How often should you rebalance your investment portfolio?
Part and parcel of good portfolio housekeeping is the practice of rebalancing it when required. How frequently a portfolio should be rebalanced depends not on how big the portfolio is but on what it is invested in.
Investors, regardless of the size of their portfolio or its makeup, would do well to maintain a keen interest in what they hold and how the prevailing environment may affect it.
This does not mean frantically changing the underlying investments every time market direction changes but ensuring they have at least a basic understanding of what their exposures are at any given time.
Investors today have broadly three options when it comes to building a portfolio; they can use index funds (also known as exchange-traded funds or ETFs for short) that represent passive investments, they can use actively managed funds or they can invest in shares of companies directly.
ETFs, by their own design, will automatically rebalance at pre-set intervals (usually quarterly but could be less frequently). As a result, investors that are exclusively invested in such funds do not need to rebalance their portfolios, safe in the knowledge that the portfolio will remain true to its original mandate.
Actively managed funds usually do not follow such a regimented pattern of rebalancing, but the underlying manager would always strive to keep the portfolio in line with the agreed mandate, often trimming positions that have done well and look expensive while adding to those that have lagged behind and offer more upside.
Investors holding actively managed funds may wish to keep an eye on the underlying manager to ensure that they continue to perform in line with expectations and ahead of their benchmark but even more importantly, that they have not lost their conviction and investment discipline.
If an investor’s portfolio is made up of shares in companies they have bought directly, the onus to rebalance would be entirely on them.
Although they do say that nobody ever became poor by trimming profitable investments, it is equally important to avoid ‘pruning your flowers and watering your weeds’; investors holding such investments need to exercise discipline to sell shares in a company if the risks are too great and the downside is too significant but also to hold onto a company that has been doing well and continues to offer considerable long-term upside.
Ultimately, the key consideration for investors is to decide how much risk they are willing to take with their portfolios overall.
Once they have done that, the frequency or scale of rebalancing will be determined by the building blocks that make their portfolio and the mix between passive/ active or directly-held investments they hold.
Evangelos Assimakos is investment director at Rathbones