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Rebalancing
Rebalancing is bringing your portfolio back to your original asset allocation mix. This is necessary because over time some of your investments may become out of alignment with your investment goals. You will find that some of your investments will grow faster than others. Rebalancing will ensure that your portfolio does not overemphasize one or more asset categories, and you’ll return your portfolio to a comfortable level of risk.
For example, having determined that shares should represent 50% of your portfolio, you find that after two years they have increased in value and now represent 65% of your portfolio. You will need to either sell some of your shares or purchase investments such as bonds, from an under-weighted asset category, in order to re-establish your original asset allocation mix.
Portfolio example
|
Asset category |
Starting allocation | Allocation after two years (some asset categories have gone up, and some have gone down) |
| Shares |
50% |
65% |
|
Bonds |
25% | 18% |
| Property | 15% |
8% |
| Commodities | 5% |
7% |
| Cash | 5% |
2% |
You would sell some of the shares and commodities and buy bonds, property and cash to return to your starting portfolio percentages. Over time, this should encourage buying things as they get cheaper and selling things as they get more expensive.
When you rebalance, you will also need to review the investments within each asset allocation category. If any investments are out of alignment with your investment goals you will need to amend them to bring them back to their original allocation within that asset category.
There are basically three different ways through which you can rebalance your portfolio:
- Sell off investments from over-weighted asset categories and use the proceeds to purchase investments for under-weighted asset categories.
- Purchase new investments for under-weighted asset categories.
- If making continuous contributions to the portfolio, increase the contributions to under-weighted asset categories until your portfolio is balanced again.
Before rebalancing your portfolio, you should consider whether any changes you decide to make will trigger transaction fees or tax consequences. Your financial planner can help you identify ways to minimise these potential costs.
Moving money away from an asset category when it is doing well to an asset category doing poorly may not be easy, but it can be a wise move. By cutting back on the current ‘winners’ and adding more of the current ‘losers’; rebalancing has the effect of buying high and selling low – Usually a pretty good way to make money!
When to consider rebalancing
You can rebalance your portfolio based either on the calendar or on your investments. Many financial experts recommend that investors rebalance their portfolios on a regular time interval, such as every six or twelve months.
Others recommend rebalancing only when the relative weight of an asset class increases or decreases more than the certain percentage that you have identified in advance. The advantage of this method is that your investments tell you when to rebalance.
If you need to talk to us about rebalancing your portfolio you can get in touch on 02920 450 143 or ask@penguinwealth.com.
Alternatively, if you wish to find out more about our book you can do so here: www.penguinwealth.com/wealth-secret/
