Rebalancing your portfolio

Over the last 100 years we have seen markets go up and we have seen them come down again. You can take almost any investment: property, gold, shares, cash, bonds and take any economy: USA, Europe, Japan, China, South Africa, Argentina etc. and they all fluctuate around their trend line over time.

Now there are 3 ways to handle this:

Do Nothing: If you have a very long time and you don't touch your investments, you will eventually receive the inherent return of the investment you are in, let's call it the "trend line return". If you are invested in shares, you will receive the highest return and if you are invested in cash, the lowest. The problem with this strategy is that you might have to wait an extremely long time for the trend line return due to the irrational nature of the market!

Actively trade: Here you try to time the market by selling your investment when the return is high and buying an investment when it is cheap. This method requires you to know more than the rest of the investors in the whole world and is doomed in the long run. The problem with this method is that the information regarding an investment is available to everybody at the same time and because of this already reflected in the price. Lots of people make the mistake to think that because they get it right 2, 5 or even 10 times, they are clever and not just lucky!

Rebalancing your portfolio: By this I mean deciding how much money you want to invest in the broader layers of the investment universe namely: country, currency, asset class, sector and instrument, and sticking to those allocated percentages no matter what. On a predetermined interval, you evaluate your portfolio and sell those areas where you have a higher percentage due to good performance, and buy those areas where you are under your predetermined percentage due to bad performance.

Let's take an example:

You decide to start your portfolio with the following percentage allocation:

• Equity 40%
• Property 20%
• Bonds 10%
• Gold 5%
• Private Equity 5%
• Cash 10%
• Hedge Funds 10%

You decide to invest in the following countries:

• USA 40%
• Europe 30%
• Japan 10%
• South Africa 5%
• East Asia 10%
• South America 5%

You decide to invest in the following currencies:

• US$ 40%
• Euro 40%
• Rand 5%
• Yen 5%
• Pound 10%

And so on!

Now if you decide to rebalance your portfolio on the 30 June and 31 December every year, you might find that your Equity exposure went up to 45% of your total portfolio and your Bonds went down to 5%. What you will do now is take the 5% profit you made in Equities and buy more Bonds at the lower price to get back to the Equity 40% and Bond 10% ratio.

The same should be done on the other levels as well, if exposure in the USA went down to 30% and Japan increased to 20%, rebalance!

WHY???

Because this will force you to leave emotions out of your decision making and stop thinking that this time is different! It will also ensure a smoother long term return and reduce the risk of thinking that you can beat the market or go for the one more year of spectacular growth in a specific area, just to lose at all and having to start again.

Problem: There is nobody out there that will do this type of rebalancing for you and you will have to do it yourself. Financial advisers will do the initial planning to determine how you should invest your money between all the layers but then they will allocate the money to the different products and leave it to grow or fade.

The good news is that there is a Fund Manager out there that does manage a fund based on rebalancing.