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Rebalancing and how to get the perfect portfolio

6 March 2019

Rebalancing and how to get the perfect portfolio

A portfolio of assets is at the mercy of market forces - stock markets fluctuate; property prices rise and fall. An individual’s portfolio may therefore become out of sync with the level of risk they are comfortable with and a process of rebalancing needs to take place. A balanced portfolio is one where the current attitude towards risk is adequately reflected in the asset portfolio. This is achieved through determining a risk profile.

Creating a risk profile is the underlying key and an Independent Financial Adviser (IFA) will analyse your risk scale, to ensure consistency. Generally a scale of one to 10 is used, with five representing a balanced attitude towards investment risk. A series of carefully-crafted questions will determine the level of risk you are prepared to take, so the portfolio can be built accordingly.

Risk is always subjective, hence the importance of implementing a scale process that removes any potential grey areas. This analysis is invaluable for ascertaining what your actual risk is, rather than telling your IFA that you are “middle of the road” – afterall most of us don’t like to stand out from the crowd!

After this process has been completed the IFA can’t guarantee that they will make money, but what they aim to do is maximise returns, minimising losses on a year-on-year basis.

An IFA will take responsibility to make sure your risk profile is perfect with the investment and the funds themselves within your portfolio, and then it’s over to the fund manager to select the most appropriate companies within these sectors. Selecting which investment firm to invest in is a bit like choosing which supermarket to shop in – you make a decision based on what’s right for you, be it convenience, cost, brand, size and so on. An IFA will select the best ‘funds supermarket’ to suit your needs and requirements. But just as people change where they buy their groceries, this also happens with the ‘funds supermarket’.

Tax efficiency is another consideration – if you get penalised 40 per cent on the gross return from your investments that would be pretty disheartening to say the least! There are ways of reducing tax risks, by investing in some of the very generous tax efficient savings offered by the Government, such as ISA’s and Pensions – again; it’s all about making sure the portfolio is properly reviewed. As you become more comfortable with how investments work, you will know what level of risk you should be taking for each segment of your portfolio.

Good professional advisors are worth their weight in gold, so make sure you work closely with your IFA as they will know how important it is to keep your portfolio in sync with the level of risk you’re comfortable with. The bottom line is it’s your money – you will want to know that it’s working as hard as it can for you. 

This article was first published in October 2015

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