Some investments will have performed better than others, and this will have skewed the relative proportion of assets held. As a result, it’s probable that each investor’s portfolio has moved away from their original allocation that was based on their unique goals, cashflow and net position, investment timeframe, and attitude towards risk.
For this reason, we revisit each client’s portfolio regularly to rebalance it.
What is rebalancing?
If you are an existing client, you will know that before we develop an investment strategy for you, we ask you to complete a risk profile questionnaire. We take this into account – along with other important factors – when developing our recommendations for a mix of investments that will best align with your comfort levels, goals and timeline.
Our objective in doing this is to design an investment strategy that (a) helps you achieve your goals within the timeframe you are aiming for, while (b) letting you sleep at night.
Once your investments are made, their performance will inevitably change the relative weighting of your portfolio. And if left unchecked, your investment spread may no longer match your risk profile. As a result, your portfolio may carry more or less risk than you intend, and this can have significant consequences.
The remedy is to sell assets that are now over-represented in your portfolio, while buying more of those that are under-represented – a process we call rebalancing. In short, it usually means we recommend buying more lower-priced investments, while selling higher-priced ones. The net result is that your portfolio is restored to be in sync with your personal risk profile.
Buying low and selling high makes sense, but for some investors it can feel counterintuitive. Some may wish to buy more of the high performers and reduce their holding of those that have not done so well of late.
The trouble with this is that no one can confidently predict that the high performers will continue their run. Market cycles demonstrate that ‘change’ is the one and only constant when it comes to investing! And by betting on yesterday’s or today’s high performers, the result can be that you are embedding more or less risk in your portfolio than suits your profile and needs. It can also mean you miss out on the boost to your portfolio that can come when the lower performers begin their rise.
Rebalancing, therefore, is a discipline that’s designed to manage risk rather than maximise return. It’s an essential component of our service, and one that’s critical to your short and long term wealth.
For clients affected by this, we will be in touch to let you know our recommendations for rebalancing your portfolio, and our reasons for doing so. We can chat in more detail then.
In the meantime, if you have any questions, please do not hesitate to make contact with us.