Rebalancing – what is it and why does it matter for your future?

If you’ve been investing over a long period, the chances are the structure of your investment portfolio has altered. Over time, market fluctuations will alter the proportion of your investment spread. This is particularly true following periods of market volatility.

With the outbreak of the coronavirus pandemic early in 2020, some stocks fell in value, while others soared. This kind of market fluctuation can lead to your investments being heavy in some areas, while being light in others.

In light of this, now may be a good time to consider if your portfolio needs to be rebalanced. Read on to discover what rebalancing is and why it’s a good idea to work with a financial planner to rebalance your investments on a regular basis.

Rebalancing helps make sure your investment portfolio stays aligned with your financial goals

It’s important to regularly review your investment balance with a financial planner to ensure that your investments stay aligned with your financial goals. Rebalancing is the name given to realigning the weightings of assets in an investment portfolio.

Regular rebalancing helps to ensure you’re taking advantage of the ups and downs of a well-structured investment portfolio and can help you stay on the right side of the ebb and flow of market movements.

Over time, some asset classes will perform better than others. During robust economic periods, stock market equities will typically outperform assets such as bonds or fixed income.

So, if your stock investments outperform your bond or fixed interest holdings, you may have an ever-increasing exposure to equities. This would mean you end up with more or less than the original desired exposure in certain areas of the market.

Why rebalancing matters for your future

Here’s an example. Say your original investment of £100,000 was divided with £70,000 invested in stocks and shares and £30,000 held in fixed income or cash. This 70/30 split was in line with your goals and tolerance for risk.

Over time, the value of the stocks and shares investment could increase to £105,000 and the fixed income and cash part to £35,000. This would mean you then had a 75/25 investment split, rather than your desired 70/30 split.

A stock market rally may skew this balance, leaving you overweighted in stocks and under-weighted in fixed income and cash. If the market continues to rise, this is great. But a decline in the markets could see your portfolio drop if you don’t reset the original balance.

Here, you may wish to sell £7,000 of equities and move this money to fixed income and cash. This would restore the 70/30 balance.

Rebalancing helps keep your financial plan on track and can help maintain an appropriate asset allocation that aligns with your long-term financial plan.

Whether you’re saving for your retirement, for your children’s future or some other life goal, a well-formed investment strategy will spread your money in a way that suits your long-term goals. As well as your goals, rebalancing will take account of your time frame and your tolerance for risk.

It’s important for your portfolio to be rebalanced regularly

Rebalancing is an important part of our work with clients. By selling a portion of your portfolio that has enjoyed substantial growth, we can put money back into those asset classes which may have performed less well.

This may sound counterintuitive, but markets rotate over time and rebalancing can save you from your own worst instincts. It’s tempting to hold more money in top-performing investments and asset classes when the market appears to be rising. But this approach can be risky, as those with tech-heavy holdings discovered when the dot-com bubble burst in early 2000.

When you have an established investment portfolio, there are two ways to rebalance it:

  1. Rebalance at a specific annual interval
  2. Rebalance only when your portfolio becomes clearly out of balance.

We typically don’t rebalance portfolios too often, since a well-structured spread shouldn’t dramatically change your original investment allocation. Once a year at most is generally sufficient. There can be some costs when funds are bought and sold, so we avoid rebalancing too often as it may diminish any potential benefits.

Our aim is to ensure your portfolio is aligned with your goals

Before we rebalance, it’s important to consider your financial goals and long-term investment objectives. Also, it’s always important to allocate new money strategically, so doing it as a part of a rebalancing exercise is a good idea.

If you haven’t worked with a financial planner to rebalance your portfolio, now may be a good time to do so. Get in touch and we’ll help you rebalance your investments and ensure you are on track to meet all your future financial goals.

Please email or call 01454 416 653 to find out how.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.


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