A portfolio is like your wardrobe – it’s a collection of handpicked pieces that fit your needs, profile and preferences. You have the basics, such as FX, stocks, bonds, mutual funds. Probably a few ‘adventurous’ pieces, like commodities or structured products. And of course, a reliable go-to for any situation, cash.

No two investors’ portfolios are exactly alike, even if their tastes might be similar. You’ll always want to ensure it reflects your needs and objectives.

You achieve this through portfolio rebalancing – a regular exercise to maintain the original asset allocation. Here are a few principles to get started.

Every portfolio is made up of a few asset classes. As each asset class performs differently in the same market environment, you should invest in multiple asset classes to reduce the risk that any set of conditions will hurt your entire portfolio.

For example, each ‘stocks’ class can be made up of stocks, equity mutual funds and stock-related ETFs, just as ‘shirts’ come in many colours and designs.

Each asset class has a weight, or the percentage of the total portfolio value. So if you’ve Indian INR 30,00,0000 worth of stocks in a total portfolio value of INR 100,00,000 the weight of stocks in your portfolio is 30%. The relative weights of individual asset classes, or asset allocation, is tailored to you depending on your risk preference.

Over time, you might find the make-up of your wardrobe changing. One day, you may realise that you have too many white shirts, or perhaps you’re running out of casual wear for the weekend.

It happens with portfolios too. But unlike your wardrobe it can happen without you realising it, due to asset classes performing differently in the same market.

Let’s say you have an allocation of 50/50 stocks and bonds. If the stock market performs phenomenally, the value of your stocks will rise in relation to bonds. This means your portfolio no longer fits your risk profile and needs to be rebalanced:

You’ll have to consider the risk levels of individual assets to buy and sell, to maintain your preferred allocation without changing your portfolio’s risk profile.

When it comes to your wardrobe, too many of the same piece may make your ensembles less versatile.

Similarly with your portfolio, it’s best not to have too much of a single asset, for instance a particular FAANG stock (i.e. stocks of U.S. technology giants Facebook, Amazon, Apple, Netflix, and Google). Any movement in the asset could have a disproportionate effect on your portfolio. This is called concentration risk.

One rule of thumb is the 5% rule*. You don’t want any stock, mutual fund scheme   or any other security to exceed 5% of your total portfolio value. So if market gains in one security pushes it above 5%, sell some of it and buy more of another.

* For illustration purpose only.

If you’ve ever had a style consultant assemble a wardrobe for you, you’ll be impressed by their eye for pieces that look just right.

The investing equivalent will be investment advisors who’ll handle the nitty-gritty of rebalancing for you. These experts specialise in researching, building and maintaining portfolios.

As you rebalance your portfolio, it’s vital in ensuring that your portfolio fits you. Be sure to talk to your Relationship Manager should you have doubts or questions about the balance of your portfolio.