Rebalancing Your Portfolio - A Key Strategy? - Hot Topics Q & A

Q. I have heard about rebalancing, but am not quite sure what it is and how it could benefit me. I have approx. £210,000 invested in various plans including personal pensions and ISAs. I have not reviewed my investments for a few years now. Can you please tell me more?

A. It's likely your portfolio includes a number of funds, and these may include bond funds and equity (shares) funds. Ideally, your portfolio should give you the potential to achieve your goals whilst keeping risk at levels you confirm are acceptable to you. 

Since your last review, the different asset classes in your portfolio will have grown at different rates (as is to be expected), altering the asset allocation.  So, as we have seen recently equity values will have fallen, in turn reducing the amount of risk in the portfolio. 

Consideration should be given to rebalancing your portfolio on a regular basis and as circumstances change in order to realign your portfolio back to the original asset allocation (for example it could have been 60% growth / equities, 40% income/bonds). If the split is now 40/60, then you will currently not be taking enough risk (assuming your attitude to risk and risk tolerance levels are the same). 

So when you rebalance you will sell some of the bonds (which will have increased slightly, held their value or fallen slightly) and purchase equities. The benefit of this is that you will be buying an asset when the prices have fallen. The same would apply if equities had risen, in that you would sell part of the asset when the value had risen and purchase more bonds. This will preserve the risk and return relationship for optimal returns to be achieved, whilst keeping the portfolio within your risk tolerance parameters.

It is worth mentioning that during the severe market volatility of 1973-75, not rebalancing would have led to an overall reduction in the portfolio value at the end of 1975. 

It is our experience that the majority of investors do not rebalance as they are not aware it exists. Now that you know, we suggest you take action and research your options as soon as you can. 

We hope this helps!

Please Note: You should take professional advice before making any investments. Past performance is no guarantee of future returns.