Portfolios need regular rebalancing

Regularly adjusting the mix of investment assets in your portfolio to keep it in line with your goals is critical.

Investment portfolios have some characteristics in common with gardens: they need regular maintenance to keep them in order. Just as some plants grow faster than others, the same will happen with your investments, which increases your exposure to the more successful constituents. This might appear to be a good thing but it means that your portfolio is losing its original balance and probably becoming more risky.

For example, over the long term equities should perform more strongly than bonds and cash. If you start with an exposure of 60% to equities, this will rise over the long term, in turn increasing the level of risk you are taking with your money.

Rebalancing should be carried out at least annually

Simple rebalancing effectively means taking the top off your winners and topping up the laggards. In effect you will tend to be selling down holdings that have become overvalued and buying more of those that appear cheap.

Rebalancing should be carried out at least annually. As long as you are not paying transaction fees then a more frequent approach can help, especially if there have been some big market movements. It is also important to consider any taxation implications – it might not be worthwhile to incur Capital Gains Tax.

EQ tip: rebalancing is one of the few ‘free lunches’ left in markets. It’s an essential part of efficient portfolio management.

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