16 Mar 2023
Larry Swedroe states an interesting strategy for rebalancing the portfolio. It states that rebalancing between assets should occur only if an asset or category has drifted from its original target by an absolute percentage of 5% or a relative of 25% whichever is less.
How it works
Assume you have a portfolio of 10 lacs with an asset allocation of 70% in equity i.e INR 7 Lacs & 30 % in fixed income that is INR 3 Lacs
On account of Market Movement, when stocks falls to 65% i.e. INR 6, 50,000 the bonds will be INR 3, 50,000. AT this point you sell 50,000 worth of bonds and buy stocks worth 50,000 to get back to the 70/30 portfolio mix and thereby rebalancing the portfolio.
The strategy reinstates a popular belief of selling high and buying low in the market.
Taking the same example, out of Rs 7 Lacs allocated to equity, if your allocation to international equity is 10% (i.e. Rs 70,000). Here the range of rebalancing would be 25 % of Rs 70,000 which means you should invest in this sub segment proportionately if the value goes down to Rs 52,500 and sell if the value goes above Rs 87,000.
The 5/25 Rule has THREE key features for investors:
- Useful for managing portfolios with limited funds /assets
- Rebalancing made possible with minimal tracking
- Fosters the ‘buy low – sell high’ strategy
Read more
-
Disclaimer
The contents of this article/infographic/picture/video are meant solely for information purposes and do not necessarily reflect the views of Bank of Baroda. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circ*mstances. Bank of Baroda and/ or its Affiliates and its subsidiaries make no representation as to the accuracy; completeness or reliability of any information contained herein or otherwise provided and hereby disclaim any liability with regard to the same. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Bank of Baroda or its affiliates to any licensing or registration requirements. Bank of Baroda shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
Leave a Comment
Thanks for submitting your details.
