Tuesday 11 January 2011

Does your portfolio need rebalancing?

Does your portfolio need rebalancing?
If you can't remember the last time you reviewed your investments, now might be a good time to give your portfolio an overhaul

If you have locked your investments away in a drawer, there is a good chance that they are poorly matched and that your portfolio is unbalanced.
Should this be the case, you will need to act to ensure your investment goals are on track. No one can predict what will happen and the best way to avoid boom-and-bust cycles is to make objective decisions that ignore fashions.
Diversification and getting the balance right are vital. Fail to achieve that and it is easy either to buy the wrong kind of investment or to create a portfolio that is vulnerable to shocks.
"Rebalancing is one of the key factors in successful long-term investment performance, probably almost as important as asset allocation itself," said Adrian Shandley of Premier Wealth Management. "As an investor, you need to set your asset allocation at the outset to reflect your attitude to risk and your desired outcomes."
If you have not continually rebalanced, your original asset allocation will almost certainly have become distorted e_SEnD and you could find yourself taking either too much or too little risk.
"In the terrible bear markets of 2007 and 2008 a continually rebalanced portfolio would have produced positive returns by the middle of 2009, whereas a portfolio that was not rebalanced would still have been in deficit at the end of 2010," Mr Shandley added.
Sadly, too many investors realise they have poor asset allocation when it is too late, which is why prevention is definitely better than cure. Building a portfolio is a question of managing risk versus return.
Rob Burgeman, a director of investment management at Brewin Dolphin, the wealth manager, added: "The best defence against this is a well-diversified portfolio of assets that is suitable for the objectives that you are trying to achieve." Thus, the pension portfolio of a 40-year-old is likely to be very different from that of someone in their mid-sixties looking for income in retirement e_SEnD and rightly so.
Attitude to risk is also a key consideration. The sensible investor takes into account the amount of risk they are able to tolerate, both emotionally and psychologically and in terms of their individual needs. It is therefore vital to understand the different levels of risk inherent in various types of investment. Overly concentrating on a single asset class will increase the risk to a portfolio unnecessarily.
So what are the issues that investors should be considering this year? "On the one hand, interest rates at 350-year lows make holding large cash deposits unattractive. On the other, tax rises and cuts in government spending are likely to have a deflationary effect on the economy," Mr Burgeman said.
He continues to favour equities e_SEnD particularly the blue chips, which tend to have international exposure - and emerging markets. He is also warming to US shares, while he has been advocating a reduced exposure to government bonds.
"Europe, too, remains a concern as the contagion could spread further within the region. We remain underweight here. As far as Asia and other emerging markets are concerned, valuations are not expensive by historic standards and, while these regions are likely to pause for breath a little, we remain strategically overweight there."
Perhaps not surprisingly given the uncertain global outlook, many professional investors are taking a cautious stance - and that includes holding gold despite its terrific run. They are also wary of government bonds in light of quantitative easing and the prospect of inflation.
"We favour high-yield and strategic [bond] funds, such as Aegon High Yield and Cazenove Strategic Bond, over government and investment-grade bond funds," said Gary Potter of Thames River Capital, the fund manager.
Marcus Brookes, who manages fund portfolios at Cazenove, is investing in funds that have lagged the market over the past year, including Invesco Perpetual Income, J O Hambro UK Opportunities and Majedie Global Focus. He has trimmed his exposure to emerging markets, given their performance over the past three years.
"Gold is an asset that we have held for two years and, while it has had a strong run over the course of 2010, we still feel it warrants a place in the portfolios for the time being," Mr Brookes added.
Many financial advisers suggest that investors should think of their portfolios as football teams.
"I'd look to dump out gilt-type funds and not be tempted by the hype about absolute return funds, and fill the midfield with international stars like Angus Tulloch (First State Asia), Graham French (M & G Global Basics) and Robin Geffen (Neptune Global and Neptune Russia)," said Alan Steel of Alan Steel Asset Management. Mr Steel reckons that small-cap funds (Standard Life's is his favourite) and commodity funds such as J P M Natural Resources will also score for investors.
However, Mr Steel's bullish tone is set to change in a few months' time when he might change tactics and move to a more defensive strategy.
"If you build up a good lead by the summer I'd go more defensive with the big caps." Again, Neil Woodford of Invesco Perpetual will make his team sheet.

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