Rational rebalancing
Rebalancing is a smart way to avoid unpleasant surprises. The recent announcement by Qantas that the company is planning a major overhaul following a multi-billion dollar loss, is a timely reminder that there is really no such thing as 'set and forget'.
Rebalancing is a smart way to avoid unpleasant surprises.
The recent announcement by Qantas that the company is planning a major overhaul following a multi-billion dollar loss, is a timely reminder that there is really no such thing as 'set and forget' in the investment world. Regularly rebalancing your portfolio ensures it can accommodate changes in asset markets - and your needs.
A two-step process
Rebalancing simply means reweighting your asset holdings so that your portfolio is in sync with your goals.
In this sense it's a two-step process – one that firstly involves looking at whether your needs have changed over time. This forces investors to re-evaluate their financial plans, which is a good thing.
The second step of rebalancing is physically bringing the holdings of individual investments back into line with personal goals.
Mid-year provides opportunities
Portfolio weightings change naturally over time in line with market fluctuations. That's why experts say that ideally, portfolios should be rebalanced every few years or following major life changes like the transition from full-time worker to retiree.
However Ron Hodge, Managing Director, InvestSMART.com.au, says, "As we start heading towards the end of the financial year investors have an ideal time to rebalance portfolios."
He explains, "Selling underperforming assets that don't look as though they are going to improve doesn't just cut your losses and let you take advantage of other opportunities. It can also provide capital losses to offset against taxable capital gains, although talk to your accountant before making any moves."
Selling out can be avoided
It's worth noting that rebalancing doesn't have to mean offloading quality investments, which could trigger possible capital gains tax liabilities and rack up unnecessary transaction costs.
Hodge notes, "Rebalancing can also be achieved more gradually simply by directing any new cash into the asset classes you are underweight in. This approach can also deliver the benefits of dollar cost averaging."
Frequently Asked Questions about this Article…
Investment portfolio rebalancing is the process of adjusting the weightings of your asset holdings to align with your financial goals. It's important because it helps accommodate changes in asset markets and personal needs, preventing unpleasant surprises and ensuring your investments remain on track.
Experts suggest rebalancing your portfolio every few years or after major life changes, such as transitioning from full-time work to retirement. Additionally, the end of the financial year is an ideal time to review and adjust your portfolio.
Rebalancing involves a two-step process: first, reassessing whether your financial needs have changed over time, and second, adjusting your asset holdings to realign with your personal goals.
Yes, rebalancing can help with tax efficiency. Selling underperforming assets can provide capital losses to offset against taxable capital gains. However, it's advisable to consult with an accountant before making any moves.
Not necessarily. Rebalancing doesn't always mean selling investments. You can gradually rebalance by directing new cash into underweight asset classes, which can also benefit from dollar cost averaging.
Potential costs of rebalancing include capital gains tax liabilities and transaction costs if you sell quality investments. However, these can be minimized by using strategies like directing new cash into underweight assets.
Rebalancing prevents investment surprises by ensuring your portfolio remains aligned with your goals and market conditions. This proactive approach helps you adapt to changes and avoid unexpected financial setbacks.
Dollar cost averaging is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of market conditions. In rebalancing, it can be used to gradually adjust your portfolio by directing new cash into underweight asset classes.
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