Why rebalance your portfolio?
Steve Hennessy – Chartered Financial Planner
When discussing investments or reading the news, you may have heard the phrase “rebalancing”. It’s an important part of making sure your portfolio continues to reflect your goals, but it can be overlooked or misunderstood.
Read on to learn what rebalancing involves and why it’s part of investment strategies.
Investing: A long-term game
Before we start looking at rebalancing, it’s important to understand how and why we invest with a long-term strategy.
It can be tempting to buy and sell stocks to try and maximise profits, especially during periods of high volatility. It seems like a good idea to buy low and sell high, but timing markets consistently is impossible. So many different factors influence stock prices that you can end up missing out or losing money.
Between 1989 and 2019, if you’d invested £1,000 in the FTSE 100 but missed out on just the best 30 days because you’d tried to time the market, it’d have cost you £19,000, according to research from Schroders. This is a good reminder of why the saying “it’s time in the markets, not timing the markets” is so common.
Instead, a long-term buy and hold approach is more suitable for most investors. As the name suggests, you buy stocks that match your long-term goals and risk profile and hold on to them. While values may fall at times, this strategy aims to deliver growth over the investment timeframe. Investors need to be patient as, historically, stock markets have risen, and so they will benefit over the long term.
Yet, a buy and hold strategy doesn’t mean you never need to make changes to your portfolio – this is where rebalancing comes in.
Evaluating your portfolio: Ensure it continues to match your strategy
When you first start investing, you create a portfolio with a certain risk profile in mind. This will consider your investment timeframe, goals, and financial position. However, over time, even if you don’t buy or sell assets, your initial investment position can change due to market movements.
Let’s say you set up a portfolio holding 50% stocks and 50% bonds. Following a period of stocks performing well, your stock allocation could have risen, changing the weighting of your portfolio. It may mean you’re now taking more investment risk than is suitable for you. In this case, rebalancing your portfolio would involve selling stock and buying bonds to achieve the original target allocation.
It’s not just asset allocation that should be considered when rebalancing portfolios. You should also consider the level of risk and diversification. Assets performing well in a certain sector, for instance, could mean you need to rebalance.
So, while you are buying and selling assets when rebalancing, it’s not about timing the market or making knee-jerk decisions based on its movements. Rather, it’s about ensuring your portfolio continues to reflect your circumstances and goals.
There’s no set timeframe for when you should rebalance your portfolio, but it is advisable to do a regular review, for example, annually. Rebalancing may also occur after significant market movements, such as the volatility caused by Covid-19.
Update your portfolio as your plans change
It’s not just market movements that can affect whether your portfolio still suits you. As you should invest with a long-term timeframe, you may find your goals and aspirations change. As a result, you may need to update your risk profile, and reflect this in your portfolio.
Rebalancing may already be factored into your financial plan. A common time for investors to rebalance their portfolio is as they near retirement. While you’re earning an income, you may be in a position to take more risk with your investments than you will once you retire and will rely more on your portfolio to provide an income. Therefore, as you approach retirement, you may choose to gradually take less risk with investments.
This is why your lifestyle choices and aspirations should be central to your financial plan. Your goals will affect your investment strategy.
Why is rebalancing such an important part of an investment strategy?
In short, rebalancing helps ensure your portfolio remains in line with your investing goals in spite of market movements. It’s important for making sure your portfolio continues to support your goals over the long term.
If you’d like to discuss your portfolio and whether rebalancing is needed, please contact us. We’ll help you align your investment strategy with your wider lifestyle plans so it helps you reach your goals.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.