Is it time to rebalance your portfolio?

It’s that wonderful time of year again when everyone makes well-intentioned resolutions to get fit, keep in better contact with friends, and start new hobbies. However, the festive period is also the ideal opportunity to shake up your finances, cut your debts down to size, and revisit your investment decisions.

Here we look at how to rebalance your portfolio to ensure it’s in the best possible shape to cope with the challenges ahead in 2023.

Review of the year

The first task is looking at how your investments have performed. Have you made money over the past 12 months or is your portfolio in negative territory?

Dig deeper than just the headline performance figures and ensure you’re looking at the returns in context. Has the fund beaten or lagged its peer group? What are the reasons behind it? For example, have returns been hit by global factors such as economic uncertainty or a war which has adversely affected the share price of many stocks?

The reality is that even though your investments may have disappointed, the returns generated may be reasonable when everything else is considered. Therefore, don’t sell investments without understanding why they haven’t done as well as you expected and considering how likely that is to change in the future.

Conversely, are there positions in the portfolio that have had a fantastic year? If so, you need to decide whether such returns are repeatable and whether you might like to take some profits.

The shape of the portfolio

The performance of your investments, whether good or bad, may have changed the overall shape of your portfolio since it was first put together. As a result, you may be taking too much – or too little – risk. That’s one of the reasons why you may need to rebalance and put the portfolio back to its original position.

The best definition of rebalancing is buying and selling various parts of your portfolio to re-set the weight of each asset class back to where it was originally. Rebalancing can mean selling some of your investments that may have done well and now represent a larger-than-ideal proportion of your portfolio.

The proceeds from these sales can be reinvested in positions that haven’t done so well, as well as other investments for which you have high hopes.

Selling investments that have done well in favour of those that have done badly means you may end up selling at the top of the market and buying at the bottom. This would be ideal. However, it isn’t guaranteed. The stock market can be an extremely volatile place and it’s never advisable to try and time the market in this way.

You might like to look at the Chelsea Viewpoint magazine for some ideas.

Has your financial position changed?

It’s also worth looking at your personal circumstances. Can you afford to invest more money over the coming year – or do you need to generate a higher income from your existing holdings?

Everyone is different so you need to closely examine your own life. Have there been major changes since you put together your portfolio that may affect your overall investment goals?
For example, are you at increased risk of being made redundant? Have you secured your dream job at a much-enhanced annual salary? Has a child been born into the family?

Depending on what’s happened, you may want to start investing for the longer-term needs of a child or grandchild or have the requirement for more income to help pay the bills.

Given the soaring inflation and rising costs of living, it’s also increasingly important to have some money set aside for emergencies. In an ideal scenario, you’d have enough money squirrelled away to cover six months’ essential expenses. These include the mortgage or rent, as well as utility bills.

What is your investment outlook?

You also need to decide where your priorities lie and alter your portfolio accordingly. For this you need to consider your goals and attitude to risk. Break down your overall portfolio down by asset class, investment style, regional allocation, and industry sector.

You need to know the extent of your exposure to each of these areas – and revisit this breakdown at the end of your review to ensure your spread of assets is still suitable.
Any changes will need to be made with your investment needs and attitude to risk in mind, as well as your opinion on various asset classes and sectors.

For example, you may have extra money to put away and decide you want to embrace a degree of greater risk with some emerging market equities. Conversely, you may want to de-risk your portfolio and have a higher percentage in supposedly safer assets such as corporate bonds.

You can read Chelsea’s investment outlook here.

Constant rebalancing

Obviously, it’s impractical (and unnecessary) to carry out a comprehensive overhaul of your portfolio every couple of weeks but it’s important not to just forget about it entirely. Ad-hoc reviews are worth considering, as well as detailed examinations triggered by particular events. Basically, anything that could affect your returns – or your longer-term investment objectives – must come under your financial microscope.

And i you do not have the time or perhaps the expertise to review your investments, you could consider one of our four managed funds:
VT Chelsea Managed Cautious Growth 
VT Chelsea Managed Balanced Growth 
VT Chelsea Managed Aggressive Growth 
VT Chelsea Managed Monthly Income 

The popular VT Chelsea Managed funds allow us - as their investment advisers – to make the fund selections for you and so you will have the peace of mind that your investments will have our full attention.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.

Published on 15/12/2022