New year comes with new resolutions, but mostly with the same me who does not stick to the new resolution beyond 31st January, a cruel truth. These resolutions are generally around my health, upskilling professionally, giving back to the society and spending more time with my loved ones; but, in spite of knowing they are important and I myself having set them; I still struggle to abide by these beyond 31st January. Is it the same with you too?

Well, this year, I borrowed something from my professional life to my personal life – Review and Rebalance. I realised that before the new resolutions are made it is important to do a review of what has happened in the previous year, what went right and what did not go right, what were my strengths and what weakness I now want to overcome. This way I will not only make new resolutions but will be able to tell myself WHY these new resolutions are important and thus strive to stick to them not just in January 2020 but until December 2020. 

Review and Rebalance are two strong words, often used in the field of investment management, wealth management and personal finance, but what does it mean? How frequently do I need to review my goals, how frequently should I rebalance my portfolio? Does review and rebalance mean one and the same thing? If not, then what is the difference?

Review and rebalance might be assumed to be like the Siamese twins but actually they are not. Let’s look at each of them independently to understand for ourselves if they are connected or not.

Review

Meaning – Review literally means a formal assessment of something with the intention of instituting change if necessary. 

Frequency – Portfolio and investment reviews are generally done quarterly by the advisors, however, the Financial planning and goal reviews should be done annually and whenever a life changing event occurs, for example – moving to a new place, looking to start a new business, getting married, starting a family, moving towards retirement, divorce, receiving inheritance, loss of parents, etc. 

What does it do? –  Financial Planning reviews compare the plan – actions which were intended to be taken – with the actions actually taken. For example, planned investments in the form of SIPs v/s actual SIPs set up during the year, planned insurances to be taken v/s policies actually taken, check if the expenses were aligned or some unplanned events occurred, etc. If there is any deviation observed, then a detailed study on the cause of the same done to incorporate these changes and revise the plan. Additionally, a plan review also helps in enhancing goals and set new targets for the new year. At the end of the year, again, these will be reviewed to upgrade the plan for the following year.

In short, review aligns our actions to our plan and in case of any deviation, looks into the causes and lead to corrective measures. 

Rebalance

Meaning – Rebalance literally means to restore the correct balance; balance again or differently.

Frequency – Investment Portfolios are rebalanced periodically – generally once in a year. No rebalancing is done to Financial plans as such, however, if there is a change in the risk profile of an individual, then the asset allocation changes accordingly and the same needs to be reflected in the individual’s financial plan. 

What does it do? –  Once the review is complete, the current asset allocation (current Debt and Equity holdings) are determined and cross checked if aligned to the risk profile or not. In case of any deviation the existing investments are rebalanced. For example, if  the required asset allocation as per risk profiling is 50:50 (Debt and Equity respectively) and over the period the investments have moved to 60:40, then some investments are moved from debt to equity, in order to restore the asset allocation back to 50:50. This is essential to ensure that your portfolio is within the required allocation. Moving from one asset class to the other also provides the ability to book profits and restore original allocation which will help meet the future goals without taking more than required risk.

In short, rebalance means resetting your portfolio to the required allocations without getting carried away with returns generated by one asset class and or taking more than required risk only to lose your sleep over it. 

Look to review and rebalance yourself and your financial plan annually, a simple recipe towards a successful Year!