Rebalancing is all about portfolio review, and aligning it with your investment strategy. Lately, Hong Kong’s stock market has surged to new highs since the GFC in 2008, while a bond index tracking the performance of major pan-Asia bonds has dipped to new lows. Neither a day trader nor a professional bond investor, you might just shrug and say, hey, does it matter to me?
When a fund manager is responsible for actively trading on your behalf, that doesn’t mean you’re relieved of the obligation to monitor and review your mutual fund or MPF portfolio and make adjustments in a timely manner. As part of the portfolio review process, rebalancing is key to successful investing over time, equally important as dollar-cost averaging .
For most of us who’re still in the workforce, a typical portfolio consists of a mix of stock and bond funds. Let’s say your asset allocation is 70% stock and 30% bonds. If stock prices go up for a few months, which we have witnessed in the past month, your allocation to the stock market (let’s say, Hong Kong stocks) might have increased to 80%, and the allocation to bonds reduced to 20%.
Now, you have unknowingly become overweight in equity, and underweight in fixed income, throwing your investment strategy a bit off track as a thirty-something. The situation suggests that you have to sell some investments in the overweight asset class and buy some in the underweight asset class once in a while, to keep your asset allocation in line with your goals.
So what is the benefit of rebalancing?
What’s the logic behind it? Regular rebalancing allows and forces you to lock in the profit gained from a particular asset class that has appreciated in value and buy another asset class that comes cheaper than before. It also prevents you from making the same old mistake of trying to time the market, just as what the dollar cost averaging technique is intended for.
As a rule of thumb, rebalancing your portfolio once a year ensures that your asset allocation stays on target while keeping transaction costs to a minimum. Nowadays, most banks, brokers and fund houses offer a dedicated website to allow you to switch your funds online. Rebalancing is easier than you think. Just mark down the date(s) when you want to on your calendar.
Rebalancing your portfolio regularly also encourages you to think about adjusting your allocation mix as your life situation or financial goals change. That’s also an opportunity to review and evaluate the performance of all mutual funds in your portfolio in the past year, and decide on whether to withdraw from underperforming funds.