The importance of rebalancing

5 min read

Investing is more than choosing different assets. It also involves managing your portfolio on an ongoing basis to achieve personal goals.

Your starting point

In the initial stages of constructing a portfolio of diverse investments, it is likely you will have made a deliberate decision about how much money to hold in different asset classes.

For example*, you may decide you want to hold:

Asset class

%

Cash

10

Fixed interest

15

Property securities

20

Australian shares

35

International shares

20

TOTAL

100

The way your portfolio is spread across different assets is known as your “asset allocation”. Over time, movements in investment markets can mean your asset allocation changes, perhaps significantly, even though you haven’t actively changed the weightings yourself.

For example*, if share markets streak ahead, the relative value of your shareholdings may increase quicker than the rest of your investments so over time the value of your portfolio could look more like this:
 

Asset Class 

% (start) 

% (later) 

Cash 

10 

Fixed Interest

 

15    

10 

Property Securities

 

20 

15 

Australian Shares 

35 

45 

International Shares

 

20 

25 

TOTAL 

100% 

100% 

* This example has been provided for illustrative purposes only.

It may seem that the increase in shares as a proportion of your portfolio is a good thing. However as shares are a higher risk asset, this also means that the overall risk level of your portfolio may have increased beyond a level you are comfortable with. Unless you are happy to take on more risk, it may make sense to rebalance.

Rebalancing your portfolio

The process of rebalancing typically involves bringing a portfolio that has changed in value back to the initial asset weightings you had in place at the start. This can be done by selling some investments and purchasing more of those underrepresented investments.

Yes, the process of rebalancing means you may incur capital gains tax on any profits made on sale of some investments. But if you don’t rebalance, you may find yourself overexposed to a market fall in one particular asset class.

It is worth reviewing your portfolio on a regular basis to see if rebalancing is necessary.

Professional support with rebalancing

If the idea of reviewing your portfolio and taking active steps to rebalance the weightings on a regular basis sounds like hard work, one option is to use a managed investment where the asset allocations are set and a professional investment manager does all the rebalancing on your behalf.

Alternatively, if you don’t have the time or confidence to do this yourself, this is an area where a financial adviser can help.
 

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This information is current as at 8 August 2017.

This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. The information provided is factual only and does not constitute financial product advice. Before acting on it, you should seek independent advice about its appropriateness to your objectives, financial situation and needs.

© 2017 BT Financial Group – A Division of Westpac.