Thursday Trivia – Difference between profit booking and asset rebalancing
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Is this the right time to book profits and exit?
How should I play the markets?
How much profit should I book?
Where should I deploy the profits booked?
Many equity/Mf investors are dealing with these questions. Well, there is one simple answer to all the above questions that is Asset allocation.
As defined by Wikipedia “Asset allocation is an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame.” In simple terms it means that one pre defines the percentage of exposure one should take in various asset classes, as per his risk profile and stick to it by rebalancing it periodically.
Asset Rebalancing V/s Profit Booking
In today’s scenario both these terms may result in same action, where you would sell some equities and invest in other asset like Gold or Fixed Deposit. But there is a fundamental difference between both these terms and Circle Wealth Advisors recommends that one should embrace Asset Allocation as the basic investment strategy. Here are the basic differences in these terms
| Profit Booking | Asset Rebalancing |
| Profit booking is the result of huge returns generated in a particular asset class | Asset rebalancing is selling assets to bring them to the original allocated levels |
| Can happen at any time at any interval | Happens at the pre define periodic intervals |
| One may need to seek expert view every time one wishes to book profits | Expert view is required at the time of creating allocation depending on the risk appetite |
| Selling of a particular asset happens only if a huge profit is made | In asset allocation one might have to sell assets without returns or may be even with negative return |
| One needs to decide where to deploy the profit booked after every transaction | While rebalancing assets it is already decided what to sell and what to buy |
Taking cue of one’s current asset allocation and deciding the desired asset allocation is the biggest step in financial planning for achieving your goals. Once you decide the right asset allocation it will not only ease the financial decisions but also help in generating consistent returns.
2 Comments
Nice post.
Thanks