As tax and investment management experts, one of our core pieces of advice revolves around the periodic rebalancing of an investment portfolio. If it’s been a while since you last looked at your weighing, it may be worth a deeper look into asset allocations and deciding whether any could do with replacement.
Realigning assets and repositioning them away from the original targeted allocations can be vital for maintaining an optimal balance between risk exposure and long-term investment return potential.
Over extended periods, even the most carefully constructed asset portfolios can drift from their designed risk-return profile. Asset categories experience varying cycles of appreciation and depreciation throughout their lifespan, particularly in markets especially prone to fluctuation. If left unchecked, such deviations from your initial asset calculations can significantly skew your overall investment stance and hinder your maximum returns. Particularly if assets were initially calculated and assigned some years ago, it can prove effective to monitor their worth diligently, but this is easier said than done for busy individuals with multiple priorities to balance.
To illustrate, consider a hypothetical balanced portfolio designed 20+ years ago with 60% allocated to stocks and 40% to bonds. Due to the variety of market fluctuations witnessed since this time, the current split for this static portfolio with no rebalancing would equate to roughly 80% equities and just 20% fixed-income holdings. While simplistic and hypothetical, this is an example of what could happen if assets are not appropriately or regularly rebalanced with tailored investment guidance.
The Benefits of Rebalancing
At Hamlyns, our disciplined approach advocates routinely adjusting asset weights to realign with predetermined targets and risk parameters. Systematic rebalancing confers several key advantages, enabling you to:
- Maintain optimal asset allocation.
Rebalancing your private assets and investments prevents unchecked deviations from occurring, keeping portfolios aligned more closely with their originally calculated risk-return profiles. By rebalancing, investors are counterbalancing inevitable performance dips across asset categories over time and mitigating themselves against potential severe drops.
- Control overall risk exposure.
The exercise of scaling back on disproportionately outperforming assets while deploying others into plateauing areas can be a great way to effectively curb creeping risk levels. Market analysts will often make guided predictions about those that are poised for immediate or long-term success and failure, and guide accordingly. Periodic rebalancing means that high-risk assets are not going to cause as much disruption to an individual’s overall portfolio.
- Instils investment discipline.
Systematically adjusting allocations based on data rather than emotionally caving to market movements instils disciplined investing habits. Multi-asset investors will know that time is very much of the essence when allocating and dispensing assets, and the more time they have, the more easily they should be able to weather adverse market moves and benefit from higher long-term returns.
- Enhance overall returns.
Numerous studies have shown that a disciplined rebalancing approach can drastically outperform a static “buy and hold” strategy over longer periods. If some investments perform better than others, the ratio of shares to bonds will inevitably change. For example, say an investor was targeting a 70:30 split between shares and bonds, and their stock market funds grow by 10% on average, while bond funds fall by 10%, the ratio will resemble something closer to 75:35. Drifting away from the original allocations can therefore be subtle but increases potential returns.
Developing a Rebalancing Plan
While advisable for all diversified and smartly allocated portfolios, rebalancing is by no means a one-size-fits-all exercise. The optimum asset rebalancing strategy, frequency, and parameters need careful consideration and movements aligned with your unique financial position.
Asset Mix and Risk Tolerance
Portfolios constituting more asset classes spanning wider industries and risk profiles warrant more frequent rebalancing to control more unpredictable deviations. Investors with lower risk profiles may prefer stricter or more regimented rebalancing thresholds, or at least for them to take place less often.
Tax Implications and Trade-Offs
Adhering to a prudent rebalancing strategy in taxable investment accounts can trigger capital gains tax (CGT) liabilities due to the selling of appreciated assets. Of course, it is entirely dependent on everyone’s financial position and investment strategy, but some returns may be subject to taxes under newer legislation.
However, the benefits of maintaining diversified risk targets may outweigh potential tax costs for most investors.
At Hamlyns, our investment specialists collaborate closely with you to establish a tax-efficient rebalancing strategy that blends disciplined asset allocation with minimising tax obligations through methods such as the following:
- Spreading rebalancing trades across tax years
- Offsetting capital gains with losses
- Rebalancing within tax-advantaged accounts (ISAs, pensions)
- Deploying lowest-cost rebalancing trades
Our advisors also guide incorporating dividends, new contributions, or withdrawals into your rebalancing activities to enhance efficiency and streamline overall portfolio management.
Implement With Professional Guidance
While pivotal for investment success, formulating and adhering to a robust rebalancing strategy demands expertise from multiple angles. From clever portfolio construction to tax optimisation, rebalancing strategies need to be formulated with the individual firmly in mind. Deficient and poorly managed approaches can prove counterintuitive and elevate risks if trades incur unnecessary costs due to frequent rebalancing.
However, with the right approach from the outset, the rebalancing process costs will be minimal in comparison to the potential returns gained by adjusting portfolios. While some deviations are likely, delaying adjustments and restricting thresholds may simply lead investors to trade with no tangible benefit in sight.
As a qualified and experienced investment management firm in Surrey, Hamlyns brings decades of expertise in analysing portfolios and instituting tailored rebalancing approaches to realign multi-asset holdings with individuals firmly at the forefront of the decision-making process. We leverage industry-leading rebalancing guidance, tools, and market knowledge to provide clear roadmaps for potential deviations and returns before finalising every client’s unique rebalancing schedule. We always take great care to ensure you remain at the helm of your portfolio asset balancing decisions, with our team offering impartial and best-in-class guidance based on your predicaments and goals.
Reach out to our investment management team to explore how our rebalancing services can optimise your asset allocations and position your wealth for sustainable long-term growth as per your unique goals.
