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Hewison Insights

Rebalancing – what is it?

Simon Curtain
Partner/Private Client Adviser
6 Oct 2014

Rebalancing is a term we hear about a lot in the investment world, but what does it actually mean and why is it important we do it?

When establishing an investment portfolio, prudent investors will set themselves an asset allocation. The asset allocation determines how much of a portfolio is allocated to each asset class (e.g. Shares, Fixed Interest, Property, Cash). It is important to put in place an appropriate asset allocation as it is a key determinant in investment performance and the level of risk you hold.

For example, you may allocate 50% of your portfolio to Australian Shares and 50% to the Fixed Interest asset class. Over time, as your portfolio value changes, these allocations will move away from the 50% target. Rebalancing is the method of bringing your portfolio back in line with its asset allocation.

This may involve the selling of shares and the purchasing of fixed interest assets or vice versa.

Often, it involves the selling of an asset after it has appreciated in value. For example, after a strong period of earnings growth your exposure to Australian Shares may be in excess of the 50% target. Rebalancing dictates the sale of some shares to bring the asset allocation back in line with the recommended 50% weighting.

This can appear counter intuitive as you are effectively selling an asset that has been performing strongly. In actual fact it is a proven method of selling assets at the top and then buying back in at the bottom.

So the next time your adviser recommends the sale of a particular asset it is not necessarily because that investment has gone bad, it could be a strategy to lock in profits and reallocate capital to another asset class.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.