Rebalancing Investment Portfolios

Amyr Rocha Lima

4 min read

Imagine you're on a sailboat, navigating the unpredictable waves of the ocean.

Your portfolio is the boat, and the market is the sea. Just as a sailor adjusts the sails to harness the wind's power, so must you adjust your portfolio to harness the market's potential. This is the art of rebalancing investment portfolios.

What is Rebalancing, and Why Does it Matter?

Rebalancing is the process of realigning the proportions of your portfolio back to its original state. It's a bit like tidying up your investment house, ensuring everything is in its rightful place. But why is it so crucial, especially for those eyeing a comfortable retirement?

There are two primary reasons:

Buy 'em cheap and sell 'em high: Rebalancing allows you to capitalise on market fluctuations, selling assets that have increased in value and buying those that have decreased. It's a classic strategy that has stood the test of time.

Risk management: As your investments grow at different rates, your portfolio's risk profile can change. Rebalancing helps maintain your desired level of risk, ensuring your portfolio stays aligned with your long-term goals.

The Tale of Two Funds: A Rebalancing Story

Let's illustrate this with a story. Imagine you have a portfolio consisting of just two funds: Fund A and Fund B. Initially, you invest £500 in each. After a year, Fund A has grown to £1750, while Fund B has shrunk to £250.

To rebalance, you sell £750 of Fund A and buy £750 of Fund B. Now, you have £1000 in each fund. You've sold high (Fund A) and bought low (Fund B), and you've maintained your portfolio's risk profile. That's the power of rebalancing!

How and When to Rebalance Your Portfolio

There are two main schools of thought on when to rebalance: strategically and periodically.

Strategic rebalancing involves making conscious decisions based on market conditions. It requires a keen eye on market trends and a good understanding of your portfolio's risk profile.

Periodic rebalancing, on the other hand, involves setting a regular schedule, such as quarterly or yearly. This method is more systematic and can be easier to manage, but it may not always capitalise on market trends as effectively as strategic rebalancing.

FAQ: Rebalancing Investment Portfolios

Q: Isn't rebalancing just selling winners to buy losers?

A: On the surface, it may seem that way. However, remember that market trends are cyclical. What's down today may be up tomorrow. Rebalancing allows you to buy low and sell high, maximising your potential returns.

Q: How often should I rebalance my portfolio?

A: The frequency of rebalancing depends on your chosen strategy. If you opt for periodic rebalancing, you might choose to do so at set intervals, such as annually or semi-annually. If you prefer strategic rebalancing, the timing will depend on market conditions and changes in your portfolio's risk profile. It's important to remember that rebalancing too frequently can incur transaction costs, while rebalancing too infrequently may allow your portfolio to drift from its target allocation.

Q: Does rebalancing guarantee better returns?

A: While rebalancing helps manage risk and potentially capitalise on market fluctuations, it doesn't guarantee better returns. The primary goal of rebalancing is to maintain your portfolio's target allocation and risk level, aligning it with your long-term investment goals. It's a tool for disciplined investing, not a surefire way to boost returns.

Q: Can rebalancing help protect against market downturns?

A: Rebalancing can help manage your exposure to market volatility. By regularly adjusting your portfolio to its target allocation, you can avoid being overly concentrated in assets that have performed well recently (and may be more likely to decline in a downturn). However, it's important to note that while rebalancing can help manage risk, it doesn't eliminate the possibility of losses during market downturns.

Engage with Us

We'd love to hear from you. What are your experiences with rebalancing your investment portfolio? Do you prefer strategic or periodic rebalancing? Share your thoughts in the comments below.

Navigating the financial seas can be challenging, but you don't have to do it alone. At Strategic Wealth Partners, we specialise in retirement planning for successful professionals over the age of 50. If you need help planning your investment strategy for retirement, we're here to help. Connect with us today and let's secure your financial future together.

For a more detailed discussion on this topic, please feel free to contact us. Our team are always available to answer your questions and to help you with any of your financial planning needs. Here’s what we offer: A cup of coffee… and a second opinion.

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