Time for a portfolio health check
Maintaining a diversified portfolio is an important goal. But diversification shouldn’t be a random process. As investors we need to make deliberate decisions about how our money is spread across different asset classes. The technical jargon for this is ‘asset allocation’.
You may start out for instance, deciding you’d like Australian shares to make up 50% of your portfolio, with the remainder spread across other investments. Over time however, your portfolio weightings will change in line with market fluctuations.
As a guide, over the last 12 months, Aussie shares have risen by a massive 26%. That’s great news for sharemarket investors. But gains of this magnitude can see shares make up a far bigger percentage of your portfolio than they did a year ago.
That matters because shares come with higher risk. Unless you’re happy to take on more risk, it can make sense to rebalance your portfolio back to the original weightings.
Rebalancing can be done in two ways. Either sell down some of the investments that make up a bigger proportion of your portfolio than you intended, or add to those assets that you’re underweight in.
Selling investments, especially those that have performed well, can generate a capital gains tax bill. You may be able to offset all or part of the gains if you sold any investments at a loss during the financial year. This is always something to check with your tax adviser.
If you’re concerned about the impact of capital gains, the second approach – steadily growing other investments in your portfolio, can be a more palatable solution.
No matter which approach you take, it’s worth giving your portfolio a health check at least annually. It may seem counterintuitive to reduce exposure to investments that are doing well, but it helps you stay on track to reach your goals. It also forces you to sell when assets are expensive and buy when they are cheap. It’s a simple discipline, but believe me, it works.
For more on information on how to check the health of your portfolio click here: https://www.investsmart.com.au/portfolio-manager/healthcheck/
Frequently Asked Questions about this Article…
Asset allocation refers to how your money is spread across different asset classes, such as stocks, bonds, and real estate. It's important because it helps manage risk and can influence the overall performance of your investment portfolio.
It's recommended to give your portfolio a health check at least annually. This helps ensure your investments are aligned with your financial goals and risk tolerance.
Rebalancing your portfolio is important to maintain your desired level of risk. Over time, market fluctuations can cause certain investments to grow disproportionately, increasing your risk exposure.
You can rebalance your portfolio by either selling investments that have grown too large or by adding to those that are underrepresented. Both methods help maintain your original asset allocation.
Selling investments can trigger capital gains tax. To manage this, you might offset gains with any losses from other investments sold during the financial year. Consulting a tax adviser can provide more personalized strategies.
While it may seem counterintuitive, selling high-performing investments can help you stick to your asset allocation strategy. This discipline ensures you sell when assets are expensive and buy when they are cheap.
If you're worried about capital gains tax, consider gradually increasing your investments in underrepresented asset classes instead of selling high-performing ones. This approach can help balance your portfolio without immediate tax implications.
For more detailed guidance on performing a portfolio health check, you can visit the InvestSmart website at: https://www.investsmart.com.au/portfolio-manager/healthcheck/
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