Canny view: First balance and then re-balance

A commitment to rebalancing ahead of time keeps a portfolio where it should be. Photo / Supplied

Balance, and finding balance. It evokes pictures of rocks stacked upon each other at the beach.

It's something of an ongoing search for time crunched people. How they can bring balance to various aspects of their lives? There are endless self-help books and articles to read about it, but plenty are still aggrieved about their lack of balance.

But surely balance is a choice? If you had the extra drink or the extra bowl of icecream. If you signed up for the new car or bigger mortgage. They're all commitments that might result in feelings you don't want later.

Hopefully it was all a conscious decision and there's no need for regret. Just floating along and hoping for the best is no strategy.

Recently, the actor Adam Sandler was profiled in the New York Times for his new film Uncut Gems. Sandler has an estimated net worth of several hundred million dollars, and he noted he has a dilemma, like the rest of us.

Sandler admitted that he had not had a Popsicle in a while. He studied the menu of frozen delights with the unhinged joy of a man who, at a later meal together, would force himself to order three scrambled egg whites, a bunless hamburger and pickles. As a middle-aged man, he's concerned about his health.

Being rich, he said later, can buy you a chef or a personal trainer, but it cannot buy the self-control to not pound a whole thing of icecream on the weekend.

And with unlimited resources you might imagine there's a temptation to let things get out of control, but Sandler's doing his best to keep things in balance and not just floating along.

Financially, it's no different. Our investments first need balance and then a commitment to maintain that balance. One of the continually ignored areas of investing is rebalancing.

What is rebalancing?

Rebalancing is the act of bringing your portfolio back to its desired asset mix by taking profits out of certain outperforming investments and reinvesting those returns in underperforming assets.

It's natural to want to hold on to the winners in your investment portfolio. Why sell when they are winning? The reality is that they won't always and it's prudent to sell some of the winners and buy more that aren't doing quite as well. No matter how unnatural this practice of rebalancing may seem, it is an essential part of managing your investment portfolio.

It is a risk-minimising strategy by ensuring that your portfolio is not overly dependent on the success or failure of one asset class or investment style. Nobody, not even the smartest investment analysts, know what asset class, sector, unit is going to win next year, or how quickly things may change. Trimming back on a winner locks in your gains and positions you to benefit from the changes in market cycles.

Nick Stewart

Why do it?

Rebalancing on a periodic basis helps align your investments with your goals. It imposes discipline on investing and prevents you from trading based on emotions.

Most of all it's about controlling risk in a disciplined manner. Something we all have the ability to misjudge. Investors will sometimes battle their advisers about rebalancing and usually it's about feelings.

Just 12 months ago we were in the midst of a serious correction. A year on and we've seen the strongest annual return since 2009.

Both provoke strong feelings. The correction brings revulsion. Investors wonder why their portfolio tilted so heavily toward stocks and should they be selling out. A yearlong positive run brings euphoria. Investors wonder why the portfolio isn't tilted more heavily toward stocks and should they be buying more.

As Vanguard notes about rebalancing:
It's important to keep in mind that the primary benefit of portfolio rebalancing is to maintain the risk profile of an investment portfolio over time, rather than maximise returns. In fact, if a given investor's portfolio can potentially hold either stocks or bonds, and the sole objective is to maximise returns regardless of risk, then that investor should select a 100 per cent equity portfolio.

If an investor is prepared to let their portfolio drift wildly then they need to stop and consider their goals and their attitude to risk.

If they don't want to rebalance during good times would they prefer a 100 per cent stock-based portfolio along with the volatility?

The arrival of the next 15 per cent correction will likely provide them with the answer. A definite no. That's why investors should never let their feelings during market movements drive their decisions.

A commitment to rebalancing ahead of time keeps a portfolio where it should be. It's the easiest form of self-control we have.

• Nick Stewart is an Authorised Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance and KiwiSaver solutions.

• This article is prepared in association with Mancell Financial Group, Australia. The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz