Reviewing your portfolio serves several purposes, and as we end the 2020-21 financial year, it may be a time for you to take profits and rebalance your portfolio to ensure it is on track to meet your financial and lifestyle needs.

Financial advisers say a regular portfolio review will ensure asset allocations in your portfolio also align with your risk tolerance levels. Whether it is a change in circumstances or goals or moving financial markets, reviewing your investments ensures the success or otherwise of achieving your financial goals.

While percentage allocations to different asset classes will be different for a conservative investor compared to an aggressive investor, and depending on your age, they still need to be reviewed regularly.

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According to Scott Keeley, senior financial adviser with Wakefield Partners in Adelaide, rebalancing should be done annually. “Typically, portfolios are established with quite strict parameters.  Ensuring that the portfolio stays as close as possible to these parameters is important to avoid unexpected outcomes, particularly during market downturns,” says Keeley.

“We advocate an annual review and rebalance.  Much more than this, and transaction costs can mount up.  Less than this, and the risk of unexpected outcomes is greater.”

With share prices having run hard since the second half of 2020 and into 2021, now could be the time to seal some profits and to ensure your holdings meet your portfolio needs. Becoming overweight the winners may expose your portfolio to greater risk.

“It is important to remove emotion and remember why the specific investments were purchased in the first place.  Diversification is key and allowing a few holdings to become overweight in a portfolio can expose the entire portfolio to greater risk,” says Keeley.

While selling winners may be hard, selling losers can be even harder. “Again, this is as much about emotion. It is hard to let go and essentially admit defeat in one of your investments.  It is also important to define ‘loser’ and again to remember why the investment was purchased. 

“A fall in capital value, while it can be depressing to see in statements, does not make an investment a loser. If the investment was purchased for a regular, sustainable income, and that remains intact, then perhaps it is not a loser. The odd loss can be handy to offset hopefully other capital gains, but no one sets out to make a loss. 

“Ultimately, when the size of the investment becomes nuisance value in comparison to the broader portfolio, it’s probably time to say goodbye,” says Keeley.

When to do it

Crestone Wealth Management senior portfolio strategist, Stan Shamu, says rebalancing takes the guess work out of investing and ensures we stay the course with our long-term strategy. In normal market conditions, Shamu recommends reviewing and rebalancing usually quarterly. But in periods of heightened volatility, more frequent rebalancing may be required.

“Failure to rebalance can threaten the diversification benefits of a portfolio. It is best practice to set limits or ranges around how far the actual asset allocation can drift from the target asset allocation,” he says, saying the latter is linked to an investor’s risk tolerance levels.

“There are two layers to this aspect, the first being the strategic asset allocation ranges, which are generally hard limits and stipulate a wide range for the asset allocation. For example, an allowable strategic asset allocation range for equities could be 0 to 60 per cent.

“The second layer, which is more applicable in this case, is around tactical asset allocation ranges. Typically, this entails stipulating a maximum and minimum range the actual asset allocation can drift away from the tactical asset allocation.

“For example, a plus-or-minus 3 per cent range for an asset class is a reasonable and practical point to commence the rebalancing process without being too reactive. In risk-off environments, portfolios tend to be overweight cash, bonds and alternatives, while underweight equities and credit,” says Shamu.

Decreasing risk and safeguarding goals

Paul Resnik, CEO of the Suitable Advice Institute, says a portfolio review may also be needed if, after a period of sustained investment growth, “your portfolio risk can be reduced without compromising your life goals.”

Risk tolerance too is important, say Resnik. “A review may be required when the risk in your portfolio is inconsistent with your risk tolerance. Too much portfolio risk may leave you disappointed by a market correction; too little risk may have you disappointed by your returns after a market boom,” he says. 

Resnik adds that “it can often be worthwhile to review portfolio selling decisions around tax time in the context of both realisation of profits and the crystallisation of losses.”

However, Wakefield’s Keeley says that managing capital gains and losses is only one component of portfolio rebalancing.  “I’d argue that the risk of being invested out of your alignment of your risk tolerance outweighs the tax considerations.”