Second, within each asset class, you must decide on sub-asset allocations. Building a robust portfolio also requires following the core and satellite portfolio approach.
Third, maintaining a robust portfolio requires periodic (at least an annual) review and rebalancing. Let us take a deeper dive into each of these steps.
When should you rebalance?
You should rebalance at least once every year.
You may rebalance on a particular date, such as your birthday, or the start of the calendar or financial year.
You may also rebalance when the allocation of a particular asset class has moved by, say, 5 percentage points.
For instance, if your allocation to equities is 60 per cent and it moves to 65 per cent, you may rebalance.
The final method is to use a mix of both the approaches: rebalance on a particular date every year but also rebalance if your asset allocation has moved by a certain number of percentage points.
Asset allocation
The appropriate asset allocation for an investor should depend on their risk appetite and risk-taking ability. While the two terms may appear very similar, there is a subtle difference between the two.
Risk appetite: This is essentially your psychological comfort with investment risks. Some investors remain unfazed by significant market downturns. They do not worry even if their portfolio dips by 3040 per cent. By contrast, others feel anxious after a 10 per cent decline.
Risk-taking ability: This aspect is influenced by factors such as the investor's age and potential future earnings. Typically, a younger individual with a long earning horizon possesses a higher risktaking capacity. If there is a market downturn and the portfolio takes a nosedive, youngsters have time on their side. They can wait until their portfolio recovers.
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