If you've put off rebalancing because the process seems daunting to you, read on. The following step-by-step guide simplifies the process using tools on Morningstar.in.
Step 1: Determine your asset-allocation targets
Your first step in the rebalancing process is to make sure you have an asset-allocation framework. And if you don't have an asset-allocation plan, it's time to make sure you have one.
The Web is full of tools and questionnaires to help you with asset allocation. If you have a portfolio in Morningstar.in's Portfolio Manager, the tool helps you find the best combination of holdings to meet your goals.
Step 2: Find your current asset allocation
After you've determined what your optimal asset allocation should be, it's time to take a look at where you are now. If you're like many people, you may have been moving your investment statements directly from the doormat to your desk drawer, afraid to glimpse at how much money you've lost.
But it's time to pull all of those statements out and take a look, or go online for an even more current view of your portfolio. Focus not so much on your recent losses, but instead take note of your current asset allocation.
Keeping track of your portfolio's asset allocation by hand can be a bit cumbersome and inexact, particularly because most funds aren't pure stock or bond. It's not uncommon for stock funds to hold double-digit cash stakes, for example.
For the clearest possible read on your asset allocation, I recommend Morningstar.in's Instant X-Ray tool, which drills into each of your fund holdings to determine how they're allocated by asset class and investment style. If you store a portfolio on Morningstar.in, simply click on the X-Ray tab view within Portfolio Manager to see your current split among cash, stocks, bonds, and others. The X-Ray tab also depicts how your holdings are dispersed across the Morningstar Style Box.
If you haven't yet stored your portfolio on Morningstar.in, open the Instant X-Ray tool, enter the ticker for each of your holdings as well as the rupee amount you hold in each. Then click Show X-Ray for your asset allocation. Take note of your current asset allocation and compare that with your asset-allocation targets in Step 1. Determine where you need to add and subtract to restore your portfolio to your target levels.
Step 3: Formulate a rebalancing plan
If your portfolio is in line with your target asset allocation and you're not making any inadvertent style or sector bets, your work is done.
Most likely, however, your analysis of your current asset allocation versus your targets indicates that your portfolio is light on stocks.
When it comes to deciding which securities to add, as well as how much to add to each, you'll probably find that the process of overhauling your portfolio is a matter of trial and error. Here again, I'd recommend Morningstar's Instant X-Ray tool to help you evaluate the impact of various holdings on your asset-allocation mix before you decide to buy.
Also, pay attention to the impact that various holdings have on your style-box positioning and sector weightings. Your stock portfolio doesn't need to be an exact clone of the broad market, but you should at least be aware of whether your portfolio is skewing heavily to one style or sector.
In some cases, the alterations you need to make are obvious--if you're heavy on bonds, for example, adding to stocks should resolve the problem. Getting to the bottom of other bets might take a little more research.
For example, if your portfolio has more cash than you want it to, that could be because one of your stock-fund managers is holding a lot of cash. You could decide to live with it, and reduce your designated cash holdings accordingly, or else pare back your holdings in the cash-heavy stock fund.
Step 4: Plan to make a habit of it
There are two ways to rebalance--either you can rebalance on a set schedule, say, every December, or you can rebalance whenever your portfolio gets dramatically out of whack with your targets. My advice is to split the difference.
While I think it makes sense to give your portfolio a thorough review once a year, you don't want to get into the habit of trading too frequently. Schedule a top-to-bottom portfolio review at a fixed time each year, but rebalance only if your portfolio's allocations have gotten dramatically out of whack with your targets.
The article first appeared on Morningstar.com, our sister US site and has been formatted for India. Christine Benz is director of personal finance for Morningstar.