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The idea behind portfolio rebalancing is to periodically adjust the allocation of assets in a portfolio to maintain its original risk profile and investment objectives. Over time, due to market fluctuations, the weightings of different assets within a portfolio can drift, causing deviations from the initial allocation. Rebalancing involves buying or selling assets to bring the portfolio back in line with its target allocations.
Portfolio rebalancing is not typically used as a method to predict market moves. Its primary purpose is to manage risk and ensure that the portfolio remains consistent with the investor's risk profile and long-term investment objectives. By regularly rebalancing, investors can maintain their desired level of risk exposure and avoid being over-exposed to a particular asset class that may have performed exceptionally well or under-exposed to one that has underperformed.
There is evidence to suggest that portfolio rebalancing can be beneficial in various ways:
Risk management: Rebalancing ensures that the portfolio maintains its target risk level, which is crucial for investors looking to align their investments with their risk tolerance and financial goals.
Disciplined investing: Rebalancing enforces a systematic approach to investing, promoting discipline and discouraging emotional or impulsive decision-making.
Buy low, sell high: By nature, rebalancing involves selling assets that have appreciated in value and buying assets that have declined in value. This can be beneficial in the long run as it forces investors to buy low and sell high, which is a fundamental principle of successful investing.
Diversification: Rebalancing helps maintain a well-diversified portfolio, which can reduce overall portfolio risk and potentially enhance long-term returns.
In summary, portfolio rebalancing is a good practice for maintaining an investor's desired risk profile and staying in line with their original investment objectives. It is not designed to predict market moves, but rather to manage risk and promote disciplined, long-term investing strategies.
When does InvestSMART rebalance a portfolio?
When does InvestSMART rebalance a portfolio?
In this article, we'll explain how we handle portfolio rebalancing within our Investment PMA, including the importance of daily reviews and the various factors that may prompt a rebalance. We'll also touch upon our efforts to minimise transaction fees and the passive nature of our investment strategy.
Daily Review
We examine our model portfolios on a daily basis for several reasons:
Deposit of funds: Ensuring that when investors deposit funds, their allocations align with the model portfolios.
Withdrawal of funds: Adjusting the portfolio when investors withdraw funds to maintain the target allocation percentages.
Dividends and distributions: Reinvesting any dividends or distributions received to keep the portfolio aligned with the model.
Market moves: Monitoring market fluctuations that could cause holdings to drift from their target allocation percentages.
By conducting daily reviews, we can quickly respond to any changes and maintain the desired portfolio balance while keeping transaction fees in check.
Quarterly Investment Committee Meetings
Our our investment committee meets every quarter to review the portfolios and their benchmarks. If the benchmark has shifted significantly, the committee decides whether it's a short-term change or requires a long-term adjustment to allocations. As our mandate is to follow the benchmark, we generally adjust our portfolios accordingly.
Rebalancing
If necessary, we may rebalance the portfolios by selling or buying holdings to align them with the benchmark. This typically occurs once a quarter after the investment committee meeting. However, we are mindful of transaction fees, such as brokerage, and try not to rebalance too often to keep costs low for our investors.
Ad-hoc Rebalancing
In rare instances, we may introduce or remove a holding from a model, prompting an ad-hoc rebalance. Historically, this has happened no more than once or twice a year.
Adding/Removing Funds
Portfolios are also rebalanced whenever funds are added or removed.
New Holdings
We may introduce new holdings, such as a more suitable ETF, to maintain low costs for investors and enhance portfolio management.
Passive Investment Approach
It's important to note that our Investment PMAs are not actively managed. We don't try to predict or anticipate market moves. Instead, we follow a passive investment strategy, which means our portfolios track the market and accept the market return less any fees.
We hope this article clarifies our approach to portfolio rebalancing within the Investment PMA. By conducting daily reviews and making necessary adjustments, we aim to maintain an optimal balance in your investment portfolio while adhering to a passive investment strategy. If you have any further questions, please don't hesitate to reach out.