Re-balancing investments

An important part of the Investment Advice we provide is to rebalance your investment and pension portfolios on a regular basis, where appropriate.

To rebalance a portfolio means to review and adjust the investments held within your portfolio. The aim is to bring it back into line with its stated objectives and to control the level of risk. Here is an example of how rebalancing works.

Let us consider an investor who has £200,000 to invest. In this example, for ease they will invest into two types of investments. The first is shares and the second is corporate bonds. Corporate bonds allow companies to raise money. The investor puts 50% into each type of investment.

Over the next year, the Shares portion increases in value by 20% and the Corporate Bond part falls in value by 10%.

At the end of this first year portfolio has increased by 5% and they now have:

Shares £120,000
Corporate Bonds £90,000
Total £210,000

The split of the investments has also changed. One part increased in value and the other has fallen. The investor now has 57% in Shares, and 43% in Corporate Bonds. This will increase the level of risk in the portfolio as the shares portion is bigger.

If they do nothing and the next year the Shares rise by 20% and the Corporate Bonds fall by 20%, now the position at end of year two is:

Shares £144,000
Corporate Bonds £72,000
Total £216,000

The portfolio overall is still going up, but the investment split is way out of line. Over two thirds of the portfolio is invested in shares.

If we rebalanced the investment portfolio after twelve months the following would happen. A rebalance would sell some of the shares and buy some of the corporate bonds. The split is now equal 50/50. At the start of year two £105,000 would be held in each investment. The process is repeated regularly so that the investment portfolio moves back to the recommended split.

This is only an example. In reality we would recommend more than two types of investments to be held in a portfolio. We might also include property, cash, overseas stocks and shares as well as overseas government and corporate bonds. We recommend clients rebalance their portfolios as it aims to:

  • Help control the level of risk within the portfolio.
  • Creates a more predictable return the longer the portfolio is held. This will help if you have specific goals and objectives, such as retirement.
  • Automatically take profits from good performing investments and creates a buy low sell high approach. Opposite to most investors.

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