When shares are down it’s time to rebalance… and it could even make you more money
Ensuring your investments are sufficiently diversified is not an easy task. But experts say it is now more vital than ever to make sure your portfolio reflects your appetite for risk – and the time frame in which you might need the money.
Financial adviser Jonothan McColgan, of Bath-based Combined Financial Strategies, usually recommends rebalancing a portfolio once or twice a year.
But given the swings in the market, he says it is now worth doing every month, adding: ‘It’s a good principle and, with this volatility, is really important.’
What does balanced mean?
A balanced portfolio has a mix of assets, all of which perform differently at varying stages of the economic cycle.
Aside from shares, it will include fixed-income assets, such as corporate and Government bonds, property and commodities. The greater your tolerance for risk, the more likely you are to have a high proportion of shares in your portfolio, while lower risk portfolios have more bonds.
But all investors should ensure a good mix. ‘Diversification is key,’ says Emma Wall, head of investment analysis at wealth manager Hargreaves Lansdown.
‘It has been tempting in recent years to pile all your money into shares, because bonds have been offering such low levels of income. But it is fixed income assets that have held up best since the start of the year.’
McColgan describes a balanced portfolio as one that is about half in equities, 40 per cent in fixed income assets, such as bonds, with the balance primarily in property.
However it all depends upon an individual’s attitude to risk. Chris Ralph, global strategist at wealth manager St James’s Place, says that for some high-risk investors a balanced portfolio could be 100 per cent in equities.
Why are we out of kilter?
Although stock markets have fallen dramatically worldwide, they have not all plunged at the same rate. If you look at your portfolio now, you will probably discover that the allocation to various assets looks different from the allocation before the coronavirus crisis began.
The percentage in equities is likely to be far lower because share prices have fallen so far. You may also find that the geographical spread of your assets has changed.
Michelle Pearce-Burke, co-founder of online investment manager Wealthify, says her team has rebalanced customers’ portfolios at least three times this year due to market volatility.
Ben Yearsley, a director of Plymouth-based Shore Financial, says that ironically many investors’ portfolios will now have too little exposure to risk because equities have fallen so sharply.
This, he says, could inhibit future investment growth. He adds: ‘If you had a portfolio a month ago comprising 60 per cent equities and 40 per cent bonds, it would be more like a 50-50 split now. So actually you will be underweight in risky assets now.’
Should I be acting now?
Bringing your asset allocation back in line with your goals could make your portfolio stronger for the future.
Adrian Lowcock, head of personal investing at Willis Owen, says: ‘The recent sell-off is a good time to rebalance, as you will be selling relatively expensive assets in favour of cheaper assets.
‘In effect, selling bonds and buying shares or investment funds. A halfway house is to drip feed money back into shares.
‘So if you now have too much of your portfolio in bonds, sell tranches, using the proceeds to buy more equities. ‘The key to rebalancing is to do it in phases, not all in one go,’ cautions Lowcock.
What should I be buying?
Investing in some multi-asset funds should help your portfolio be more balanced in the future.
These could include Troy Trojan, which holds a mix of cash, gold, bonds and equities, and Pyrford Global Total Return.
These prioritise the preservation of your capital, but have the flexibility to buy into more equities when they see potential for upside on the stock market.
Vanguard’s LifeStrategy funds allow you to choose different allocation blends between equities and bonds – and come with relatively low fees.
Is patience still a virtue?
Once you’ve rebalanced your portfolio, you are unlikely to see dramatic changes immediately.
But you can rest easy in the knowledge that you have prepared your investments for the long term. You can then check regularly to see whether your allocation needs to be adjusted.