Staying aligned to your goals

An animated video on the importance of rebalancing a portfolio to keep it on course with its investment goals.


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A lot of effort goes into creating a good investment portfolio: defining goals and choosing the right mix of assets to meet those goals, always taking account of acceptable risk. 

But an investment portfolio doesn't stand still. It responds at every moment to news and events. Over any given period, some parts of the portfolio will perform better than others. 

It is because the value of financial investments changes so much that we create portfolios. As one investment falls in value, another will rise. The portfolio gives us diversity. It spreads our risk. 

Over time, some of this movement will even out. That is the magic of a diversified portfolio. But the portfolio will not stay the same. The art of good asset allocation is to combine higher-risk, higher-return investments with those that are lower risk but which may grow less. 

If the portfolio is left untended, the higher risk, higher growth assets will gradually come to dominate. To use a simple equity and bond portfolio as an example, higher risk equities will gradually become a larger and larger proportion of the portfolio because they are likely to produce a higher long-term return than bonds. 

This may mean achieving the required returns sooner than expected. But it may also mean failing to achieve expected returns when they are needed. Higher risk is likely to bring higher reward, but only for those who have time to wait. 

To smooth out this uncertainty, a portfolio needs to be regularly rebalanced. Rebalancing can be done twice a year, but often once a year will be adequate to avoid undue costs.

All this means is selling some of the assets that have performed most strongly, and have become a bigger part of the portfolio than we have planned, and reinvesting the money in seets that have not performed so well, and whose proportion has shrunk. It’s good investment practice and it will help to keep the portfolio on its agreed allocation target. Some funds even do this authomatically for you.

The key principle to bear in mind is that investment is about achieving goals and that asset allocation is about creating portfolios that meet an investor’s goals. Rebalancing is simply the process that keeps the portfolio in line with the goals.

Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

Other important information:

This video was produced by Vanguard Asset Management, Ltd. It is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

If this is to be used on third party websites for an audience of professional investors as the submission suggests I would also include the for professional investors disclaimer at the top.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

© 2018 Vanguard Asset Management, Limited. All rights reserved.