How to ‘Re-balance’ Your Investment Portfolio of Shares

If you’ve researched about how to buy shares online, you may have come across the concept of ‘re-balancing’.

This isn’t a new Yoga pose, nor is it as difficult as walking a tightrope!

Re-balancing is actually a simple way to manage your risk after you’ve built a basic investment portfolio. The best portfolio management books wholeheartedly recommend portfolio re-balancing.

Investing is rarely ‘Click and Forget’

Unless you have invested in an ‘all-in-one’ passive or active mutual fund which includes a portfolio of different asset classes, you will have to act as your own financial adviser.

This means that on a periodic basis, you should take stock of your investments and refresh your understanding of what you own, and why.

We often put a lot of thought into the exact composition of our portfolio when initially making an investment. In previous posts, I have analysed my own portfolio as a pie chart to show my asset allocation.

Perhaps you decided that your investing risk appetite was cautious, and therefore you invested 60% of your portfolio in corporate bonds, and 40% in shares.

That allocation only holds true on the day you invest. Five years later, it could look completely different. The stock market may have doubled over that investment time horizon, whereas bonds may have delivered low single digit returns.

In which case, the value of shares may now represent 65% of your portfolio. This is a much larger holding than you were originally comfortable with.

By lettings your investments run on auto-pilot, your portfolio has grown into a totally different beast. 65% in equities corresponds to much a higher risk profile.

Re-balancing is the solution.

How to re-balance a stock portfolio

  • To re-balance your portfolio, look at a recent snapshot of your investments and recalculate what proportion of your latest valuation is formed from which investments.
  • You should calculate this at both the asset allocation, and the individual asset level (if you own individual company shares).
  • Next, compare this to your original investment strategy and measure how far your investments have wandered from their original limits.
  • Place a series of trades to sell-down surplus-sized investments, and use that cash to buy investments which have shrunk in relative size.

After re-balancing, your portfolio should now look just like it did out of the box.

Re-balancing tips

Because re-balancing involves placing trades, it can be expensive – particularly if you buy individual company shares in stocks and shares ISA.

If you make regular investments, you could avoid investing costs, by making changes to your next round of investments. For example, stop investing in shares and instead direct all new funds into corporate bonds.

It may take a few months to re-balance in this way, but the (worthwhile) benefit of this approach is that you haven’t spent any additional fees.

How often should you re-balance? You shouldn’t need to re-balance more than once a year. Of course, you may find that re-balancing is needed on a different basis if market movements have been extreme, but as a general rule you should think of re-balancing as an annual exercise.

Do also consider that your original investment portfolio approach may need to evolve over time. Model investment portfolios for retirement tend to skew towards bonds as your age progresses. This means that rigidly balancing your portfolio back to its original equity: bond weighting may result in too much risk at an advanced age.

Here are some other useful share investment questions I have answered in other posts:

If you have a question about investing in shares or building a share portfolio – leave a comment below and I’ll create an article tailored to your preferred topic.

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