Rebalance For Safety

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Build a diverse portfolio of shares from both the UK and abroad, which may include some Corporate and Government Bonds, some property and possibly some commodities. You will spend your time balancing these percentages for an efficient portfolio, giving you the best returns possible for your ideal level of risk. If you then leave your company, all your hard work will be undone.

Let’s look at a simple example. You do your research and decide that you want to invest in a mixed portfolio of 50% bonds of different varieties and 50% equities of varying sectors. The bonds are lower risk and likely to give you about 5% growth per annum. The equities are higher risk, but you expect them to give you 7% per annum. The net result is around a 6% return per annum when averaged over a five-year time frame, so you can leave it to run its course.

When you log back in five years down the line just after a market crash, you are disappointed to see that a big slice of your portfolio has been affected by this crash. How did this happen? You look back at the portfolio and you see that one month before the crash you had 75% in equities and only 25% in bonds. ‘How did this happen?’ you ask yourself. You had specifically chosen a 50/50 split because that reflected your tolerance to risk, but that wasn’t what you had.

In such a case, the equities had grown faster than the bonds during the first four years and eleven months; your portfolio had gradually become increasingly risky over that time. When the market crashed, 75% of your money was exposed to the crash, resulting in a more adverse effect than expected.

Rebalancing refers to regularly resetting a portfolio to the original design to avoid this potential problem. In effect, you are locking in the gains from the higher-risk assets in order to protect them when the bad times come. Amongst the advisers who do this across the UK, most do this at a set point in time, at either the annual or quarterly review. This is significantly better than not doing it at all, but an even better way is to use a technique called ‘Trigger Rebalancing’.

Similar in every way to conventional rebalancing except the timing, ‘Trigger Rebalancing’ has you rebalance at optimum times rather than at random times throughout the year. You can set trigger levels for each asset class so that when that trigger is breached, the portfolio is rebalanced. This may mean you rebalance twice in a month and then not again for another twelve months. The result is a further increase in the returns of the portfolio over time above that of traditional rebalancing. You can see this effect in the chart below.

The key is therefore, if possible, to rebalance at these optimum times to further boost your returns. Either way, rebalancing is important; otherwise, you may get a nasty shock further down the line.

Financial Planning Versus Financial Advice

What’s the difference between a Financial Planner and Financial Adviser you ask? Let me explain.

Whilst different people in our industry call themselves different things, and many have exactly the same qualifications, I believe there is a distinct divide. The majority of people in our industry, although I am pleased to say this is decreasing gradually, focus on financial advice. By that I mean that they focus on advice around products. These people will quite happily sell you a pension or a NISA, but that is where the focus will be . . . the products not you.

For me, the difference between ‘financial planning’ and ‘financial advice’ is that the former is done by people that understand your needs and take time to understand a client’s beliefs, future ambitions, time frames and goals, to be able to build them a proper financial plan. Only once this is done can the most appropriate investment or retirement recommendations be made. By really getting to the core of what is important to a client, you can deliver much better financial recommendations as a result of building a detailed financial plan.

As a result, if you wanted to seek advice on your finances and your retirement, and for whatever reason did not want to approach Efficient Portfolio, then I would always suggest that you looked for a firm that does proper financial planning, which is Chartered, includes Life Time Cash Flow Forecasting, has advanced pension qualifications like G60 and has a clearly defined service proposition. By finding a firm that ticks these boxes, you will at least avoid a lot of the dross in the industry.

If you decide to do it yourself, you need to take care to not make any mistakes overlook any important factors about your older pensions and get it wrong, then you will have only yourself to blame. There is no insurance to fall back on. If a professional does make a mistake, they have Professional Indemnity Insurance to ensure the wrong can be righted.

If you are considering using an independent, Chartered Financial Planner, then please contact Efficient Portfolio by emailing enquiry@efficientportfolio.co.uk or by calling +44 (0)1572 898 060.


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