What to know before rebalancing your investment portfolio

Every now and again, your portfolio might need an adjustment. The question is: how do you know? Regular check-ins, known as portfolio rebalancing, are crucial to keep things in shape and boost your portfolio's returns.

In this article, we’ll explore the different types of portfolio rebalancing and factors to consider when adjusting your investment strategy.

What is regular rebalancing?

Rebalancing is a key element of portfolio management. It’s a practise that involves fine-tuning your investments through buying and selling, to realign your portfolio back to your original goals and risk preferences.

Five factors to consider when rebalancing

Before you dive into portfolio rebalancing, it’s important to consider the following factors:

1. Review your original goals

What are you trying to achieve with your investments? Checking back in with your goals will help you frame whether your portfolio is still set up appropriately.

2. Explore your asset classes

To keep a portfolio in balance, many investors opt for an equal split between asset classes, such as stocks and bonds. You should consider both your risk tolerance and financial goals when deciding your asset allocation. If you're comfortable with volatility, you might have a greater allocation of assets with higher levels of fluctuation, such as cryptocurrencies. If you're cautious about volatility, you may prefer to allocate a greater weight to bonds or property.

3. Decide how regularly you’ll rebalance

You’ll need to decide how often you’ll review your asset allocation. Perhaps you’ll audit your portfolio every six months, or every quarter. Try to pick a schedule that you’ll stick to and set a reminder in your calendar.

4. Consider a Financial Adviser

Feeling unsure about your asset allocation? It may be worth speaking with a Financial Adviser before you make major changes to your portfolio. Consulting with an expert can alleviate some of your worries and help you make informed financial decisions.

5. Decide on a rebalancing approach

There are multiple strategies for rebalancing your portfolio, which we’ll explore in more detail below, so you can decide what approach is best for you and your finances.

Strategies for rebalancing your investment portfolio

Calendar-based rebalancing

As the name suggests, this strategy involves you deciding a frequency for rebalancing your portfolio. You’ll decide how often you will analyse and reset your portfolio back to its original asset allocation, such as monthly or quarterly. To decide the frequency that is right for you, you’ll need to consider time constraints and costs.

Percentage-of-portfolio rebalancing

Rather than focusing on specific timeframes, percentage-of-portfolio rebalancing pays attention to the percentage composition of each asset in your portfolio. You assign each asset class, like stocks or bonds, a target weight and tolerance range.

For instance, government bonds, also called UK gilts, might have a target of 25% with a range of +/- 5% for each asset class. This would mean government bonds can fluctuate between 20% and 30%. If the weight of any one asset class falls outside of the allowable range, the portfolio will need rebalancing.

Threshold rebalancing

With threshold rebalancing, you set asset allocation boundaries then rebalance your portfolio when these are breached. You choose a threshold that reflects your risk tolerance, which is the level of risk you’re willing to take with your investments. 5% or 10% are popular thresholds, meaning you’d rebalance whenever an asset’s total allocation rises or falls by 5-10%.

If you’re more relaxed with your portfolio, you can use the 5/25 rule. This means that if an asset class makes up 20% or more of your portfolio, you'll adjust it if it changes by 5%. But for asset classes that make up less than 20%, you'll make changes if they shift by 25% from their intended allocation.

Reduce your investment portfolio risk

If your rebalancing goal is to minimise the risk associated with your investment portfolio, a high interest savings account may be a suitable option for you. Traditional savings accounts are generally considered a safe investment choice as banks are protected under the Financial Services Compensation Scheme.

Our cash deposit platform can help you maintain liquidity while optimising the returns on your savings. At Flagstone, we offer access to hundreds of interest rates across our market-leading banking panel.

Want to learn more about how you can make the most of your savings?

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The value of expert advice

Looking to monitor your investments to achieve your financial goals? Working with a professional like a Financial Adviser can take some weight off your shoulders. They can help you decide on a rebalancing strategy that suits your lifestyle and financial situation.