The New Year is but a few weeks old, the festive season is behind us and it’s time to knuckle down to working on both our personal and business lives.
The first priority in establishing financial security is to develop a solid foundation which will ensure your family’s ability to maintain their lifestyle in the event of premature death or disability.
It is also important to ensure that, when you reach retirement age, whilst you may not want to retire, financial independence will give you several options. Without making adequate provisions, you may well not have these options.
Everyone yearns for a silver lining; wanting to create wealth, and to do this you need to rebalance your portfolio on a regular basis. This technique has worked well for me and many others over the years.
It is also a sound and logical investment strategy that removes sentiment from the equation. Sentiment is derived from fear and greed and this explains why so many investors stayed in money markets in 2011 and were totally immobilised, unable to make sound long-term investment decisions.
Few have the knowledge or skill to invest early and sell before it’s too late. Without sound investment techniques, it is impossible to say whether one should be buying or selling and, in the short term, even the top economists and investment houses can’t predict what will happen.
The starting point is to assess your risk and determine the parameters of your investments. How much risk are you prepared to take? A risk profile will assess whether you are a conservative, moderate, cautiously aggressive or, in some cases, very aggressive investor. Time horizons determine your risk.
Are you looking for income or long-term growth? This will determine your asset allocation and thereafter at each review period, which could be quarterly, bi-annually or annually, you need to assess your portfolio by examining whether the allocation needs to be changed.
Rebalancing is a clinical exercise, not an emotional one. It will determine your future investment strategy and ensure that, when markets are up some profits will have been taken, and when markets are down some investments are made at lower prices.
There are three basic steps in the rebalancing process:
- List and sum up all your investable assets.
- From the above total, separate the assets into different investment classes, namely: Equities, bonds, cash and property.
- Having completed the above steps, the next step is to rebalance the portfolio to the appropriate mix.
If nothing has changed in your personal life between review periods – then there is no reason to change your risk profile. What you need to do however, is to look at your assets to see whether the mix has changed, thereby increasing or reducing the amount of risk in your asset allocation.
The rebalancing process will always ensure that you will tend to sell into strength, simply because when your portfolio is overweight in an asset class, it has usually developed due to good performance. Conversely, if your portfolio is underweight, the reason is usually because of a fall in the value of that particular asset. Not many investors can do this because one has difficulty in buying shares when markets are down (fear) and conversely selling when markets are up (greed).
The rebalancing process is not easy and requires a lot of discipline. Regardless of the present state of the equity market, once you have rebalanced your portfolio you may now find that your equity allocation is lower than the percentage you should have invested in equities. This means that you should be buying at these lower levels. If you stick to the formula you won’t be overly concerned about short -term fluctuations, and you will be buying selected quality stocks at good value.
If you do nothing, nothing will happen. But, if you do something, then at least you’re on the right track to ensuring a good investment plan. It’s not easy and I would suggest you enlist the help of your financial advisor.