The Importance of Rebalancing Your Investment Portfolio
Rebalancing is the practice of realigning the components of a portfolio of investments back to a target allocation from which it has drifted away. Naturally, the process is contrarian and results in selling the things that have done well and buying more of what has done less well. To some, this may feel painful, but it is good practice and sensible behaviour your adviser can certainly support you with.
Why is Rebalancing Necessary?
Left unrebalanced, a portfolio comprising 60% global equities (‘growth assets’) and 40% short-dated global bonds (‘defensive assets’) would have drifted to nearly 80% in growth assets over the past 10 years. This is a material change in risk exposure.
Figure 1: Drift in growth/defensive asset exposure of 60/40 portfolio from Sep-14 to Aug-24
Source: Albion Strategic Consulting. Data source: Morningstar Direct © Growth assets: Vanguard Total World Stock Index Fund Admiral VTWAX, Defensive assets: Vanguard Global Short-Term Bond Index Fund VGSTBGA. Monthly returns in GBP.
The figure above illustrates the primary need for rebalancing i.e., to prevent unwanted asset allocation drift. Evidence supports that this is the main role of rebalancing[1]. It is a process which encourages good investor behaviour and helps one avoid falling foul of biases. Rebalancing helps systematic investors maintain a well-diversified solution through time, enabling them to benefit from exposures to imperfectly correlated assets.
Rebalancing to Manage Risk
Investors hoping to profit in the short term from rebalancing trades face certain long-run disappointment. … The fundamental purpose of rebalancing lies in controlling risk, not enhancing return.
David F. Swensen, Pioneering Portfolio Management (2000)
How Rebalancing Works
The process of rebalancing involves selling assets that have performed well and buying those that have underperformed, as illustrated in the following figure:
Figure 2: The process of rebalancing requires selling what has performed best
Source: Albion Strategic Consulting
In some cases, contributions to and withdrawals from your portfolio can be used to nudge the allocation towards the target to keep risk in line. Keeping a watch on how far your portfolio drifts from its target is something your adviser will help with. At times of market turmoil, the issue of a potential rebalance may be considered – in order to realign risk – and don’t be surprised if we raise this with you at such a time.
Are You Due for a Portfolio Rebalance?
At Wells Gibson Limited, our team monitors your portfolio to ensure it remains on track, making necessary adjustments to safeguard your investment experience. We support our clients by guiding them through market changes and helping them avoid common investor pitfalls, such as emotional decision-making.
Whether you need to rebalance your portfolio or make strategic contributions or withdrawals, we are here to help you pursue long-term success. If we determine that a rebalance is necessary, we will reach out to discuss it with you.
Get in Touch
Is your investment portfolio on track? If you’re uncertain, now may be the time to evaluate whether a rebalance is needed. Contact our team today, and let’s ensure your portfolio is positioned for sustainable, long-term growth.
[1] E.g. Albion, (October 2023). ‘Governance Update 26: Assessing rebalancing strategies’
