Rebalancing Investment Portfolios to reduce risk
For a client to successfully maintain a diversified portfolio they need to regularly review and rebalance their investment (or your adviser can do it on their behalf). Rebalancing means they maintain an asset allocation suited to their age and risk profile, which keeps them on track to achieve their long-term investment goals. Rebalancing a portfolio is one of the more difficult things for clients to do because it involves moving funds from assets that have been performing well into assets that have not been performing as well – ‘buying low and selling high’.
However, it’s vital for clients to overcome this, as disciplined rebalancing can not only reduce risk, it can lead to a better return outcome over the long term, due to not being over-exposed to assets that have become over-valued following a period of strong performance, or being under-exposed to assets that have become under-valued following a period of poor performance.
The table below shows that by rebalancing monthly, the portfolio* not only achieved a 0.8%pa reduction in volatility, but also an additional 0.1%pa in performance. So, rebalancing over the long term makes sense compared to a simple ‘set and forget’ strategy.
Rebalancing may reduce risk and provide better returnsData from 30 September 1991 to 30 September 2011 | ||
With monthly rebalancing | Without rebalancing | |
Return %pa | 7.8 | 7.7 |
Volatility %pa | 8.7 | 9.5 |
Source: Datastream. All returns are in $A. *The portfolio is made up of 45% Australian shares, 25% international shares, 5% Australian listed property trusts, 15% Australian bonds and 10% Cash. | ||
Indices:
The All Ordinaries Index has moved down over the past week decreasing 5 points (or -0.1%) since closing last Friday to 01:42 pm this Friday.
The rest of the world as measured by the MSCI index is up 14 points (or +1.1%) from closing last Friday to end of trade Thursday.
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