Expert recommended ways to review your financial plan and rebalance it
A dream home, car, vacation, wedding, family planning, child’s education, parent’s retirement, and your own retirement, these are some of the milestone moments of our lives, and we all have some or the other kind of expectations related to spending or celebrating such moments of our lives.
According to everyone’s personal preference, while some people’s expectations may be extraordinary, some may be expecting something modest. But the fact is that everyone has at least some kind of expectations when it comes to these iconic moments.
Why have a financial plan?
What people call expectations; financial experts refer to them as goals. And the biggest reason behind using the term goals is that expectations, most of the time, remain unfulfilled. But when you call something your goal, your inclination towards it increases, and so do your chances of achieving it. Moreover, people never have a plan to fulfill expectations, but a goal is mostly backed by a practical financial plan, which boosts its probability of turning into reality.
Why review your financial plan & rebalance the portfolio?
Having a researched and expert-recommended financial plan undoubtedly adds to its effectiveness. With constantly changing market conditions, economic scenarios, and your investment motives, it becomes extremely important to review your financial plan for its effectiveness and relevance regularly, especially after a major change in your financial or personal life. And once you have got the review results, it is even more important to rebalance it to ensure the optimum performance of your investments and achieve your goals at your desired time.
While reviewing your financial plan and rebalancing your portfolio accordingly may sound complicated and difficult, this step-by-step guide can make the entire process simple for you.
How to review your financial plan?
Reviewing your financial plan should be on your to-do list at regular intervals, e.g., once every year or right after any major change. This ensures that your plan is effectively working and it will successfully help you to achieve your goals on time.
So, the next time you plan to review your financial plan, don’t forget to refer to the following points while reviewing:
1. Review The Performance Of Your Investments:
Once you have made the respective investments required to achieve your goals, it is important to keep an eye on their performance to identify if they are generating the required returns or not. Along with the amount of returns, it is equally important to identify if those returns will help you achieve your goal at your respective time or not. And if not, you should either postpone your goal-achieving date, if possible, top-up the investment to boost the returns, or shift your underperforming investment to an option with better performance. If none of the options work, it’s best to find the best exit plan and withdraw your investment with minimum loss.
2. Review Your Goals, Income, Expenses, And Insurance Plans:
The only thing that’s permanent in life is change. As time passes by, your priorities, income, expenses, and goals keep changing. And all these changes should also reflect in your financial plan so that it can help you achieve things that matter to you currently and not the ones that mattered a year ago. In a year, your income can increase, a new member can be added to your family, a goal can be achieved, or even a new goal can be set, with the constantly changing time, the possibilities of changes in a year are endless. Therefore, it is essential to review and update your financial and insurance plan as per your current priorities.
3. Revise Your Tax Plan:
Your tax liability is directly related to your income, and along with the increase in your income, your tax liability will also increase. Reviewing your tax planning will help you identify the amount of additional tax which you may be required to pay because of the increase in your income. Along with your tax liability, tax planning will also help you know about the ideal investment ways which you can use to save the additional tax. So, in order to minimise your tax liability and optimise your tax savings, you must review and revise your tax planning each year.
Once you have reviewed your financial plans, completed the analysis, and identified the areas of improvement, it's time to rebalance your portfolio.
What Is Rebalancing?
Rebalancing is reshuffling your current asset classes to match your ideal asset allocation in case any of your assets underperform or your decided asset allocation changes. It also enables you to keep your financial plan on track during all market conditions and continue to match your risk appetite and goals.
For example, your original asset allocation was 60% in equity and 40% in debt. Over a period of time, the value of the equity investments increased by 20%, and due to this, the asset allocation automatically changed to 80% equity and 20% debt. Now, in order to rebalance your investments, you will need to sell your 20% equity investments, and invest 20% in debt investment to restore your original asset allocation of 60% equity and 40% debt.
Why Rebalancing Is Important?
The primary aim of rebalancing is to bring it back on track and ensure optimum performance, just like you do the regular servicing of your car to make sure that it runs perfectly for a long time without breaking down and leaving you stranded.
How To Rebalance Your Financial Plan?
Keeping in mind the prime reason for rebalancing is to make sure that the success of your financial plan is not entirely dependent on the performance of one particular investment option. It further aims to spread the risk across multiple asset classes, so that even if one asset class doesn’t perform up to the expectations, the others can make up for it, and give you the required returns along with the stability, security, and ultimately help you lead a financially stress-free life.
So, without any further reading, let us share some of the most dependable ways to rebalance your financial plan:
1. Strategic Rebalancing:
Strategic rebalancing depends on your goals, investment tenure, and expected goal-achieving date. For example, long-term goals like retirement planning require more equity allocation, and when the goal-achieving date is closer, the investments are rebalanced by shifting from equity to debt, in order to safeguard the returns as the debt investments are comparatively less risky.
Strategically rebalancing your investments at the right time helps you protect your returns as well as the capital from market volatility.
2. Tactical Rebalancing:
Tactical rebalancing is all about anticipating the movement of the market and utilising it to redirect investments and earn some extra returns. In order to execute this tactical move, you need in-depth market knowledge, market movement, tax implications, exit expenses, and, most importantly, keep an eye on the market movements.
3. Trigger-Based Rebalancing:
In trigger-based rebalancing, you are required to fix a particular percentage of price movement which, whether positive or negative, you can easily accommodate in your risk appetite. And when the price movement goes beyond your decided percentage, you can consider rebalancing your investment to maximise the return or minimise the loss.
Eg. If your asset allocation is 60% equity, 40% debt, and your risk tolerance is +/- 10%, so, whenever in the future, if your asset allocation changes to 70% equity and 30% debt, the trigger-based rebalancing will make you reduce the additional 10% equity exposure and bring it back to the original 60%.
Though rebalancing is completely optional, it is always recommended. And while these points help you understand the insights about rebalancing, it is always better to consult an expert financial advisor to help you make the right changes, required to enhance the effectiveness of your financial plan.
Edited by Megha Reddy
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)