in Chile
11:57:16 - PVR to consider interim dividend on April 24
11:57:15 - PVR to consider interim dividend on April 24
11:50:00 - ORG Informatics bags order of Rs1700mn from Bharat Electronics
11:33:59 - Hindustan Zinc raises Zinc prices - Reports
11:33:58 - Hindustan Zinc raises Zinc prices - Reports
11:31:22 - Cipla raises $170mn selling shares overseas
11:15:36 - Satyam & Optimation in strategic partnership in New Zealand
11:13:06 - TV 18 Board to consider raising funds on April 18
10:45:31 - Rajesh Exports secures order worth Rs1.78bn from UAE
10:34:26 - Hero Honda says it expects solution to strike 'very soon'
10:23:36 - Subex Systems Board to recommend dividend on April 25
09:48:21 - Results Today: ACC, Mastek, Aztec Software, CCL Products, CRISIL and Shree Renuka Sugars.

"Sizzle with the Sensex!” By HDFC Bank


The Sensex is breaking new barriers, reaching historic highs and creating waves of enthusiasm in the minds of the one and all. The victory of the bulls over the bears has resulted in the Sensex racing to unprecedented highs. In the midst of such enthusiasm it is important for investors to plan out their investments with due care and caution. Investors should not get carried away by the booming Sensex. This is the time for introspection where investors should analyze their needs before taking any major investment decision.
So the questions that are require an answer at this point of time are: Firstly, is it the right time to enter equity markets for a new investor? Secondly, what should be the strategy for the existing investors? Thirdly, in case equity investments are not a viable option, what are the other avenues that a person can consider?
Any investment plan should always be a function of your needs, requirements and your profile. The most important factor should be one’s own individual needs and requirements and not the levels of Sensex. It is important for investors to adopt a disciplined approach to investment. Thus, for an existing investor it is important to revisit the portfolio at such levels and redeem his units to make his risk return proportion in sync with his profile. Generally it is always better to revisit your investment portfolio regularly so as to ensure that it is in sync with your requirements. When a person is in his early 20s he is advised significant exposure to equities as his obligations and commitments are quite less. As a result he can have a significant exposure to equity and equity related instruments. However, when the individual gets married and has children, it is felt that his risk appetite should be reduced as he has obligations to fulfill. The obligations can be towards his family or towards his child’s education, marriage etc. Suffice it to say that since his obligations have increased his exposure towards equities should be reduced proportionately. When the person is nearing his retirement, his exposure to equities should further decline.
Stock market is essentially a reflection of sentiments. Under the current scenario there are positive sentiments about the markets. In case the investor is interested in investing over a long time horizon then it is perfectly acceptable to invest at this time. Thus, while entering at this time it is always better to invest with a long-term horizon. Once the investor has decided to invest, there are two options that are available to the investor. He can either choose to invest regularly over a period or invest in lump sum amounts whenever he deems it fit to do so. While the first option of regular investing is all about disciplined investing, the second approach is about attempting to time the market. If one is lucky enough, his timing may prove right and he may gain more. However, such an approach is extremely risky as it is a well-known fact that markets cannot be timed. Under the current scenario it is advisable for investors to enter the market through regular investments. Systematic investment plan and value averaging are two techniques of approaching investments in a phased manner.
SIP is increasingly gaining popularity among the retail investors. SIP is a mode of investment in mutual funds wherein an investor can invest a fixed amount regularly irrespective of the market level (on monthly or quarterly basis). The fixed amount is either directly debited from the bank account or is paid using post-dated cheques. Through this regular investment routine, one is able to invest in a disciplined manner. When one invests over a period using SIP the cost of units acquired is not dependent upon the prices prevailing at a particular point, but over a period. This method reduces the risk of entering the market at the wrong time.
For those investors who are interested in entering the market for a shorter time frame, we advise to wait for a correction. It is a well-known and accepted principle that equity investments act as a shield against inflation. But investing blindly in equities may not be appropriate. Investors will have to carry out a close analysis and introspection before taking a final call relating to the investment decision. A careful investment decision made after due deliberation can in fact make you “sizzle with the Sensex!”

