Markets are never static. Equities surge, debt yields shift and the yellow metal rallies or stalls, all within the same year. Investors holding Gold ETF funds sometimes panic or celebrate when they see the SBI Gold ETF share price jump or slip in a single session, yet a sharp move is less a reason for excitement than a cue to review. Rebalancing, the practice of restoring your planned asset mix, is the disciplined response.
What Rebalancing Really Means
Let’s say you decide to have 10% in precious metals, 60% in equities and 30% in debt. However, if this precious metal asset has had a good run, it could increase to 14% of your portfolio. Without you making any decisions, you have changed your risk profile. Rebalancing will allow you to get back to your target.
Rebalancing is a very straightforward concept. It will force you to sell assets that have performed well and invest in underperforming ones. This makes your investing calmer and more consistent.
How to Rebalance
Investors typically use either of the two approaches below:
Time-based – You will invest based on specific times of the year (e.g. once a year). This is good if you want something simple.
Range-based – You will set a range that you are comfortable with (e.g. +/- 5%). Whenever an asset class goes outside of this range, you will rebalance. This is good for large movements but involves checking your portfolio more frequently. Many people like to use a combination of both. Check your portfolio once a year, but invest earlier if your allocation is far away from your target.
How to practically rebalance
You may not always need to sell. The easiest way is to invest new money. If you’ve got too much in precious metals, you can stop investing in it for a while. Invest your new savings in equities/debt. This will save you on transaction costs and potentially tax.
If you still need to sell some, make sure to consider:
Tax – Any gains will be subject to tax depending on how long you’ve held them. Selling early could result in higher tax.
Costs – Too many trades will cost you.
Liquidity – Try using limit orders to ensure you don’t get a bad price especially with illiquid funds.
Reason – Don’t sell just because the price has gone up. Sell because you’re over your allocation.
When the Metal Price Goes Down
You can also rebalance when prices fall. If you’re under your target because of falling prices you can gradually invest more into your asset. Whilst this can be difficult as you don’t want to buy after a fall, it is logical as you originally invested in this asset to diversify your portfolio.
Don’t get frustrated and sell all of your asset. Often precious metals will behave differently to equities and this is why they are valuable to you. They will have a period of calmness but will still play an important part in the long term.
Mental Pitfalls
There are many mental pitfalls that will prevent you from rebalancing. Anchoring will mean that you won’t want to sell as you don’t want to sell below your purchase price. Recency bias will mean that you think the current trend will continue forever. Loss aversion will mean that you see small falls as bigger losses than gains. Overconfidence will mean that you get tempted to not stick to your plan as you think you know what will happen next.
To overcome this create a plan. Write down your target, range and review date. When you feel emotions kick in, refer back to your plan.
Track your Trades
Make sure to track all of your trades. Note down the date, units and price. As units will be purchased at different times, they will have different holding periods which will affect tax. Your broker will provide statements but it’s good to track it yourself.
Consider costs
Too much rebalancing can cost you more than it saves. Most households will find rebalancing once a year is enough. Occasionally you may need to make changes after large movements.
Taxes
Taxes have changed recently in the Union Budgets and may change again. Before making any large sales to rebalance, make sure you know what the current rules are. Refer to official guidance or a chartered accountant. If your portfolio is large, an investment adviser registered with SEBI can help you create an investment plan that fits your goals.
Use Volatility to your Advantage
Volatility shouldn’t bother you if you have a plan in place. If you are investing with discipline you will be reminded to check your portfolio and rebalance to get back on track. Set your target and check it at the correct time. Be systematic with your investing and often over the years you will get better results than trying to guess the market.
