Thinkpiece

07 Apr Thinkpiece

In this update:

• Portfolio rebalancing – Why it matters even when nothing else has changed.

It’s a common misconception in financial planning – if your life hasn’t changed — no new job, no house purchase, no sudden inheritance — your investment portfolio shouldn’t need to change either.

However, even in a year where nothing has changed, your portfolio is far from static. Left to its own devices, a portfolio acts less like a steady ship and more like a garden – without pruning, the fastest-growing plants will eventually take over the entire plot.

Portfolio Drift

When your portfolio was first built, a specific asset allocation was selected (the mix of equities, bonds, and cash) based on your objectives and including your tolerance for risk and capacity for loss. But markets don’t move in a straight line.

The Drift Effect – If the stock market has a good year while bonds remain flat, a typical 60% equities and 40% bonds split might actually drift to look more like 75/25. This creates a hidden risk. Your portfolio is now significantly more exposed to a market crash than you originally intended. You haven’t changed, but your risk profile has.

Rebalancing is the process of selling high-performing assets and buying underperforming ones to return to your original ‘mooring.’ It forces you to follow the golden rule of investing – buy low and sell high.

Be fearful when others are greedy, and greedy when others are fearful.

 Warren Buffett

Managing Volatility vs. Chasing Returns

Many investors view their financial adviser as someone who manages investments and drives performance, but in reality, experienced advisers know that one of their key jobs is managing volatility. Think of volatility like the suspension on a car. You don’t necessarily need the suspension to make the car go faster, but you definitely need it to keep the car on the road when you hit a pothole (Ed – we’re getting lots of real-world practice at that!)

By rebalancing your portfolio annually, we ensure that a sudden market correction doesn’t result in a loss that is mathematically—or emotionally—impossible to recover from.

The Psychology of the ‘Maintenance’ Year

The hardest time to rebalance is when things are going well. It feels counterintuitive to sell your ‘winners’ (the equities that are up) to buy ‘losers’ (the bonds or sectors that are down).

However, rebalancing removes emotion from the equation. It creates a disciplined framework that prevents you from chasing performance or panic-selling. Even if your personal life is in a ‘holding pattern,’ the global economy is constantly shifting. Annual adjustments ensure your sails are set for the current conditions, not the conditions from three years ago.

Rebalancing is about ensuring your portfolio remains aligned to your wishes, preferences and objectives. It is the quiet, disciplined work that separates ‘lucky’ investors from ‘successful’ ones.

Another key element is ensuring that the fund managers currently used, are reviewed and where necessary replaced. For example, the economy is constantly shifting, the business cycle is always adjusting, fund managers change, fund mandates change, and funds change their charges. A review of the fund managers used is like ensuring that the tools in the toolkit are the right one’s for the job at hand.

Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.

 Pablo Picasso

Your opportunity

If you’ve not yet put in place a sound financial plan and you’d like to know more, please feel free to contact us on 01626 305318 or via email here.

The value of investments can go down as well as up. You may end up with less back than you have paid in. Past performance is no guarantee of future returns.

The views expressed are not to be taken as financial advice. Professional advice should be sought before proceeding.