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Every investor needs to strike a balance between risk and return.
We’re all different. Some of us are more willing and able to take on risk than others.
But once you and your adviser have decided on the right mix of investments for you to achieve your goals, it’s important to stay on track.
The balance of your portfolio changes all the time, without you doing anything.
Investments that have performed well will naturally start to take up more of your portfolio. Those that haven't done so well will take up less of it.
So, perhaps once or twice a year, you need to readjust your investments - to restore your portfolio’s original balance.
The main reason for doing so is to control your risk, to ensure that your portfolio isn’t overly dependent on one particular asset class.
Another reason to rebalance is that it can improve your returns. That’s because markets don’t carry on rising indefinitely. Similarly, sooner or later, an asset class that’s been out of favour will start performing well again.
We don’t know which type of asset is going to do best in any particular year or when a particular market will peak or bottom out.
But as long as you regularly rebalance - selling some of the winners and buying some of the losers - you’ll ensure that you’re well positioned to benefit from changes in market sentiment.
So, staying balanced is the sixth and final step to successful investing.
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