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Why You Should Rebalance Your Portfolio

A little thing can make a big difference

For investors & savers a little change can make a pretty big difference. 

Simply making sure you re-balance your portfolio can make sure your goals stay on track.

Of course you can't rebalance something that was never balanced to start with. Some people invest without any overall plan, winding up with a collection of funds, each of which seemed like a good idea at the time it was purchased.  A well constructed savings or investment plan will select a range of different asset classes, held in NZ and overseas, that is most likely to give you the type of returns you are after, taking into account the risks you feel comfortable with.

Investors can make their money work by creating a portfolio that's carefully designed to accomplish that goal.

Many investors regularly add money to their investment retirement funds, and of course as investment returns get added to your funds then you can easily end up with more in one asset class than you intended.  The rebalancing can often be accomplished without any fund switches, just by allocating more of the new money to a fund that is underweight in the portfolio and less new money to one that's overweight.


To show how rebalancing works and the difference it can make, Here is a simplistic example: Consider a portfolio divided equally between Fund A and Fund B.

Remembering that the reason for having investments balanced across a number of different funds is to limit risk without giving up too much of the overall return, when a portfolio gets lopsided it has higher risk because it's depending too much on one just one fund (or asset’s) performance.

Let’s say that in the last year on the two funds in the example we had two very different results, with Fund A up 28.6 percent while Fund B lost 2.6 percent.

The example portfolio was $10,000 split evenly between those two funds at the start of the previous year. After a year of this performance the overall portfolio had grown to $11,300. But now 56.9 percent of the portfolio is in Fund A and only 43.1 percent in Fund B.

To rebalance, an investor would sell enough of Fund A to bring its balance down to $5,650 (half of $11,300) and invest the proceeds in Fund B.

If you don’t re-balance and the funds continue with similar performance you will rapidly have a disproportionate level of investment in one area.  If, or when, a market correction occurs or the overweight investment fund has a bad year the effect on the portfolio will also be disproportionately high.

Think of re-balancing as “taking some money off the table”, and sticking with your comfortable level of risk.

At the extreme, one could rebalance a portfolio every day, however the extra effort of doing so for minimal daily movements just doesn’t make it worthwhile.  The best thing to do is to ensure you review your entire portfolio regularly – at least yearly – and re-balance then.

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