What is portfolio rebalancing?

Portfolio rebalancing refers to the way people create and maintain a diverse mix of assets, such as shares or bonds, in an investment portfolio. Periodically, it might have to be adjusted to ensure it still meets your needs. It means monitoring your portfolio drift and arranging occasional asset sales of ‘winners’ and purchases of ‘losers’ that align with your objectives and appetite for risk.

Why is a mix of shares and bonds important?

Research has found that the breakdown of assets in your portfolio will greatly influence your investing success in the long term. Investors often target a specific target asset allocation. This might, for instance, be 40% bonds and 60% shares. The exact percentage will depend on your unique goals, timeframe and willingness to manage risk.

Investors keen to maintain a more patient strategy might prefer to target shares, as these generally deliver higher returns in the long term. Their volatility though means they are more likely to fluctuate. Someone after a faster return might instead opt for high-quality bonds. In general, these are less risky and more resilient against market drops. These may appeal to more cautious or older investors nearing retirement.

When is rebalancing necessary?

Portfolios will perform according to the balance of assets they contain. Over time, their performance will evolve, reflecting market trends in that sector. When deciding to rebalance, it is sensible to sell better-performing investments and buy more underwhelming ones. Whilst it might feel counterintuitive to buy assets dropping in value, the aim of rebalancing is to ensure you retain the appropriate risk level. This will keep you disciplined, eliminate emotion and help protect you if the stock market falls at a later date. Rebalancing is important in ensuring you are able to grow your portfolio over the long run, and to reposition it to fully take advantage of stock markets when they pick up steam. As the saying goes, “buy low, sell high”.

If you are considering asset management strategies in Cheshire and Oswestry, call our specialist team at Hartey Wealth Management now to set up an appointment.