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A rebalanced portfolio

REBALANCING may sound like an acrobatic manoeuvre but it is actually an important part of managing an investment portfolio.

In very basic terms, it requires investors to be ‘counter-cyclical’, that is, to buy assets that have fallen in price and sell assets that have risen in price.

This is part of the disciplined approach that helps investors achieve their long-term goals.

The aim of rebalancing is to ensure that a portfolio remains appropriately diversified, by asset sectors and by specific investments.

Alliance Investment & Retirement Services’ Brad Martyn said all investment portfolios should be reviewed regularly. Part of the review process should be an assessment of whether some investments should be increased and others reduced.

Mr Martyn said a need for rebalancing most often arises when one investment, such as an ASX-listed company, performs extremely well for an extended period.

“In those cases, the investor can become overly reliant on one investment,” he said.

Mr Martyn acknowledges that many investors are keen to hold on to shares that have performed very well, in the hope of further strong gains. However, this can be a risky approach.

“We would normally recommend that they sell some of the shares in a phased manner and reinvest the money elsewhere to ensure they have a reasonable spread of quality investments,” he said.

“They still benefit from any future gains but are protected if the investment falls in value.”

At a broader level, rebalancing can be used to maintain an appropriate asset allocation.

As shown in the table (left), there is enormous variety in the way that investors’ money can be allocated, depending on their goals, time frame, risk tolerance and so on.

An ‘aggressive’ investor targeting high long-term returns may put all of their money in international and Australian shares, while a ‘conservative’ investor would prefer a more diversified portfolio with interest-bearing assets.

Once an investor, with advice from a professional financial adviser, has determined their preferred asset allocation, they need to ensure they stick to their plan.

However, Mr Martyn cautioned that investors should not adopt an overly rigid approach to rebalancing their asset allocation.

For instance, an investor may target a 20 per cent weighting for Australian shares, but market fluctuations could push that figure down to, say, 15 per cent or up to 25 pe cent.

The sharp fall in international shares (down 25 per cent over the past year) and the strong growth in listed property trusts (up 21 per cent over the same period) are two examples that may warrant a review of asset allocation.

Mr Martyn said the most appropriate response would depend on several factors, not just the current asset allocation.

“We would need to look at the overall performance of the portfolio as well as the client’s tax situation,” he said.

“If they sell an investment that has performed well, that would create a capital gains tax liability that needs to be managed.

“We also need to take account of the transaction costs. If you are constantly buying and selling, the transaction costs add up.

“If a client puts extra money into their portfolio each year, that may be a more cost-effective way to rebalance their portfolio.

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