COVER STORY
The once-over
Just as your car needs a tune-up every year , a regular portfolio MOT can help ensure your investments remain in line with your goals and risk appetite . But there ’ s a difference between a review and a rebalance . An MOT is like a health check where , to strain the car analogy further , you kick the tyres to make sure the assets you hold in your portfolio are still suitable for your needs . A portfolio rebalance is when you make changes to your asset allocation , such as changing the proportion of stocks and bonds , or buying and selling funds . Some experts suggest you conduct a portfolio review ( not necessarily a full rebalance ) at the same time every year – maybe on your birthday or New Year ’ s Day . Having a set date in the diary means you ’ re less likely to change your portfolio on a whim .
How do I know if I should rebalance ?
You may decide to rebalance your portfolio if it has drifted from the parameters you originally set . Your better-performing holdings ( which could well be the riskier ones ) will gradually start to form a larger part of your total portfolio as their value grows . This can mean you end up with more risk than you ’ re comfortable with . A 10 % tolerance margin on equities and bonds works well for most investors , says Steven Rowe , director and IFA at Lucent . This means you don ’ t rebalance unless an asset you hold has appreciated by more than 10 %, because that ’ s the point at which other investors may start to take profits . “ This is the sweet spot ,” says Rowe . “ When something has risen by 10 %, if you reset it then , historically that has given higher returns than timebased rebalancing . But obviously that is quite hard to monitor as a DIY investor .” Morningstar research tested
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