Managing Market Swings: A Simple Guide to Rebalancing

Revisit your plan and take stock

Market swings can rattle even seasoned investors. Before reacting to changes, revisit your original asset allocation — the mix of equity, debt, gold, or other investments you chose based on your financial goals and risk appetite. Now, review your current portfolio. If markets have shifted, your allocation may be off-balance — say, equity is down and gold has gone up. If any part of your portfolio shifts off course by 5 to 10 per cent, it may be time to rebalance.

Use surplus gains or new funds to rebalance

If one part of your portfolio has grown more than planned — like gold or debt — you could redirect part of the profits to investments that have fallen behind, such as equity after a dip. If you have fresh capital, use it to top up investments that have fallen below your target allocation, instead of selling existing assets. It’s a simpler, more tax-efficient way to restore your portfolio in line with your original allocation.

Trade smart, not often, to keep costs low

Each time you buy or sell an investment, it can cost you money — like brokerage fees, exit charges, or capital gains tax. If you sell within a year, you may pay higher taxes, especially short-term gains that are taxed higher. Avoid unnecessary trade to keep your investing simple and cost-effective.

Rebalancing isn’t about timing the market

The goal isn’t to buy at the lowest or sell at the highest. The aim is to adjust your portfolio to stay aligned with your original plan. Staying on track matters more than waiting for the perfect moment, which may never come.

Stick to a rebalancing schedule, even when markets wobble

When markets move sharply, it is easy to react out of fear or excitement. But rebalancing works best when done on a set schedule, like once a year, or when your investments drift too far from your original mix. Following a rhythm can help you stay focused, keeping your portfolio aligned with your long-term goals.

To understand how rebalancing works, consider this simple example. Your target allocation is 60 per cent equity, 30 per cent debt, and 10 per cent gold. After a market dip, equity drops to 50 per cent, while debt and gold rise to 35 per cent and 15 per cent, respectively. Rebalancing here means booking some profits from debt and gold to top up equity, bringing your portfolio back to the original 60:30:10 split.

Rebalancing is an effective and essential exercise that helps you manage risk, stay on track with your goals, and avoid emotional decisions, especially when markets are volatile. Over time, staying consistent with this approach can make a real difference to your long-term results.

The writer is CEO, BankBazaar.