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How a balanced portfolio can help you weather the storm

We take a look at the importance of rebalancing and how it can help you steer through the market storms.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Lots of us follow the key investing principles of diversification, owning a mix of different investment types across the world. But as time has sailed by, is this portfolio still fit for purpose?

The pandemic, volatile oil prices and other events outside of our control has made for some choppy markets. Make sure you check in regularly with your portfolio – it needs to be shipshape to see you through this uncharted territory.

Your investments need to match the level of risk that’s right for you. Risk is very personal, and will depend on a few things like how long you plan to invest, how much loss you can handle, and what you hope to gain.

This article and tools aren’t personal advice. If you are unsure if a course of action is right for you, please seek advice. All investments fall as well as rise in value, so you could get back less than you invest.

Subtle changes add up

There’s a philosophical thought experiment about things that grow and change, which has kept thinkers, drinkers and layabouts (among others) busy for centuries.

Plutarch, an ancient Greek biographer, wrote about Theseus’ ship, which carried the hero around the Mediterranean on his adventure to slay the Minotaur. The legendary ship had been maintained by the Athenians for centuries with new planks added and removed over time. But philosophers have debated for years whether this was still in fact the same ship or a new one.

There’s a modern example in the sitcom classic Only Fools and Horses. Trigger shows off a medal he got for saving money for the council by using the same broom for 20 years. He explains he did this by changing the head 17 times and the handle 14 times. “How can it still be the same bloody broom?” he’s challenged.

Can something, which has been gradually changed so much over time, still be the same thing?

Subtle changes add up. The ship and broom might get longer or shorter.

Have you got what you started with?

I’m no philosopher, but I think the ship and broom both actually needed regular maintenance. It kept them doing the task they were designed to do.

If you don’t put in the time to keep a wooden ship looking its best you end up with bits of rotting tree matter. Far from a vessel for legendary voyages.

While our thought experiment lends itself to issues over identity, it can also apply to personal finance.

Your portfolio is constantly changing. Market conditions, company performance and investor sentiment all play a part.

Like the ship and the broom, you might also make changes, by adding new investments on when you think something looks attractive, or selling something when it isn’t doing so well. Times and circumstances change, but your portfolio still needs to do the task it was designed for.

Your portfolio, left unattended is probably a very different thing from what you started with. Like that hedge your neighbour has finally got round to trimming in lockdown – it needs regular maintenance to keep it on track and growing in the right direction.

How your portfolio’s changed

As time passes, parts of your portfolio will fare better than others. Some companies or fund managers may perform strongly while others could fall flat, or even go out of business. Sectors, investment types and styles will also go in and out of favour.

Volatility in markets, like we’ve seen recently, tends to speed up these widening differences. You might hold more of some investments than you used to, and less of others. Your original decisions might not be reflected in what you hold now.

Sometimes these changes mean your portfolio no longer matches your tolerance and attitude to risk, even if you thought about this when you chose your investments.

Learn more about risk

Even if you just hold index-tracker funds, you might want to take a closer look.

The makeup of the FTSE 350 has changed a lot over the last few months. Sectors like healthcare, utilities and food now make up a bigger portion of the FTSE 350 than they did at the start of the year. While you might be happy with the current allocation, just consider that they could be different investments to what you originally started with.

How COVID -19 has changed the FTSE 100 and FTSE 250

What is rebalancing and why is it important?

Rebalancing is when you sell a little of what’s done well, and reinvest it elsewhere – it should help keep the portfolio on track to achieve your goals. You should do this regularly, usually a few times a year.

You could think about selling a portion of your top performers and top up areas that haven’t done so well, as long as you’re still happy with your choices. It might sound counterintuitive, but having investments that move in different directions is what diversification is about.

Learn more about diversification

Lots of us own shares we bought years ago because our friends suggested them, or we liked a product that company sold a while ago. It takes a lot of time to follow an individual company, its progress and the different risks it faces.

It could a good time to review your portfolio. Do you have a few shares you’ve found hard to keep track of, or you’ve lost interest in researching? Has performance been poor for a while?

If some shares no longer fit your objectives, the money could instead be put into a fund, for example, which could have someone else – the fund manager – do the hard work for you.

Learn more about funds

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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