Does Your Advisor Automatically Rebalance Your Portfolios?

Rebalancing is an important aspect of your long-term investment strategy. It maintains your optimum asset mix, keeps your risk level in check, and ensures your portfolio stays on track.

Over time, as different Asset Classes perform at different rates; your portfolio may deviate from your original asset allocation.

This means that your portfolio may no longer be performing according to your Investment Plan, and you may be exposed to a greater level of risk than what you are comfortable with.

Rebalancing is the process of buying and selling portions of your portfolio in order to reset the Asset Classes back to their original state. It serves to reduce risk, lock in gains, and impose discipline on the investment process.

Your Family Wealth Advisor and their investment management team should have a process in place that continuously monitors your portfolio to ensure that your asset allocation remains appropriate.

If any part of your portfolio deviates from its target allocation by more than a certain percentage, for example, 10%, they should take appropriate steps to bring it back in line with its target weight. Breaking these thresholds could signal unnecessary portfolio risk or a lost investment opportunity.

The chart below illustrates how various Asset Classes performed differently each year, creating opportunities to rebalance your portfolio to optimize your portfolio returns.

The assets at the top of the chart are the best performing assets for that year, while the assets at the bottom of the chart are the worst-performing asset for that year. As you can see, they change positions every year.

This presents Portfolio Managers the opportunity to rebalance your portfolio as they sell portions of the out-performing assets and invest them into the underperforming assets to bring your portfolio back to its original target asset mix as dictated by your Investment Policy Statement.

Regular rebalancing may help you to achieve better risk-adjusted, long-term returns because it automatically leverages the discipline of “buying low and selling high” by realigning your assets from those that have performed exceptionally well to other areas of your portfolio that may have lagged.

While it is impossible to predict which Asset Class will outperform at any given time, rebalancing ensures that your portfolio is always poised to take advantage of the next market cycle.

Automatic rebalancing takes the emotion out of buy and sell decisions, which can be affected by short-term market events and keeps you focused on your long-term investment strategy.

Annual Returns for 20 Major Asset Classes

Source: Fidelity[1]

Rebalancing helps to ensure that your investments always reflect your personal goals and investment profile, so you are not subject to the whims of random investment decisions or rumours.

Without a plan, you may be influenced into buying a security or stock because someone you trust tells you to buy it because they tell you it’s a good investment or to sell it because they told you to sell.  There may be little or no research behind your decision to purchase or sell the security – just someone’s opinion or a rumour.

When you have an investment plan in place, and your portfolio is rebalanced regularly to maintain your portfolio’s targeted asset mix based on your risk profile, you are less likely to be influenced by rumours and make random investment decisions.

I cover this extensively in my book Who’s Investing Your Money? – 7 Key Questions to Ask Your Financial Advisor. This book examines the various types of advisor registrations, their limits and abilities and will help you find the right advisor for you.

To learn more about how an Automatic Portfolio Rebalancing can reduce the volatility of your portfolio while maintaining portfolio returns, please call me at (604) 855-6846 or email me at aspitters@pfcwealthsolutions.com

Who’s investing your Money is available as a free PDF download at www.whosinvestingyourmoney.com

Alternatively, the book is available from Amazon.ca as a paperback and Kindle version from this link: Who’s Investing Your Money? – Amazon

[1] “Kiss — Greater Fool – Authored by Garth Turner – The Troubled Future of Real Estate” N.p., n.d. Web. 26 Jul. 2019 https://www.greaterfool.ca/2019/05/25/kiss-2/

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