Making sure your investments are sufficiently diversified is no easy task. But experts say it’s more important than ever to make sure your portfolio reflects your appetite for risk – and the time frame in which you may need the money.
Bath-based Combined Financial Strategies financial advisor Jonothan McColgan usually recommends rebalancing a portfolio once or twice a year.
But given the fluctuations in the market, he says it’s now worth doing every month, adding, “It’s a good principle and with this volatility, it’s really important.”
Tight: a balanced portfolio has a mix of assets, all performing differently at different stages of the economic cycle
WHAT DOES BALANCED MEAN?
A balanced portfolio has a mix of assets, all of which perform differently at different stages of the economic cycle.
In addition to equities, it includes fixed income assets such as corporate and government bonds, real estate and commodities. The greater your risk tolerance, the more likely you are to have a high percentage of stocks in your portfolio, while lower risk portfolios have more bonds.
But all investors must ensure a good mix. “Diversification is key,” said Emma Wall, head of investment analysis at asset manager Hargreaves Lansdown.
“It has been tempting in recent years to stack all your money in shares, because bonds offer such a low income. But it is fixed income assets that have held up best since the beginning of this year. McColgan describes a balanced portfolio as a portfolio that is about half in equities, 40 percent in fixed income assets, such as bonds, with the balance primarily in real estate.
However, it all depends on a person’s attitude to risk. Chris Ralph, global strategist at asset manager St James’s Place, says that for some risky investors, a balanced portfolio could be 100 percent equity.
WHY ARE WE OUT OF KILTER?
While stock markets have fallen dramatically worldwide, not all have fallen at the same rate. Now, if you look at your portfolio, you will likely find that the allocation to different assets looks different from the allocation before the corona virus crisis began.
The share price is likely to be much lower as share prices have fallen so far. You may also notice that the geographic spread of your assets has changed.
Michelle Pearce-Burke, co-founder of online wealth manager Wealthify, says her team has rebalanced clients’ 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 be at too low a risk because stocks have fallen so sharply.
According to him, this could inhibit future investment growth. He adds, “If you had a portfolio that was 60 percent stocks and 40 percent bonds a month ago, now it would be more like a 50 to 50 split. So basically you are now underweight in risky assets. ‘
SHOULD I ACT NOW?
Bringing your asset allocation back into line with your goals can strengthen your portfolio for the future.
Andrew Lowcock, head of personal investing at Willis Owen, said, “The recent sell-off is a good time to rebalance as you start selling relatively expensive assets in favor of cheaper assets.
Basically selling bonds and buying stocks or investment funds. A midway house is to put money back into shares.
So now if you have too much of your portfolio in bonds, sell tranches and use the proceeds to buy more stocks. “The key to rebalancing is to do it in stages, not all at once,” Lowcock warns.
WHAT SHOULD I BUY?
Investing in some multi-asset funds should help your portfolio be more balanced in the future. This includes Troy Trojan, which has a mix of cash, gold, bonds and stocks, and Pyrford Global Total Return.
These prioritize preserving your capital, but have the flexibility to buy back into more stocks when they see potential for upside in the stock market. Vanguard’s LifeStrategy funds allow you to choose different allocation mixes between stocks and bonds – and at relatively low fees.
IS PATIENCE ANOTHER VIRTUE?
Once you have rebalanced your portfolio, you are unlikely to immediately see dramatic changes. But you can rest easy knowing that you have prepared your long-term investments. You can then regularly check whether your assignment needs to be adjusted.
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