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Why is it necessary to rebalance one's portfolio in a booming market Research Team | Posted On Friday, April 11,2014, 10:06 AM

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Why is it necessary to  rebalance one's portfolio in a booming market



One has heard of the famous saying “An investor needs to do few things right as long as he does not do many things wrong”. Rebalancing a portfolio is something an investor needs to get right in order to succeed in his investments in the stock market. Is there a better time than a booming market to clean up one’s portfolio? Remember a rising tide lifts all boats. One might have accumulated shares with no strong fundamentals or those which are in heavy debt and their deficiencies are masked by the rising markets. There is no better time to get rid of these stocks than a booming market as one can get a very good price for them as well as rid himself of their burden. Speak of killing two birds with a single stone.

Keep emotions out of investing

Admit Failure :
Many a time in investing one hates to admit his mistakes. One boasts of his success but neglects to speak of his failure. This time it is different, success is just a step away are commonly used words. A booming market does not last forever. This is the time to eliminate excess baggage from one’s portfolio .Make hay when the sun shines.

Haste makes waste :
One of the common mistakes made in a booming market is to sell blue chip stocks of well reputed Companies just because they are rising in price .The returns given by blue chip stocks are stupendously high over long time periods and it is best to have these stocks in one’s portfolio for the long haul.

Know when to sell :

  • One has a thousand reasons to pick up a stock but no idea when to exit a stock. Many a time one holds stocks of not so well reputed Companies with the hope that one day these stocks will rise and give him a huge profit.
  • Hope is an emotion plain and simple and emotion has no place in investing. If one is not comfortable holding a stock for ten years then there is no point in holding this stock for a single day. There is no room for emotion while investing and getting rid of stocks which do not meet one’s expectations must be a priority.

The art of rebalancing one’s portfolio :

  • One can limit the damage to ones portfolio by booking profits when the markets are booming. The shares which do not fit ones investment objectives or have remained stagnant for a long period of time are eliminated through profit booking in a booming market and the funds obtained are stored for bargain purchases.
  • Remember if there are no good investments to be made hold cash. Cash is king. When markets fall as is inevitable at some point in time ,as bear markets too have their day buy good quality reputed blue chip stocks at throw way prices and add it to the portfolio. These stocks would give bumper returns in the next bull market. Regular rebalancing helps one to increase his holdings in good quality stocks.

The art of buying low and selling high

  • Many a time one buys shares and adds them to his portfolio without caring to monitor these shares.
  • These shares might peak in a bull run and since a bull run is the time when one tends to check the prices of shares this is the time to analyze all stocks in one’s portfolio.
  • If the stocks do not meet the investment goals then this is the time to dump them and get a good bargain as these stocks would most probably fetch a good price due to the bull market and by default one would buy low and sell high.
  • Continuously monitoring one’s portfolio would help to solve these problems at the root but a bull market serves as a band aid to sell high in an emergency.

Timing a bull market

  • One of the most important question one needs to ask himself is does this party last forever? Is there an end to it? When does the bull market end?
  • The period of undying euphoria is the time warning bells need to go off in one’s head.
  • If one is a retail investor he tends to join the party late and purchase shares at unreasonably high prices believing the party will last forever. One becomes greedy and tired of being a bystander watching the action and wants in. Retail investors generally fuel the last leg of the bull run.
  • Be fearful when others are greedy and greedy when others are fearful .One must sell all the lesser quality stocks as well as cyclical stocks in the portfolio and purchase defensive stocks for the long term as these shares are cheaper now.
  • In a bear market defensive stocks hold their own and thrive.

Should one invest in an IPO in a bull market?

  • Many businesses wait for the bull market to launch their IPO.
  • They believe that in this season of euphoria one would readily pick up the IPO.
  • A number of substandard Companies launch IPO’s in these times and one must be careful not to pick up IPO’s of Companies with no strong fundamentals.
  • One would purchase IPO’s of these Companies in a bull run and watch his hard earned money evaporate when the markets fall.

Should one buy cheap stocks in a bull market?

  • The time of a bull market is one when euphoria clouds reason and one tends to get so greedy that he commits big blunders.
  • One might decide to pick up cheaper stocks believing that their prices would double in a bull market.
  • Since the prices are lower compared to the blue chips one believes that he would be able to purchase huge quantities of such stocks and watch their price rise rapidly.
  • This is akin to picking up a number of pairs of shoes available on the roadside stalls rather than a single renowned brand of shoes from a retail shop.
  • If one picks up low quality stocks they crash in a bear market.


There is a famous saying "In investing, what is comfortable is rarely profitable." Rebalancing of a portfolio though difficult is necessary, more so in the bull market when one gets an opportunity to weed out the non performers in his portfolio.

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