Quick Take: Rebalancing is not always optimal

Nov 01, 2022
Bharat Shah prompts us to to rethink some portfolio principles.

Bharat Shah is the Executive Director at ASK Investment Managers and has nearly 30 years of experience in the Indian capital markets.

  • There is nothing wrong with asset allocation, but it is not as contributory as it may sound in theory.
There is nothing fundamentally wrong with asset allocation, and it does  make sense for most.

But for those who can conceptualize risk and assess the consequences of the asset class they are investing into, a very mechanical process of asset allocation is not as contributory as it may sound in theory. Much like the Efficient Market Hypothesis  which sounded like a very elegant intellectual construct and a highly evolved one. Even a moment's reflection shows that nothing could have been more inappropriate than an idea such as this.

  • When it comes to asset allocation, there is a difference between absolute and relative.

I would say initial asset allocation will come at the level of absolute.  You have certain goals that need to be taken care of, such as child's education. You assess the inflation-adjusted amount and provide for an asset allocation to take care of it.

The incremental capital should be allocated for optimization, because there is no undue risk you are taking on that incremental capital.

Over a period of time, a certain asset like equity will appreciate more. Hence its percentage in the portfolio would rise. Rebalancing will cut it off down to less than appropriate. That relative mindset to keep anchoring back to a mechanical construct, results in suboptimal long-term outcomes. Much like SIP, which is a simplistic idea, but propagated well. It is right at some stage and for those who cannot exercise discipline.

  • After that initial absolute satisfaction is achieved, the relative part of it doesn't make sense.

These insights were shared at the Morningstar Investment Conference India held in September.

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