How to maintain a balanced investment portfolio

6 steps to successful investing: #6 Stay balanced

How often do you readjust your investments to restore your portfolio's original balance? Staying balanced is the sixth and final step in the Six Steps to Successful Investing series, and it's one of the most important disciplines any investor can build. Every investor needs to strike a balance between risk and return, but keeping that balance takes ongoing attention.

In this video, you'll learn why staying on track matters so much. We're all different, and some of us are more willing and able to take on risk than others. But once you and your adviser have settled on the right mix of investments to achieve your goals, the job isn't done, because the balance of your portfolio changes constantly, all on its own. Investments that have performed well naturally grow to take up a larger share of your portfolio, while those that have lagged shrink. Left unchecked, that drift can leave you taking far more risk than you intended.

You'll learn why the solution is to rebalance, perhaps once or twice a year, to restore your portfolio's original balance. The main reason is to control your risk, ensuring your portfolio doesn't become overly dependent on any single asset class. But rebalancing can also improve your returns, because markets don't rise indefinitely, and asset classes that have been out of favour eventually come back. Since no one can reliably predict which asset will do best in any given year, or when a market will peak or bottom out, regularly selling some of your winners and topping up your losers keeps you well positioned to benefit from shifts in market sentiment.

The takeaway: staying balanced is the sixth and final step to successful investing. A simple, disciplined rebalancing routine helps you keep your risk under control and stay on course toward your long-term goals, whatever the markets happen to be doing.

Chapters / Key points

• Why every investor must balance risk and return
• Why staying on track matters once your mix is set
• How your portfolio's balance drifts on its own over time
• Why winners grow and laggards shrink within a portfolio
• Why you should rebalance once or twice a year
• How rebalancing controls your risk
• Why rebalancing can also improve your returns
• Why selling winners and buying losers keeps you well positioned
• Why staying balanced is the final step to successful investing

Transcript

Six steps to successful investing #6: Stay balanced

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.