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Investment Portfolio

Why you need to rebalance your investment portfolio?

Simon Curtain
Partner/Private Client Adviser
30 May 2016

Rebalancing is a term commonly used by finance and investment professionals, including financial advisers. But what does it mean and why is it an important consideration for investors’ portfolios?

Importance of having an appropriate asset allocation in place

Prudent financial advisers and investors will set an asset allocation when establishing an investment portfolio. An asset allocation determines how much of a portfolio is allocated to each asset class, for example; shares, fixed interest, property or cash. This provides a key determinant in investment performance and the level of risk you hold, and it’s important that an appropriate asset allocation is in place and agreed upon by the financial adviser and his/her client.

By way of providing an example, you may choose to allocate 60 per cent of your portfolio to Australian shares and 40 per cent to fixed interest. Over time, your portfolio value will change and these allocations will invariably move away from the target weighting. Rebalancing is the process of re-aligning the weightings of a portfolio to bring it back in line with the agreed asset allocation, which may involve selling shares and purchasing fixed interest assets, or vice versa.

How does it work?

It will often involve selling an asset after it has appreciated in value. For example, after a strong period of earnings growth, the portfolio’s exposure to Australian shares may be in excess of the above 60 per cent target. To bring the portfolio back to the 60/40 target weighting, it will need to be rebalanced through the sale of some shares. Although selling an asset that has performed strongly might be counter-intuitive, selling the asset at the top when it’s overvalued, and then buying at the bottom when its undervalued, it is a proven method of investing.

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

To talk to an adviser about your investment portfolio’s current asset allocation and the potential need to rebalance, please contact us.

Any financial product advice provided is general in nature. It does not consider your needs, financial situation or objectives. You should consider the appropriateness of this advice to your circumstances before you act on it.

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.