If you've left your investments unchecked for a while, it's probably time to review them to ensure your investment goals and risk preferences are still aligned.
This process is known as portfolio rebalancing and it means buying and selling your holdings to fine-tune your investments.
Deposit platform Flagstone outlines five steps to consider when it comes to rebalancing your portfolio:
1) Review your original goals
Think about what you are trying to achieve with your investments. Checking back in with your goals will help you understand whether your portfolio is still set up appropriately.
2) Explore your asset classes
In a bid to maintain balance in a portfolio, many investors opt for an equal split between asset classes, such as stocks and bonds. You should consider both your risk tolerance and financial goals when deciding your asset allocation.
If you’re comfortable with volatility, you might have a greater allocation of assets with higher levels of fluctuation. If you’re cautious about volatility, you may prefer to allocate a greater weight to bonds.
3) Decide how regularly you’ll rebalance
You’ll need to decide how often you’ll review your asset allocation. Perhaps you’ll audit your portfolio every six months, or every quarter. Try to pick a schedule that you’ll stick to and set a reminder in your calendar.
4) Consider a financial adviser
If you’re feeling unsure about your asset allocation, it may be worth speaking with a financial adviser before making a major change or changes to your portfolio. Consulting with an expert can alleviate some of your worries and help you make informed financial decisions.
5) Decide on a rebalancing approach
There are multiple strategies for rebalancing your portfolio. One way is calendar-based rebalancing, for example monthly or quarterly, but make sure you know the costs involved.
Another way is percentage-of-portfolio balancing so instead of focusing on a specific timeframe, you focus on the percentage composition of each asset class you hold. You can look at a target weight for each asset class. As an example, you could have a government bond (gilt) target of 25% with a +/- 5% so they can fluctuate between 20% and 30%. If the weighting falls outside of this range, it may be a trigger to rebalance your portfolio.
There’s also threshold rebalancing set by allocation boundaries so once breached you know it’s time to rebalance. This could be based on your risk tolerance, for example.
