MONEY
REBALANCE X
6
trustnetdirect.com
trustnetdirect.com
To ensure that you do not end
up taking too much, or too little,
risk, you should aim to rebalance
regularly – certainly on an annual
basis. This involves selling some
of your investments that have
performed well and now represent
a larger proportion of your portfolio
and reinvesting into those that
have performed poorly. This will
help to get you back to your original
starting position.
Patrick Connolly, certified
financial planner at Chase de Vere,
explains: “Not only does rebalancing
ensure you do not take too much
risk, but by selling investments
that have done well in favour of
those that have done badly, you are
effectively selling at the top of the
market and buying at the bottom.
This is the Holy Grail of investing
and something that very few
investors consistently achieve.”
If you have not taken the time to
review your investments over recent
years, your asset allocation is likely
to look very different and the risk
profile of your portfolio would have
altered considerably.
To put this into perspective, the
average North American fund has
achieved a total return of 22.72 per
cent over the past two years, while
the typical UK All Companies and
Japan vehicles are up by 5.54 per
cent and 16.38 per cent, respectively.
In contrast, the average emerging
markets investor would have
endured a 7.33 per cent loss over the
period.
Tom Stevenson, investment
director for personal investing at
Fidelity International, asserts that
while a well-diversified portfolio
will have a good balance between
asset classes and geographies, no
one knows what lies ahead, so
PERFORMANCE OF INDICES IN 2015
25%
MSCI Emerging Markets (-9.99%)
Nikkei 225 (13.29%)
20%
MSCI AC Europe (2.37%)
15%
10%
5%
0%
-5%
-10%
-15%
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
-20%
Apr
Your portfolio should also be
tailored to your risk appetite. As
a general rule of thumb, investors
usually fall into one of three
categories: cautious, balanced and
adventurous – where the latter,
more intrepid demographic, will
have a greater amount of money
invested in equity investments and
THE HOLY GRAIL
Mar
You may start out with a balanced
portfolio, but Phil Scott says it can
quickly become lopsided if you don’t
review it on an annual basis
TAILOR-MADE
a lower proportion in less volatile
assets such as bonds.
As highlighted above, different
asset classes behave differently
depending on the economic
backdrop and market cycle,
meaning the portfolio you started
off with can end up looking very
different a few years down the line.
Therefore the risk profile of your
basket will inevitably change – this
should be your trigger point to take
action. Depending on how markets
have performed, a low-risk investor
could suddenly find they have a
portfolio with a much higher risk
profile than they originally wanted
and vice versa.
Feb
BALANCING
ACT
NO ONE KNOWS
WHAT LIES AHEAD,
SO DIVERSIFICATION
MAKES SENSE
Jan 15
W
hile the investment
community is unlikely
to remember 2015 as a
vintage year, the period
was, if nothing else, eventful.
Key milestones included the
FTSE 100 smashing through the
7,000 mark for the first time, only
to subsequently retreat. In August,
markets went into free-fall after
China tinkered with its currency
and economic growth continued
to slow, while the 12 months then
closed with the US Federal Reserve
raising interest rates by 0.25 per
cent, marking the first increase in
almost 10 years.
The upshot is that the goings-on
of the past year have spurred on a
significant divergence in investment
performance.
There has been the good, such
as the 13.29 per cent gain from
Japan’s Nikkei 225; the bad, with the
MSCI Europe ahead by just 2.37 per
cent; and the downright ugly, with
emerging market equities off by a
hefty 10 per cent.
As such, while many wellintended 2016 resolutions may
have already fallen by the wayside,
investors would be wise to use
the new year as an opportunity to
review their investment portfolio,
give it a thorough MOT, and check
whether it is still fit for purpose.
This means re-balancing your asset
allocation.
Sensible investing is all about
diversification and your cash should
be spread across a variety of asset
classes and geographies when you
begin investing.
This will typically mean investing
across a mixture of funds invested in
equities, bonds, property as well as
some cash.
Source: FE Analytics
7