Rebalancing – what it is, why it matters
/Whether you work with a financial adviser or manage your own portfolio of investments, it’s important to understand the role of rebalancing and regularly review your asset allocation.
Below, Pendal’s Head of Multi-Asset Michael Blayney explains what it is and why it matters.
In a given year, certain asset classes will perform better or worse on the market relative to others.
This means that the sizes of your allocations (or weights) to certain asset classes within your investment portfolio can fluctuate, changing the level of risk – and return – in your portfolio.
That’s where rebalancing comes in.
By regularly reviewing and rebalancing your portfolio’s exposure to certain asset classes (be they equities, cash or bonds), you can ensure your portfolio continues to align with your risk tolerance.
“If an investor had not rebalanced all last year, then they’d be sitting on a portfolio overweight equities and underweight bonds. They’d be running more risk now than they were at the start of the year, when equities were cheaper than what they are now,” Michael says.
“Rebalancing helps keep your assets in line with your desired risk profile.”
According to Michael, another benefit of rebalancing is that it takes some of the emotion out of investing.
“It helps avoid behavioural problems, liking wanting to bail from the stock that just did really well, or wanting to load up on tech stocks given the extraordinary year they have just had.
“People start to believe that certain parts of the market will never do well, and certain parts are impregnable. But over long periods, these tend to even out and rebalancing helps address that sentiment.”
Technology stocks are a good example of why rebalancing matters.
The technology-heavy Nasdaq on Wall Street returned 55 per cent last year, which super-charged global equity returns – but that doesn’t mean it will happen again.
“You always get technological change. People tend to underestimate how much that happens over the long term,” Michael adds.
Rebalancing also allows an investor to run a good quality defensive portfolio, that allows them to have enough liquidity for their expenses, and to take advantage of opportunities that arise.
This article has been prepared by Pendal Fund Services Limited ABN 13 161 249 332, AFSL 431426. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider whether the information is suitable for your circumstances and we recommend that you seek professional advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.
