How to rebalance your portfolio to get your investments back on track

The majority of investors are not actively rebalancing their portfolio despite a higher rates-driven seismic shift knocking markets out of the habits of the past decade.

Some 54 per cent of investors admitted to not rebalancing their portfolio, according a survey carried out by DIY investing platform Interactive Investor and a further 9 per cent were unsure if they had.

Another 37 per cent say they are tweaking their portfolio to achieve their desired asset allocation – but over a third of these only do so rarely, and 5 per cent do it less than once a year.

A significant number of investors are rebalancing their portfolio at least once a year, of which 27 per cent make tweaks more than once a year. 

On the other hand, 13 per cent claim they rebalance their portfolio only at times of major market movements.

Balancing act: The majority of investors are not rebalancing their portfolios despite a shift in bonds and equities

Rebalancing a portfolio is especially important currently given the dramatically different investment environment we are now in with much higher interest rates and bond yields than a year ago.

Myron Jobson, senior personal finance analyst, interactive investor, said: ‘Portfolio rebalancing is akin to tuning an instrument, where every component plays a crucial role in achieving harmonious results. 

‘Trimming the excesses and redirect funds into underperforming assets, ensures that your risk-return equilibrium remains intact. This calculated approach of buying low and selling high has the potential to bolster long-term returns.

‘There is not a hard-and-fast rule on when it comes to rebalancing, but investors could benefit from making a habit to revisit their investment allocations annually or bi-annually.

Since the global financial crisis in 2008, a generation of investors have only ever known a world of very low interest rates and dismally low bond yields, which meant there were few alternatives to investing in equities. 

Jason Hollands, a director of Bestinvest explains: ‘Now, bonds should be firmly back on the radar of investors, some of whom may never have considered them in the past, given they can lock-in yields of over 5 per cent on very safe, short-term Gilts – bonds issued by His Majesty’s Government.’

Laith Khalaf, head of investment analysis at AJ Bell adds: ‘The big change that has happened since interest rates rose is that bonds are now yielding significantly more than they were, and that also means their capital value has fallen significantly, which will have reduced their weighting within investor portfolios.

‘Those who invest across asset classes might therefore need to consider whether their allocation to bonds is still appropriate in light of the current financial landscape.’

Portfolio rebalancing is one way investors can do this – it is an important strategy where an investor fine-tunes their asset allocation, ensuring it aligns with their goals and market dynamics.

Asset allocation involves dividing an investment portfolio among different asset classes – mainly equities and bonds, with alternatives forming a smaller position.

However, it’s possible to do too much tinkering. 

Khalaf explains: ‘Sometimes rebalancing can happen of its own accord because of market movements. Checking your portfolio and rebalancing once a year is probably the best approach for most investors.’

There are several things’ investors should consider when rebalancing a portfolio. We asked some investment experts for their best tips.

What am I investing for and how long do I expect to remain invested?

Jason Hollands says: The first thing to do is to think about your financial goals and the investment time horizon linked to them – i.e. how long you expect to remain invested, as this will really determine the amount of risk you should take. 

‘Those expecting to remain invested for very long periods of time, e.g., 20 years, can afford to have higher exposure to risky areas like equities as they have the time to recover from short term setbacks on the way. 

‘However, if you are going to need your money just a few years-time, for example to pay-off a mortgage or buy an annuity, it is unwise to have high exposure to very volatile areas like equities that could suddenly see a big slump in value just ahead of you needing to access your cash. 

Clearly define your investment goals and strategy 

Lipski says: ‘There is no right or wrong assets mix or so called asset allocation, but you do want to settle on the best investment mix for your situation and needs such as your goals, age and risk tolerance.

‘The old rule of thumb used to be that you should subtract your age from 100 – and that’s the percentage of your portfolio that you should keep in shares. For example, if you’re 20, you should keep 80 per cent of your portfolio in shares.’

‘But market fluctuations can change the value of your investments and make your portfolio drift and expose you to more risk or less growth than you originally planned.

‘By rebalancing your portfolio, you will avoid the drift and align to your original asset mix. Invest additional funds in any asset class that is underweight by selling investments from any asset class that is overweight to free up cash. In order to avoid overtrading and paying more fees you can set a threshold for each asset class and each investment. For example, it moves more than 10 per cent then you can rebalance.’

Investors could consider multi-asset funds 

Investors who are uncomfortable with determining their own asset allocation calls, may wish to defer to expertise of managers of multi-asset funds.

Lipsi picks out Vanguard Life Strategies. He says: ‘The 20 per cent, 60 per cent and 80 per cent equity offerings of Vanguard’s LifeStrategy range are deemed to be a long-term solution and are not managed to volatility targets so there will be no tactical asset allocation changes should market volatility increase or decrease.

‘In the current environment, together with bias towards US holdings, their performance may come under pressure in the short term. But the strategy has proved itself over the longer term.’

Climate Assets Balanced is another option for investors seeking a sustainable offering according to Lipski. 

Long-term manager of Climate Assets, Claudia Quiroz, draws upon Quilter Cheviot’s house asset allocation view to create a diversified global portfolio with an ESG factor integration.