Smart Investing

There are two principles of investing that we strongly advocate — diversification and asset rebalancing. An investor’s problem is not solved when he narrows down on his specific investments and decides how much must go to equity and debt. He must periodically rebalance his portfolio too.

Ironically, though asset allocation (and its subsequent rebalancing) is one of the most important aspects of investing, it is also one of the most frequently overlooked. The underlying logic behind it is relatively simple: Have a portfolio that matches your tolerance for risk while enabling you to meet your future financial goals. That’s right. Asset allocation is important because it has a big impact on whether or not you will meet your financial goals.

If you don’t include enough risk in your portfolio, your investments may not earn the return required to meet your goal. That is why when you save for big-ticket items such as a college education for your child or even your retirement, you must include some exposure to equities in your portfolio. But that does not mean you should go overboard. If you include too much of risk in your portfolio, the money for your goal may not be there when you need it. This is where rebalancing plays an important role. Because once you decide on an asset allocation, you have picked a mix of assets that have the highest probability of meeting your goals at a level of risk you can live with. So when the allocation gets skewed, it is your responsibility to fine tune it back into place.