The pros and cons of rebalancing your investment portfolio

Rebalancing is an important tool that we use in our investment process. But what is rebalancing and what does it involve? It’s really quite simple. When our investment team creates a diversified portfolio based on the client’s risk level, they make decisions about how much money should be allocated to equities and bonds.

Rebalancing is all about maintaining that weighting and making sure the risk level continues to reflect what the client wants. It’s a process that we action for our clients on an annual basis and here’s why…

The Pros:

• It helps to keep risk in check and close to mandated levels i.e the agreed monies that are allocated to bonds or equities.
• It helps to take profits when they come.
• It helps to rebalance the portfolio away from areas that may have underperformed.
• It stops portfolios running away from the agreed mandated risk levels which would then not be appropriate for our clients.

However, it is important to navigate this process with eyes wide open, to mitigate any potential negative effects of rebalancing…

The Cons:

• We have made an assumption that our initial allocations are correct and we can’t actually guarantee this.
• Rebalancing can create a taxable event. For example if you have a pension or an ISA no tax is payable however, if you have an investment account that is taxable to Capital Gains Tax (CGT) then you could incur a tax charge when you cash it in.
• If you are investing for the long term and believe that markets revert back to their average, then any rebalance could be seen as unnecessary.

But despite these potential pitfalls, we believe that rebalancing is a vital tool for maintaining discipline in how the portfolios have been set up and mitigating any risks in a portfolio. An annual housekeeping process that, when done well, is well worth the effort.

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The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it.

This article is distributed for information purposes and should not be considered investment or other advice or an offer of any product / security for sale. This article contains the opinions of the authors but not necessarily the firm and does not represent a recommendation of any particular security, strategy or product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.

Please contact us before you transact. Errors and omissions excepted