Get your portfolio back in balance
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