Confusing Risk with Volatility


Too often, people confuse risk with volatility. Risk and volatility are not synonymous!
Risk is usually defined as the potential for loss. But to us, risk is really unmanaged volatility. Volatilityarises from random price movements which occurs naturally in every market. Without volatility, there can be no profit opportunity. Volatility is what drives markets either up or down and helps form and sustain trends. The greater the volatility, the greater the profit opportunity. Conversely, when there is little or no volatility, there is little or no profit opportunity. Markets will tend to drift sideways. To us, harnessing volatility is managed risk.
Volatility is like electricity. It can be both dangerous and useful. For instance, a downed power line is dangerous. It frightens everyone except the repairman. He understands the risk because he's been trained to identify it and then manage and contain it. Once the downed power line is repaired, what was once dangerous becomes useful again. But because its dangerous, should electricity be avoided? Hardly. To be useful, electricity must be harnessed or managed. The same holds true for trading.
Entering a market without first identifying risk is foolish. And doing so without protecting against risk is as foolish as someone walking through a puddle of water with a downed power line across it. Like electricity, volatility should be respected, not feared. When properly harnessed, volatility becomes extremely useful because it fuels profits.
Each time you enter a market, you must identify the risk associated with that particular trade. Onceidentified, you need to limit the risk with a protective stop loss order. In the event that volatility forces the market to move against you, a stop loss order acts like an electrical fuse. It quickly and safely gets you out of the trade, thus preserving the lion's share of capital for the next opportunity.
An Illustration
Take Crude Oil. Crude is a very volatile market. Consequently, it tends to trend very well and often. And when it trends, the profit potential can be huge. Conversely, without managing volatility, it can be extremely dangerous. Because of the leverage used to trade Crude, each time it moves a penny, your account balance would change by $10.00 for each contract traded. Thus, a $1.00 move would represent a $1,000 change per contract. So, if you bought Crude Oil and it moved up by $1.00, your account balance would increase by $1,000. Conversely, if it moved down by 1.00, it would decrease it by $1,000. Suppose you bought 3 contracts when Crude Oil was trading at $63.00. Suppose you also set a stop loss order to sell it if it dropped back to $61.90. If it did, you'd exit with a loss of $1,100 per contract ($63.00 - $61.90 x $10.00) or $3,300 in total. That would be well within your risk tolerance of 3.5% for a $100,000 account.
If Crude moved up by $1.50, your account balance would increase $1,500 x 3 or $4,500. But suppose after it moved up $1.50, it moved down $2.00 a few hours later. Crude can frequently move $1.00 in an hour.
One moment, your account balance swelled by $4,500 only to turn negative by $1,500 within hours. To the uninitiated and inexperienced, that can be unnerving. Remember though, you set a protective stop at $61.90. You predetermined that, after you enter the trade, you were willing to let the market move as much as $1.49 against you before it moved back in your favor.
In this example, the trade moved $4,500 in your favor and then $3,297 against you. That $7,800 differential is volatility. It is not risk. It's completely normal and must be expected.
Now suppose Crude had momentarily moved up $4,500 only to later hit the protective stop which caused a loss. To the inexperienced, they might think they just lost $4,500 in profits. That's certainly easy to think after the trade ended. It also presupposes you knew Crude wouldn't move higher than $4,500 before falling back and hitting the stop. Both suggestions of course are equally ridiculous.
Reality tells us something else. First, all markets ebb and flow. Between the time a trade begins and ends, the market is going to move up and down. Second, its impossible to capture the entire range of a trade between entry and exit. If you are able to capture 50%, consider yourself fortunate. So, if you bought Crude at $63.00 and it traded to a high of $69.00 before you exited, you might capture only $3.00 of the move. And if you did, you'd net at least $9,000 ($1,000 x $3.00 x 3 contracts). That's a return of $9,000 having risked just $3,300.
There is considerable leverage trading commodity futures. That's why the profit potential is so
enormous. In the illustration above, you saw that a one penny move in Crude Oil represents a potential $10 gain or a $10 loss. Leverage can certainly magnify volatility. But it doesn't necessarily increase risk.
With a risk management strategy that caps risk at 3.5% for every market traded, the degree of volatility is no longer an issue. A 3.5% loss trading Crude Oil is just the same as a 3.5% loss trading Exxon stock. But where a one penny move in Exxon is worth only a penny, a one penny move in Crude is worth 1,000 times more. If you knew that your risk was limited to 3.5%, which would you rather trade? The answer should be obvious.
There is something else to keep in mind. As an account balance grows, as more markets are being traded, and the longer trends last, the fluctuations of an account's balance will become even more pronounced. But no matter how dramatic the volatility may be, it won't change risk.
Now take this one step further. Suppose you were trading Crude Oil plus the Swiss Franc and the Dow Index. Also suppose you capped risk at 3.5% for each market. Theoretically at least, if you were trading all 3 markets at the same time and each market moved against you by 3.4% without ever hitting your protective stop, your account balance would momentarily drop by over $10,000. And if those 3 markets later moved simultaneously in your favor by $4,500 each, your account balance would appear to skyrocket from a negative $10,000 to a positive $13,500. That $23,000 differential would not be unusual. It would be normal volatility.
And the risk never changed. Such fluctuations do not reflect trading performance and should not be used as a measurement. It would be foolish to judge the effectiveness of a trading methodology by fluctuations in an account balance. It would be even more foolish to draw any conclusions based on momentary spikes to an account balance. Trades can only be judged after they're closed. Hopefully, this illustration shows why volatility is not the same as risk. Risk, or more specifically unmanaged risk, arises when you fail to set protective stop loss orders that let a trade go more than a predetermined amount or percentage against you. Remember, volatility drives markets and fuels profit opportunity. Volatility is good. Unmanaged risk is bad.
In the final analysis, the only aspect of trading that you can control is risk. Nothing else. You can't control profits anymore than you can predict what a market is going to do or when. But risk always remains within your control and is the most important aspect of profitable trading. You might say that successful trading is much more a game of defense than of offense.
Once identified, protective stop loss orders limit risk to a small, predetermined percent of capital. That allow the market to perform naturally. If it moves in your favor, the stop order will be moot since you will probably exit the trade with a profit. And if the stop order is hit, you can reset assured that your loss was small and manageable and that your capital wasn't damaged.
Combining a trading methodology that has an expectancy of a positive outcome every time you enter a market with well conceived risk management, you will ultimately succeed because you will generate more profits from winning trades than loses from losing trades.

