Could be time to get some balance back

It’s been a bumper 12 months for sharemarkets. Aussie shares have notched up gains of 25% over the last year[1]. International shares have done even better, soaring 30.4%[2]. This should bring a smile to even the most pandemic-weary investor. However, it does come with a drawback.

The rise in share values may mean shares now account for a bigger percentage of your portfolio than they did a year ago.  As shares are at the higher end of the risk spectrum, chances are the overall risk of your portfolio has also risen.

Let’s look at it this way. We’ll say a hypothetical investor – Judy, has a diversified portfolio (good for her). This time last year, she sat down with her financial adviser to decide on a blend of investments that would help Judy achieve her goals while also matching her tolerance for risk. Together, they decided on a mix of investments that looked something like this:

• Aussie shares                            30%
• International shares                  25%
• Fixed interest                            25%
• Cash savings                             15%
• Other                                         5%

Total                                                   100%

Over the past year, sharemarket have roared ahead. Today, Judy’s portfolio could look more like this:

• Aussie shares                            38%
• International shares                  33%
• Fixed interest                            15%
• Cash savings                             10%
• Other                                         4%

Total                                                      100%

What’s happened is that Judy’s weighting in shares – the value of shares as a proportion of her portfolio has increased dramatically. She now has 71% of her portfolio in equities compared to  55% last year. This means her overall portfolio risk has increased. That’s not a problem if Judy is happy to wear more risk. But if her attitude to risk hasn’t changed, it could come as a surprised for Judy to discover just how much risk she’s taking on.

The real crunch can come if sharemarkets fall. With such a high weighting in shares, a market tumble could hit Judy’s portfolio hard.

Ways to get some balance back

The example above shows why it’s important to make a habit of regularly reviewing your portfolio. It’s not just about sitting back and admiring the gains. It’s more about checking to see if your portfolio is spread across different investments in a way you’re comfortable with.

We’ll assume our investor Judy has noticed that her portfolio is creeping up in favour of higher risk investments like shares. She returns to her adviser for strategies to find a new balance.

One option her adviser may suggest is to move cash between different investments. This can mean selling some investments to skim the profits though this brings the possibility of paying capital gains tax, which no investor relishes. The sweetener is that rebalancing a portfolio this way can mean you automatically sell during market highs, and buy when values are low, which is a key way to make money.

If Judy would rather hang on to her sharemarket investments, another solution her adviser may offer is to tip more cash into assets that are starting to represent a smaller proportion of her portfolio. In Judy’s case that could mean upping her holdings of fixed interest investments.  Or she may choose to diversify into something entirely different like, say, property. There are plenty of investments Judy can potentially pick from, so it can be a mix and match process

The upshot is that even if you take a long term ‘buy and hold’ approach, market movements can see your portfolio risk creep up. Rebalancing from time to time is a way of helping your portfolio stay on track to achieve your goals while having a level of risk you’re comfortable about. Ideally, rebalancing is something worth thinking about at least annually because as we’ve seen lately, a lot can happen in a year. A chat with your financial adviser can let you know if your portfolio still sits neatly within your comfort levels for risk, or if you’re veering into higher risk territory – and the steps you can take to bring your portfolio back into balance.