As some shares rise and others fall, the makeup of your portfolio changes. If you don’t prune the growers or boost the stragglers, you could well end up with too much of your portfolio in technology or commodities, or whichever market sector has done particularly well that year. So, when is the right time to mix things up and realign the the scales?
First of all, it’s worth noting that there is definitely a wrong time to rebalance. It is not usually worth rebalancing because of a major political or economic event. Brexit would be the obvious example here. No-one knows the outcome yet or how it is likely to affect companies, so you are best off sitting tight instead of chopping and changing every week.
Darius McDermott, managing director of Chelsea Financial Services, suggests waiting to see what turns up when the fog has cleared (if it clears):
“In terms of Brexit we would say that investors should just make sure they have a balanced portfolio and be aware that the currency movements in the short term is what could impact their portfolio more than market moves. If the pound falls, overseas holdings will do better than UK ones and vice versa. Once the Brexit outcome is clearer they could look again.”
Part of the problem is that, if you chop and change with every politician’s temper tantrum, the charges involved in making changes could outweigh any benefits. There is always ‘noise’ and investors need to ignore 90% of it.
That said, McDermott recommends rebalancing after major moves in financial markets, both up and down. He says the investors should review and rebalance their portfolio if there are stock market moves of, say, 10% or more.
Patrick Connolly, chartered financial planner at Chase de Vere agrees:
“Not only does rebalancing ensure you don’t take too much risk, but by selling investments that have done well in favour of those that have done badly you are effectively selling at the top of the market and buying at the bottom. This is the holy grail of investing and something which very few investors consistently achieve.”
Major life events such as marriage or having children or receiving an inheritance should prompt a re-evaluation of your portfolio because your goals may change, as may your appetite and ability to take investment risk. Expensive stuff such as school or university fees can rear its head when your family grows. There should be the same re-evaluation if you change jobs, fall ill, move house and so on.
That being said, in most cases you shouldn’t wait for a specific prompt before rebalancing. You should just review your portfolio a couple of times a year as good housekeeping. McDermott says:
“Most people tend to do it at the turn of the year when they are thinking about ISA or pension choices, or when they get their annual statement (which simply acts as a reminder).
“At these times it is a good idea to look at both the asset allocation and geographical mix - especially if markets have moved a lot. For example, due to the US market doing well, your 10% allocation could have grown to 15%. Do you really want that or should you rebalance?”
Connolly agrees that you should aim to get back to your starting position unless you are really convinced that the US market is going to soar:
“Selling some of the investments that have performed well and now represent a larger proportion of your portfolio, and reinvesting into those that have performed worse and are now a smaller amount of your portfolio, will help to get you back to your starting position.”
Resist the urge to adjust your portfolio with every flip and flop of the Brexit process or missive from the White House. It’s a hiding to nothing. In a normal year, you should review your investments once or twice a year and rebalance if they look out of whack.
There are exceptions – such as when there are extreme moves in markets or when you have a major life event. Otherwise, you’re best off leaving them alone.
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