The why, when and how of portfolio rebalancing

Portfolio rebalancing is an important part of portfolio management and a clear way to demonstrate the value you provide for your clients. This article will look at the why rebalancing matters and what to consider to get the best outcome for your clients – and yourself.

Rebalancing – the risk management strategy

Left unchecked, your clients’ portfolios will, over time, drifts towards 100 per cent shares. The increased risk – and volatility – that comes with this will usually be outside the risk your clients are expecting and beyond what they would accept. This makes rebalancing an important risk management process for your clients’ portfolios.

Rebalancing will lower the risk for a portfolio and keep it in line with your client’s
financial plan and risk profile.

Moving your clients out of their best performing investments may not seem like a popular move. Doing just this, however, will not only lock in profits (before a correction), but also steer clear of dangerous investing habits such as trying to time the market. Rebalancing will also help save clients from their own worst instincts. A defined rebalancing strategy – and informed clients – takes the emotion out of investing, stops your clients chasing falling stocks or hanging on to stocks which have performed well too long.

Rebalancing – what you should consider

Managing portfolio risk is why rebalancing is an integral part of financial advice. There are still when’s and how’s to consider when making decisions for your clients.

As there are CGT implications and transaction costs associated with rebalancing, it is itself a balancing act between the benefits of reduced risk versus the cost of doing so. That’s why the optimal frequency to rebalance a portfolio depends on the personal preference and financial circumstances of individual clients.

Vanguard, however, in their 2010 paper ‘Best Practices for Portfolio Rebalancing’ suggested semi-annually or annually was suitable for most investors. An alternative is to rebalance when asset weightings reach certain thresholds. This may be suitable in times of bull (or bear) runs on certain asset classes, however involves greater portfolio monitoring.

There are also different ways how to rebalance your portfolio, including:

  • Selling the best performing asset classes and actively investing back into under-performing assets.
  • Maintaining the original portfolio size by selling the out-performing investments and using the funds for other purposes, such as an income stream or paying down debt.
  • Direct the income generated from the portfolio, such as dividends and ongoing contributions, to the cash account. Use this to buy more of the under-performing asset classes. This approach may lower CGT and transactions costs as there may only be buy spreads depending on the assets being purchased.

Benefits of platform auto-rebalancing

For most advice practices portfolio rebalancing is a time-intensive responsibility. Making the most of technology available on platforms and wraps, such as the ‘distribution instruction’ or ‘re-weighting facility’ can make the process more efficient and simpler. Automating this area of portfolio management also frees up time for you to focus on higher value client engagement.

Re-weighting clients’ portfolio in IOOF Pursuit has never been easier.

With the new Re-weight portal now available in Portfolio Online, you can choose how you wish to re-weight your client portfolios seamlessly right now, or at a future date, with ease. To learn more about the online functionality, please refer to the IOOF Pursuit adviser guide - Re-weight and IOOF Pursuit adviser guide – Standing instructions. Here you will find more detail on how to access and use the Re-weight and Standing instructions portals as well as tips to ensure you are enjoying all the benefits of our recent online trading and transacting enhancements. Click here or speak to your IOOF BDM or for more information on Pursuit auto-rebalancing.

The information contained in this newsletter is provided on behalf of the IOOF group of companies and is intended for financial adviser use only. It is given in good faith and has been prepared based on information that is believed to be accurate and reliable at the time of publication. Any examples are for illustration purposes only and are based on the continuance of present laws and our interpretation of them at the time.