23 Jul 2021

Rebalancing requires conviction

When I started investing 1½ years ago, I was looking forward to rebalancing my portfolio. One asset class would have done better than the other and I’d either be safeguarding the excessive profit or buying the dip, I thought. I expected this to be a thrilling and pleasant experience.

When I did have to rebalance my portfolio earlier this year, however, it was not as pleasant as I had thought. I found myself hesitating to sell equity to buy debt. “The interest rates are so low, should I really invest in debt now?” “Maybe I can keep the higher equity allocation for some more time and make the most of this bull run?” These were some of my thoughts.

Image credit: QuoteInspector.com, licensed under CC BY-ND 4.0

When I sit down and think about this hesitation, I am realising that:

  • It’s easy to have conviction and discipline while discussing hypothetical scenarios. When it comes to actually following through with action, it can be hard.
  • Unless the investor emotionally prepares themselves, rebalancing will likely be an equally difficult experience every time. Because, we’ll always be dumping recent well-performers in favour of recent ill-performers.

My next task is to think about the whys of rebalancing and emotionally prepare myself. It will also help to do some backtest to see the performance difference between portfolios with and without regular rebalancing. Quantifying the difference is an easy way to get the conviction I’d need.

Maybe the real takeaway is that I am rebalancing the portfolio only because they say it’s necessary, and not because I know it’s necessary. “Because they say” is seldom a convincing reason.

No comments:

Post a Comment