Investment Rebalancing

When it comes to managing your investments, one of the most important strategies is ensuring your portfolio is well-balanced. Many people make the mistake of concentrating too much money in one place, thinking their favourite investment will always be the best performer. However, even the most promising investments can face unexpected challenges, from market downturns to natural disasters. That’s why diversification and regular rebalancing are essential practices for long-term financial security.

Why Diversification Matters

Diversification means spreading your investments across different asset classes, such as property, shares, and bonds. This approach reduces your exposure to risk because it’s unlikely all asset classes will perform poorly at the same time. For example, while property might be hit by a local economic downturn, shares in international companies might continue to grow, and bonds can provide steady income. By owning a mix of assets, you protect yourself from the impact of any single investment underperforming.

The Role of Rebalancing

Rebalancing is the process of periodically adjusting your portfolio to maintain your desired level of diversification. This is important because as the value of your investments changes over time, your portfolio can become unbalanced. For example, if your shares experience significant growth, they might make up a larger percentage of your portfolio than you originally intended. Rebalancing helps you sell a portion of those high-performing assets and reinvest in other areas to bring your portfolio back in line with your goals.

A Real-Life Example: Peter’s Strategy

Peter is a long-time property investor who owns his home and two rental properties. Over the years, he’s seen good returns from his properties, but he realises his investments are not diversified. All of his properties are in the same town, and he has little else invested outside of real estate. Peter knows people who were financially impacted by the global financial crisis and the Christchurch earthquake, and he doesn’t want to be in a similar situation.

To reduce his risk, Peter decides to diversify his portfolio. He loves property and wants to keep it as a major part of his investments, but he also wants to add other assets to the mix. Peter sets a goal of having 50% of his money in property, 25% in shares, and 25% in bonds. Bonds provide steady income and are relatively low-risk, while shares offer potential growth and liquidity, meaning they can be easily converted into cash if needed.

Implementing the Plan

Peter starts by selling the rental property he believes has the least potential for future growth. He then uses the proceeds to buy bonds and shares, carefully choosing investments that align with his risk tolerance and financial goals. Initially, his share investments are flat, but over time they experience a sharp rise, eventually making up 32% of his portfolio. Recognising his portfolio has become unbalanced, Peter takes the profit from his shares and reinvests it in bonds and property to bring his asset allocation back to 25/50/25.

Adapting to Changing Circumstances

Rebalancing isn’t just about maintaining proportions; it’s also about adapting to life’s changes. Later, Peter’s properties see a surge in value, and they now represent 60% of his portfolio. Understanding the importance of staying diversified, Peter reviews his holdings and decides to sell one of his properties, using the funds to purchase something more affordable and reinvesting the difference in shares and bonds.

This flexibility becomes especially valuable when Peter’s wife falls ill and needs $50,000 for urgent medical treatment. Because Peter has diversified and rebalanced his investments, he can easily access the cash he needs from his bond and share portfolios without having to sell his property.

The Long-Term Benefits of Rebalancing

Over time, Peter finds his diversified portfolio of bonds, shares, and property has served him just as well as property alone, if not better. Not only has he reduced his risk, but he’s also created a financial safety net that allows him to respond to life’s unexpected challenges.

Rebalancing is a vital tool for managing your investments and securing your financial future. By setting clear goals, diversifying your assets, and regularly reviewing and adjusting your portfolio, you can protect yourself from unnecessary risks and ensure your money is working as hard as possible. Whether you’re a seasoned investor or just starting, talk to FoxPlan, your financial advisors, about how rebalancing can help you achieve a more stable and rewarding financial future.