When it comes to investing, the aim of the game is to balance maximising your returns with managing your risk.
As an investor, it is important to both understand what you are investing in and ensuring it matches your risk profile.
So what is portfolio rebalancing?
Portfolio rebalancing is the act of selling a well-performing asset for the purchase of one with lower returns.
Wait. That doesn’t seem right!
Or does it?
Why it is wise to ensure balance within your portfolio
The thought of switching out a well-performing asset for an underperforming one seems about-face.
Unless you know to look at the bigger picture.
A solid portfolio needs to be a mix of assets that will ensure a solid return as well as a portfolio that can withstand market turbulence.
If one thing COVID and 2020-2021 has taught us on an investing front is it’s wise to not put all your eggs in one basket.
Let’s look at the COVID-19 crash.
The stock market saw a crash like we haven’t seen with the Australian stock market crashing more than 35 per cent.
This came just weeks after we reached our highest of highs. How quickly things can change overnight.
Take this graph for example.
The red dotted line illustrates the returns on a diversified fund. By balancing out your investments across a variety of assets, you’ll note a less bumpy ride compared to the peaks and troughs of individual investments, yet still a solid investment return.
Should I rebalance my portfolio?
Rebalancing your portfolio (such as selling stocks and buying bonds) is a way to balance out the risk.
Any great plummets in one asset will be buffered by your other balanced assets.
When you first set up your portfolio, you did it based on your risk profile.
As time goes on, some assets will outperform others, changing the balance of your portfolio. If a drastic drop occurs again along the lines of March 2020, you may lose a lot more than you expect.
By rebalancing frequently, you can reduce the opportunity of your portfolio moving out of your preferred risk profile and mitigate any big losses from unexpected market turbulence.
If you would like to discuss your investment profile or rebalancing your portfolio, get in touch to speak with one of our Financial Planners.