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Rebalancing Investment Portfolios

This article was originally published on Juno Wealth’s website. Juno Wealth was acquired by Progeny in February 2019.

What is ‘rebalancing investment portfolios’ and why is it so important?

If you know us at all well here at Juno Wealth, you’ll know that we believe there are two things that are fundamental to your investment portfolio. First, your investment portfolio should align with your personal and financial objectives. That means identifying what you want and need out of your finances and retirement, and creating a financial strategy to meet those goals.

The second element which goes hand in hand with the first, is ensuring you have a diverse portfolio. That means investing in different asset classes as well as globally, because this will minimize the risk and volatility of your investments. It’s sensible investing and it’s at the heart of what we do.

It also means investing your assets in a way that’s in line with your risk tolerance. That’s something we take very seriously at Juno Wealth and will evaluate as part of your investment strategy. Asset allocation at Juno Wealth is therefore a very carefully balanced process.

The result is that we like to think of your portfolio as comparable to a really good whisky – the perfect blend of water and whisky. But that means, there’s a third element that’s essential to your portfolio and keeping it on track, namely regular rebalancing.

Why do you need to rebalance investment portfolios?

There’s a body of empirical evidence that proves that diversity in asset classes is the best way to ensure, that over time, your portfolio will achieve your objectives. But having a diverse portfolio inevitably means that some of your assets will perform better than others. After all, that’s partly the point.

For example, equities often outperform bonds over the long term. But equities are also riskier than bonds. So, as some of your assets grow at a faster rate than others, over time, the balance of your portfolio changes. It shifts from being made up of a good balance of low and higher risk investments, to having a larger proportion of high risk investments.  The result?

There’s now too much whisky and not enough water in your whisky blend. And although it may be tempting to stick with it, if you do, your portfolio will cease to be aligned with your tolerance to risk and / or your financial (or personal) objectives.

Cue the rebalance. A process whereby we reinvest your portfolio, to bring it back into balance. The perfect whisky/water blend once more.

Why is it so important?

Sometimes a rebalance may feel counterintuitive. After all your portfolio seems to be thriving and there’s a powerful human instinct which almost compels you to want to stick with what’s going well, rather than pull out and reinvest in something which is not performing so well.

We call this emotional investing and we’ve spoken about this in our journal entry about behavioural coaching previously. It’s dangerous territory and you may be completely unaware of its influence over you. It’s one of the reasons that having an independent financial adviser at this stage, to help manage those powerful gut instincts and to remain focused on the original plan, is vital.  After all, just because a particular asset has performed well over the last year, does not mean it will continue to do so. In fact, research shows that it probably won’t. But in the face of fantastic returns, that’s not always easy to accept.

What’s really important to you?

In our experience, most investors are not looking to maximise their returns. In fact, for the vast majority, your initial objective is and continues to be about minimising risk and staying on track to meet your financial goals. In other words, being able to sleep at night knowing that you’ve got it all covered. That’s why most people come to us in the first place. Rebalancing is central to that.

How often should you rebalance?

At Juno Wealth, we rebalance your portfolio regularly. How often will depend on both you and your portfolio. Ideally, we will rebalance every 12 to 18 months but it’s important to ensure some flexibility to allow for other considerations.

Rebalancing is also an ideal opportunity to check back in with you. Your personal circumstances and goals may or may not have changed. We also have to ensure that any rebalancing is done both tax and cost efficiently.

In order to ensure that we time your investment portfolio rebalance correctly, we continuously monitor your portfolio behind the scenes. That way we know if we need to bring a rebalance forward or whether it’s ok, to leave it for another 6 months while you take off on that world cruise you had planned.

It’s all part of the journey

Working with us at Juno Wealth is an ongoing process. We see it as a journey during which we will continue to guide and lead you to ensure you meet all your goals. A vital part of that is regular rebalancing of your investment portfolio, because we just don’t think you want to risk your future. Too much whisky and not enough water is not a good thing.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

Tracey Evans

Associate Director, Wealth

Tracey is passionate about helping clients to see their ‘big picture’ and has been doing so for nearly 30 years.

Learn more about Tracey Evans