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."