The Benefits of Regular Rebalancing

The current investment climate appears to be fraught with uncertainty, however, despite this, it has been well publicised that some developed market stock indexes, such as the Dow Jones Industrial Average in America and the FTSE 100 here in the UK have recently reached new all-time highs.

As a result of this uncertainty a number of our clients have been turning to Discretionary Managed Portfolios in the form of our Avellemy Portfolios. For those that are unfamiliar with Avellemy and the risk-targeted, platform based discretionary model portfolios they can offer, you may be wondering what the significant benefits of such an investment could be.

One of them comes in the form of rebalancing. In the context of investment management, rebalancing refers to the exercise of buying and selling assets at specific pre-determined intervals, to restore a portfolio to its desired asset mix – this is usually the allocation of assets which gives an investor the correct ‘balance’ of risk/return.

It can be done on a ‘calendar’ basis, e.g. daily, monthly, annually etc. Or it can be done based on ‘tolerance’, where bands are specified in advance for each asset class, and a rebalance is triggered whenever an asset class moves outside that tolerance band.

For example, an investor starts off with a 60% exposure to stocks and a 40% exposure to bonds and wants to maintain these levels with a tolerance of +/- 5%. The stock market then rises meaningfully and his asset allocation moves to 75/25 – he sells some of the gains realised in stocks and buys more bonds thus restoring his original asset mix of 60% stocks and 40% bonds.

Stocks, bonds, commodities, property and other types of assets all behave differently in different economic and market cycles. Most investors aim to achieve a level of diversification which reflects their desired level of risk. However, depending on market conditions an investor’s asset allocation can vary significantly over time, which could result in a much higher (or even lower) risk exposure than expected.

Rebalancing is therefore employed as a means of ensuring that the level of risk an investor is exposed to, does not stray too far away from what they require to achieve their goals. It can often be said that employing a disciplined rebalancing strategy not only reduces risk but enhances returns over time.

For an individual, rebalancing your investments on a regular basis can be a daunting prospect but with Avellemy, your rebalancing strategy will be reviewed at regular intervals, and set and executed by your Investment Manager to ensure your risk mandate is appropriately maintained.

Contact us on 0345 475 7500 for more information.