Get your port­fo­lio back in bal­ance

The Daily Telegraph - Your Money - - YOUR MONEY -

Your money may have been evenly spread out ini­tially, but you need to take ac­tion to keep it that way. By Holly Black

In the year since the EU ref­er­en­dum the pound has plunged and the stock mar­ket has soared, and many in­vestors have en­joyed stel­lar gains in their port­fo­lio as a re­sult. The FTSE 100 is up by more than 16pc over the past year, as com­pa­nies with over­seas earn­ings have seen their prof­its boosted by weaker ster­ling. Mean­while, the av­er­age UK “all com­pa­nies” fund has re­turned 28.6pc over the past year while the typ­i­cal UK smaller com­pa­nies fund is up by 37.9pc over that pe­riod.

While many in­vestors will re­joice at these gains, what they may not re­alise is their port­fo­lio is likely to have been thrown out of kil­ter by the mar­ket moves. “Re­bal­anc­ing” your port­fo­lio is some­thing you should do once or twice a year, ex­perts say.

Russ Mould, in­vest­ment di­rec­tor at A J Bell, the fund shop, said: “Even a well-diversified port­fo­lio can be­come un­bal­anced in a fairly short pe­riod of time, depend­ing on how each of the holdings per­forms, and re­bal­anc­ing can help avoid that.”

For ex­am­ple, if you in­vested £50,000 equally across five funds, you would have a 20pc weight­ing to each. This means you are not overly ex­posed to one re­gion, as­set type or fund man­ager, so not all of your funds should rise and fall at once. But if one fund soars while an­other tum­bles, your weight­ings will be­come skewed, with more money in one fund than an­other, which could in­crease the risk in your port­fo­lio.

A J Bell an­a­lysed how a hy­po­thet­i­cal £50,000 port­fo­lio split equally be­tween five pop­u­lar funds would have changed over the past year. The five funds were JP Morgan US Eq­uity In­come, Thread­nee­dle UK Eq­uity In­come, Van­guard UK Gilt ETF, Fi­delity Strate­gic Bond and Black­Rock Euro­pean Dy­namic.

The anal­y­sis found that the strong per­for­mance of Black­Rock’s Euro­pean Dy­namic fund would have in­creased an in­vestors’ ex­po­sure to the con­ti­nent over the past year. The fund is up by 36pc over the past 12 months. How­ever, an­other hold­ing, Van­guard’s UK Gilt ETF, would have lost you money over the same pe­riod, af­ter charges.

These move­ments could in­tro­duce risk into your port­fo­lio by in­creas­ing your Euro­pean weight­ing at a time when there are po­lit­i­cal un­cer­tain­ties and an in­creas­ingly toxic Ital­ian bank­ing sec­tor. Re­duc­ing your ex­po­sure to gov­ern­ment bonds, which can act as a much-needed safety net within a port­fo­lio, could also prove risky.

While this port­fo­lio orig­i­nally had 60pc of its as­sets in shares and 40pc in bonds, af­ter one year these weight­ings have shifted to 66pc and 34pc re­spec­tively. If the funds con­tin­ued on the same tra­jec­tory, the port­fo­lio would be 85pc in stocks and just 15pc in bonds af­ter five years.

It would also have shifted to having

34pc of its money in Europe and 29pc in Amer­i­can stocks.

Re­bal­anc­ing a port­fo­lio is a sim­ple mat­ter of buy­ing and sell­ing units in the funds to bring them back to their orig­i­nal weight­ings.

Damian Barry, se­nior in­vest­ment man­ager at Seven In­vest­ment Man­age­ment, said: “Just as a fund man­ager trims his po­si­tions in win­ning stocks and puts more money into those that are yet to out­per­form, all in­vestors should be check­ing their port­fo­lios are where they are sup­posed to be. There is a real dan­ger that, by not re­bal­anc­ing your port­fo­lio, you make your­self vul­ner­a­ble to a mar­ket cor­rec­tion.” In this in­stance, the port­fo­lio’s value has in­creased by £8,439 over the past year, so to re­bal­ance back to a 20pc weight­ing per fund an in­vestor would need to ad­just the amount in­vested in each fund to £11,687. This means re­duc­ing holdings in the JP Morgan US Eq­uity In­come, Thread­nee­dle UK Eq­uity In­come and Black­Rock Euro­pean Dy­namic funds by £583, £690 and £1,908 re­spec­tively. These prof­its can then be used to buy more of the Van­guard UK Gilt ETF and Fi­delity Strate­gic Bond funds, with pur­chases of £1,695 and £1,483 re­spec­tively. This re­quires a lot of dis­ci­pline – it feels counter-in­tu­itive to take money out of a fund that has per­formed well and put it into one that has not been so strong. Mr Barry said: “All in­vestors are guilty of be­hav­iour bi­ases. It’s easy to get car­ried away by mar­ket move­ments and that’s why it’s so im­por­tant to re­bal­ance; it helps you

avoid the trap of just stick­ing with your win­ners.”

Stick­ing with this strat­egy will not only make sure your in­vest­ments are aligned with your at­ti­tude to risk, it helps en­sure you are ben­e­fit­ing from so-called “pound cost av­er­ag­ing”.

This is a process reg­u­lar savers also en­joy, whereby you buy fewer units in a fund when they are ex­pen­sive and more when they are cheap, to give you bet­ter av­er­age value and help boost your re­turns over the long term.

Re­bal­anc­ing is a tac­tic the ex­perts em­ploy too. Mr Barry has been tak­ing prof­its from emerg­ing mar­kets af­ter they climbed by 32pc last year. He cut his al­lo­ca­tion by 3.5 per­cent­age points and put the money into out-of-favour “fron­tier mar­kets”, which are early-stage emerg­ing mar­kets.

Mr Mould said: “Re­bal­anc­ing means the in­vestor is not tempted to try to time the mar­ket or make tac­ti­cal switches be­tween coun­tries or as­sets, and it means the port­fo­lio doesn’t be­come over-ex­posed to as­sets that have done the best and un­der-ex­posed to those ar­eas that may not have per­formed well but are be­com­ing good value.”

It’s im­por­tant to en­sure that a global port­fo­lio re­mains in bal­ance

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