Copyright 2006 * Wildwood Partners, LLC

My Broker Call

15:19:01 - Our Buy Today Sell Tomorrow call: Buy Bajaj Auto at Rs2855
15:10:56 - Our Buy Today Sell Tomorrow call: Buy Escorts at Rs101
15:06:50 - Our Buy Today Sell Tomorrow call: Buy ACC at Rs832
14:52:16 - Our Buy Today Sell Tomorrow call: Buy Colgate at Rs449
14:47:29 - Our SL triggered Dr Reddy's Lab call - Pritesh
14:45:31 - Our 1-month delivery call of ACC given on March 27 has achieved the tgt of Rs820 - Pritesh
14:34:21 - Buy dr Reddy's Lab at Rs1476 with SL of Rs1464 and tgt of Rs1497 - Pritesh
14:32:19 - buy srei infra cmp 61 with a sl of Rs 59 target 65 and 67 - Biren
14:32:18 - buy srei infra cmp 61 with a sl of Rs 59 target 65 and 67 - Biren
14:25:58 - Buy Divis Lab at Rs1990 with SL of Rs1977 and tgt of Rs2024
14:08:00 - buy nicholas pir cmp 278.5 with a sl of R 274 target 286 and 289 - Biren
14:07:24 - Our l&t call bang on tgt
13:56:44 - Correction: update Alok Ind sl from 75 to 77 now trade is safe - Biren
13:55:34 - update also ind sl from 75 to 77 now trade is safe - Biren
13:38:10 - update pratibha sl from 259 to 262 now - Biren
13:17:58 - Buy Mphasis BFL at Rs220 with Sl of Rs216 and tgt of Rs228 - Pritesh
12:56:18 - Our BTST call of VSNL has gained by 2%, book profit in the scrip
12:46:04 - Buy Aptech at CMP Rs140 for delivery of 2 weeks with tgt of Rs162
12:05:15 - High risk traders buy L&T at Rs2602 with SL of Rs2589 and tgt of Rs2637
12:05:14 - High risk traders buy L&T at Rs2602 with SL of Rs2589 and tgt of Rs2637
11:42:57 - Holdings & limits updated so check positions now and take fresh positions
11:42:56 - Holdings & limits updated so check positions now and take fresh positions
11:37:25 - our nagar cons bang on target (393) - Biren
11:35:01 - our nagar cons bang on target (390) - Biren
11:35:00 - our nagar cons bang on target (390) - Biren
11:28:39 - BUY NAGAR CONS CMP 382 WITH A SL OF RS 378 TARGET 390 AND 393 - Biren
11:13:50 - Buy Inox at Rs216 with SL of Rs212 and tgt of Rs221, 224 - Pritesh
11:13:08 - BUY SEAMECLTD CMP 115. WITH A SL OF RS 112 TARGET 121 AND 123- biren
11:01:04 - Our BTST call of APIL has surged by over 3.50 %, book profit in the scrip
10:58:57 - Our BTST call of STER has gained by over 2% to Rs2006, book profit in the scrip
10:58:56 - Our BTST call of STER has gained by over 2% to Rs2006, book profit in the scrip
10:47:49 - Buy Indian cement at 175 SL 172 and TGT 182 - Deepak
10:47:48 - Buy Indian cement at 175 SL 172 and TGT 182 - Deepak
10:23:42 - buy pratibha cmp 264.2 with a sl of Rs 259 target 275 and 277 - Biren
10:22:45 - buy pratibha cmp 264.2 with a sl of Rs 259 target 275 and 277 - Biren
10:18:15 - buy alok ind cmp 77.1 sl 75 target 82 and 84 - Biren
10:13:14 - TT5- Mesg-Rates refresh will delay for login ID A to M. For next 5 minutes
10:06:36 - buy indswfitlab cmp 121.5 with a sl of Rs 118 target 127 and 129 - Biren
10:05:05 - Our BTST call of APIL has gained by over 3%

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