The target mix of your investment portfolio should be built on your goals, time horizon and risk tolerance. But goals can change, and market fluctuations can cause your asset allocation to shift, so it’s important to monitor your portfolio on a regular basis and make adjustments as needed to ensure you are not taking on more risk than you are comfortable with.
This process is called portfolio rebalancing.
When should investors rebalance?
Most rebalancing strategies consider two types of triggers: time, threshold, or a blend of both.
With a time trigger, the portfolio is rebalanced on a predetermined schedule such as quarterly, semi-annually or annually (but not daily or weekly).
With a threshold trigger, the portfolio is rebalanced only when its asset allocation has drifted from the target by a predetermined percentage, such as 5 or 10 per cent.
How can investors rebalance?
1. Reinvest dividends
Direct dividends and/or capital gains distributions from the asset sector that exceeds its target into one that is underweight.
2. Make additional contributions
Add funds to the asset sector that falls below its target percentage.
3. Transfer funds between asset classes
Shift money out of the asset class that exceeds its target into the other investments.
When you rebalance you need to consider the costs and tax implications. In most cases you will have brokerage costs and, with some managed funds, an entry/exit fee. There may also be tax consequences when transferring funds between asset classes. Sometimes it is more tax effective to use new cashflow or distributions rather than transferring assets.
If you have a large portfolio, redirecting cash flow or dividends may not be sufficient to bring your asset allocation back into balance. In such instances, you might have to liquidate investments to rebalance, which may have tax implications.
How often should investors rebalance?
Generally, more frequent rebalancing will ensure tighter tracking to your target asset allocation, but this potentially comes at the cost of lower returns, increased turnover, and a heavier tax burden in the current period. This is why rebalancing should not occur on a daily or weekly basis.
Vanguard research has found that there is no specific rebalancing threshold or frequency that consistently outperforms. Rather, an investor’s rebalancing strategy is based on their willingness to accept risk against their expected returns.
Research has also shown that any rebalancing is better than not rebalancing at all.
If you would like assistance getting your accounts under control as we approach the end of financial year, call us today on 1300 79 80 38.
Visit our Financial Knowledge Centre where you will access educational videos and articles, plus join our monthly e-Newsletter to help improve your financial knowledge.
If this article interested you and you would like to speak to Pat Casey on the phone, select a time to speak Pat – Financial Planner Sydney.
At Assure Wealth we specialise in helping busy, successful families structure their finances to achieve greater wealth and financial peace of mind.
Author: Pat Casey – Managing Director & Financial Planner Sydney – Assure Wealth
Download the Assure Wealth Corporate Brochure
Disclaimer: The information provided on this website has been provided as general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your Walker Lane Pty Ltd Adviser before you make any decision regarding any products mentioned in this communication. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Walker Lane nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.
Assure Wealth Pty Ltd ABN 31 965 466 780 Corporate Authorised Representative no. 1244817, Patrick Casey Sub-Authorised Representative no. 1244748 of Walker Lane Pty Ltd ABN 70 626 199 826, an AFSL holder No 509305.
