Strategies uncovered: Why it pays to rebalance your portfolio

Julie Brownlee, Fsp Invest, 27 Jun. 2014

Tags: rebalance, rebalancing, why rebalance, investing strategy, strategies, emotions, investing decisions,

The most disciplined of people tend to make the best investors. Discipline is a very good trait to have. And one way to help that discipline is to rebalance your portfolio.

Rebalancing involves periodically putting the different asset classes in your portfolio back to their original allocation.

So why should you rebalance your portfolio? And is it worth the bother?

Let’s take a closer look…

Rebalancing helps you take your emotions out of your decisions

Emotions and investing don’t mix. Emotions can really have a detrimental effect on your investing.

By following their emotions, many investors do the exact opposite of what they should be doing, Phil Oakley in Money Week explains. They chase the price of some hot investment and sell out of assets that have dropped in value.

Just think about your investment portfolio as a whole. The assets that do well over time become the biggest part of the portfolio. Those assets that don’t perform well then become the smallest parts of your portfolio.

Why rebalancing is so important

Let’s say shares are in a bull market and keep increasing in value. You’re probably chuffed your shares are performing well and rising in value.

But this has a downside. It means your portfolio risk is now much higher than it was to start with.

Let’s say you have an allocation of 35% of shares in your portfolio. As share rise in value, your allocation increases to 50%. Then the market crashes. This wipes 50% off your shares. This means your portfolio will actually lose a quarter of its value!

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Of course, under your original share allocation, you’d still lose 17.5%, but by regularly rebalancing, you can limit the damage. You just need to sell off some of your shares are they rise in value, then reinvest that cash in assets not doing as well.

Over the long-term, rebalancing means that you buy low and sell high. And this can make you money over time.

So there you have it, why it pays to rebalance your portfolio.

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