How to rebalance your portfolio to get your investments back on track

The majority of investors are not actively rebalancing their portfolios, despite a higher interest rate-driven seismic shift that has knocked markets out of the habits of the past decade.

About 54 percent of investors admitted to not rebalancing their portfolios, according to a survey conducted by do-it-yourself investment platform Interactive Investor, and another 9 percent weren’t sure they had.

Another 37 percent say they adjust their portfolio to achieve the desired asset allocation – but more than a third of them do this infrequently and 5 percent do it less than once a year.

A significant number of investors rebalance their portfolio at least once a year, with 27 percent making adjustments more than once a year.

On the other hand, 13 percent say they only rebalance their portfolio during times of major market movements.

Rebalancing a portfolio is particularly important right now given the dramatically different investment environment we now find ourselves in with much higher interest rates and bond yields than a year ago.

Myron Jobson, senior personal finance analyst, interactive investor, said, “Rebalancing a portfolio is like tuning an instrument, with each component playing a critical role in achieving harmonious outcomes.

“Cutting the excesses and redirecting funds to underperforming assets keeps your risk-return balance intact. This calculated approach of buying low and selling high can boost returns over the long term.

There is no set rule for rebalancing, but investors can benefit from getting into the habit of reviewing their investment allocations annually or semi-annually.

Since the global financial crisis in 2008, a generation of investors has seen nothing but a world of very low interest rates and woefully low bond yields, leaving few alternatives to investing in stocks.

Jason Hollands, a director of Bestinvest explains, “Now bonds should be firmly back on the radar of investors, some of whom may never have thought of them in the past, as they can lock in returns of more than 5 percent on very safe, short-dated Gilts bonds issued by His Majesty’s Government.”

Laith Khalaf, head of investment analysis at AJ Bell adds: “The big change that has taken place since the interest rate hike is that bonds are now yielding significantly more than they used to, and that also means that their capital value has fallen significantly, which will have reduced their weighting within investor portfolios.

“Those who invest in different asset classes may therefore need to consider whether their allocation to bonds is still appropriate in light of the current financial landscape.”

Portfolio rebalancing is one of the ways investors can do this – it is an important strategy where an investor fine-tunes their asset allocation and ensures it aligns with their goals and market dynamics.

Asset allocation involves splitting an investment portfolio across different asset classes, primarily stocks and bonds, with alternatives forming a smaller exposure.

However, it is possible to tinker too much.

Khalaf explains, “Sometimes rebalancing can happen on its own due to market movements. Reviewing and rebalancing your portfolio once a year is probably the best approach for most investors.”

There are several things investors should consider when rebalancing a portfolio. We asked some investment experts for their top tips.

What am I investing for and how long do I expect to stay invested?

Says Jason Hollands: The first thing to do is think about your financial goals and associated investment horizon, ie how long you expect to stay invested, as this really determines how much risk you have to take on.

“Those who expect to stay invested for a very long time, say 20 years, can afford to have more exposure to risky areas like equities because they have time to recover from short-term setbacks along the way.

“However, if you only need your money for a few years, say to pay off a mortgage or buy an annuity, it is unwise to have a large exposure to highly volatile areas such as stocks that suddenly take a large price drop. can undergo. fall in value just before you need access to your money.

Clearly define your investment goals and strategy

Lipski says: “There is no right or wrong asset mix or so-called asset allocation, but you do want to choose the best investment mix for your situation and needs such as your goals, age and risk appetite.

“In the past, the rule of thumb was to subtract your age from 100 — which is the percentage of your portfolio you should hold in stocks. For example, if you’re 20, you should keep 80 percent of your portfolio in stocks.’

But market fluctuations can change the value of your investments and drift your portfolio, exposing you to more risk or less growth than originally planned.

By rebalancing your portfolio, you avoid drift and align with your original asset mix. Invest additional cash in any asset class that is underweight by selling investments from any asset class that is considered to free up cash. To avoid over-trading and paying more fees, you can set a threshold for each asset class and investment. For example, if it moves more than 10 percent, you can rebalance.”

Investors may consider multi-asset funds

Investors who are not comfortable determining their own asset allocation may want to adopt the expertise of multi-asset fund managers.

Lipsi singles out Vanguard Life Strategies. He says: “The 20 percent, 60 percent and 80 percent equity offerings of Vanguard’s LifeStrategy range are considered a long-term solution and are not managed according to volatility targets, so there will be no tactical changes to asset allocation as market volatility rises or falls.

“In the current climate, coupled with the bias towards US interests, their performance could come under pressure in the near term. But the strategy has proven itself in the longer term.’

Climate Assets Balanced is another option for investors looking for a sustainable offering, according to Lipski.

Claudia Quiroz, long-term manager of Climate Assets, leverages Quilter Cheviot’s view on proprietary asset allocation to create a diversified global portfolio that integrates ESG factors.