Balancing a Portfolio - The Rebalancing Act

Image representing Balancing a Portfolio - The Rebalancing Act

Richard T Lishman explores how to minimise overexposure to risk, tax efficiency and the importance of utilising the services of an Independent Financial Adviser.

Rebalancing Under and Overexposure

As portfolios can change over time, maintaining the ideal combination of investments that deliver returns and manage risk requires constant and well-timed adjustments – this is called rebalancing your portfolio.

One of the reasons why investments fluctuate is because of the performance of an asset. When they rise or fall in value, their ‘weight’ can also change. So, when an asset class significantly performs, it is likely that the portfolio will be ‘overweight’ in regard to that particular asset – and vice versa. As this can cause the portfolio to stray from the original long-term plan and can alter the projected pathway, the risk profile becomes unbalanced. Thus, to reduce this under or overexposure to risk, frequent rebalancing is paramount to maintaining the ‘perfect’ portfolio.

Size Matters

The amount of adjustments to your risk profile will also be determined by the size of your portfolio. For instance, anything up to £200,000 would typically only need reviewing once a year, but any amount over this will require more attention – indeed, when more is invested, smaller shifts in percentage terms can have more significant repercussions.

Tax Efficiency

Lastly, you should always take tax efficiency into consideration when rebalancing your portfolio, especially if you think tax changes might affect you and your investments. There are, however, ways to reduce tax risks, including investing through a tax-efficient wrapper such as an individual savings account (ISA), pension or venture capital trust (VCT).

Although such investments provide flexibility, rebalancing is always needed to ensure that tax reviews – such as the implementation of the Tapered Annual Allowance and change to Lifetime Allowance limits – don't outweigh the benefits.

For those looking to park some money for circumstantial events such as retirement or a wedding, it is always worthwhile making sure that a segment of you portfolio is earmarked in more cautious funds.

Ultimately, as you become more comfortable with how investments work and you have the correct support behind you, you will naturally grow accustomed to identifying what level of risk you should be taking for each segment of your portfolio.

Independent Finance Advice

Balancing and rebalancing a portfolio is a task that requires constant nurturing and attention, which is why it is always sensible to utilise the services of an Independent Financial Adviser (IFA) such as those at money4dentists.

An IFA can help you to create and manage a risk profile, not to mention that they will take on the responsibility of balancing your portfolio so that your investments and funds suit your needs and aspirations.

Plus, an IFA can assist you with selecting both asset classes and specific firms – almost like a ‘funds supermarket’.

The bottom line is, it’s your money, so to achieve the best results possible with minimum losses, balance your portfolio effectively and efficiently.

For more information please call 0845 345 5060, 0754 DENTIST, email [email protected] or visit www.money4dentists.com

Posted by Gemma

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