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Why it's important to rebalance your retirement investments

Published 21 January 2024

Why it's important to rebalance your retirement investments

Investing is an essential tool for building wealth and securing a strong financial future. Although gaining high returns on investments is the ultimate goal, it's crucial to understand investment portfolios are not static; they require careful monitoring and periodic rebalancing to achieve maximum profitability.

Rebalancing is the process of adjusting your portfolio back to its original asset allocation. It ensures your portfolio remains in line with your investment goals and risk tolerance, and can lock in profits from overperforming assets and take advantage of buying opportunities.

Why Investments Move Up and Down

Investments are subject to market volatility, influenced by a variety of factors such as economic conditions, political events, and company performance. These fluctuations can cause your investment portfolio to deviate from your initial asset allocation.

For instance, if you have a portfolio of 60% stocks and 40% bonds, a surge in the stock market may increase your stock holdings to 70%, exposing you to higher risk.

Conversely, during a bear market, stocks may decline while bonds remain stable or even increase. This can result in a decrease in your stock holdings and an increase in bond holdings, making your portfolio more conservative and potentially limiting returns.

You may also add property to your portfolio, which provides diversification, but might also cause your asset allocation to deviate from your initial plan.

The Frequency of Rebalancing Your Investments

The frequency at which you should rebalance your investments varies depending on individual factors such as age, risk tolerance, and personal investment goals. However, as a general rule of thumb, rebalancing should be done at least once a year or whenever your portfolio deviates significantly from your desired asset allocation.

For young investors with longer investment horizons, annual rebalancing may be sufficient. On the other hand, older investors may need to rebalance more frequently, allowing them to reduce risk and protect their investments as they near retirement.

Rebalancing in the Lead-Up to Retirement

As individuals approach retirement, rebalancing investments becomes exceedingly important. While the primary goal often shifts from accumulating wealth to generating income, it is important to keep in mind that even after retirement it is vital to ensure our funds continue to grow to meet our increasing life expectancy. This often involves reducing risk by shifting more growth orientated assets into income-producing investments. This is particularly relevant with Australian shares that are often higher income generating due to their propensity to pay high dividends than most international shares.

Regular rebalancing ensures retiree portfolios remain appropriately exposed to market volatility, whilst allowing for any likely market volatility. A balanced portfolio can continue to provide a consistent income stream during retirement, which can be crucial for maintaining one's lifestyle.

Therefore, proactive rebalancing is a key strategy in safeguarding retirement finances.

Tips for Rebalancing Your Investments

Rebalancing your investments may seem like a daunting task, but here are some simple tips to help you do it effectively:

  • Set a date: Decide on a specific time each year, or every six months, to review and rebalance your portfolio.
  • Stick to your plan: Don't let emotions dictate your investment decisions. Stick to your original asset allocation plan and rebalance accordingly.
  • Consider transaction costs: Rebalancing may involve buying and selling investments, which can incur transaction costs. Be mindful of these costs when making decisions.
  • Seek professional advice: If you're unsure about how to rebalance your investments, seek guidance from a financial adviser who can help you make informed decisions, especially as your needs change and you may require other strategies to meet your goals.
  • Keep track of your investments: Regularly monitoring your investments allows you to identify when they deviate from your desired asset allocation and allows you to take action promptly.

In summary, investments are for the long-term and regularly rebalancing your investments is crucial for achieving maximum returns and mitigating risk in Australia's ever-changing economy. By setting a schedule, sticking to your plan, and seeking professional advice when needed, you can ensure your investments are well-positioned for continued growth and financial stability. Don't neglect the importance of rebalancing; make it an integral part of your investment strategy for long-term success