Newsletter #24: How not rebalancing a portfolio led to ₹80000 in losses
Before starting the post, I would like to thank everyone who kept reading my newsletter and giving feedback since it started 7 months ago. The aim of this newsletter was always to provide value through the insights I have found over the past few years in the world of finance. But I wanted to add something more, so I have decided to try a new way of presenting those insights.
People resonate with the stories of others, and hence I have decided to bring you a few stories of people and their financial journeys. All the mistakes they made and how all of us can learn from them, and the alternatives we can use. Now, let's start with the story.
In 2021, my friend, let's call him A, was running at an all-time high because of how well markets were doing. His usual asset allocation was divided into 40-30-20-10 format between equities, debt, government securities and foreign investments.
But when the markets kept going up, his allocation changed. Equities now held a big chunk in his portfolio of about 60%, while the others shrunk in size.
When people decide on an asset allocation, they consider their risk appetite. For example- Someone in their mid 20s has lesser dependents and hence can afford a few risks, so their portfolio mainly consists of high-risk investments like stocks. On the other hand, someone nearing retirement in his 50s will go for government securities because returns there are guaranteed.
Now the big mistake Mr A made was not to rebalance his portfolio to the asset allocation he is comfortable with. He stayed put with the belief that the markets would further rise and he could make profits out of that.
The markets could rise further, or they could correct themselves, which is exactly what happened in 2021, but staying with your asset allocation is important.
The goal of rebalancing is to return to the allocation you are comfortable with, not to earn more returns or time in the market.
During this time, my friend made losses when the market corrected, but even if it went further up, the asset allocation did not fit in with his goals.
No matter how great investors we are, we are all human. When the markets fall, we will stay up at night worrying whether we will have a job tomorrow or if our investments are enough to pay school fees.
In my opinion, rebalancing helps you sleep better at night, which is priceless. Even if a 90% equity portfolio can give amazing returns, it is not worth it if it hampers your peace of mind.