The Importance of re-balancing investments

  • by Graham Bond
  • 25 Apr, 2017

Controlling investment returns

rebalancing investments

An important part of the work we will do for you is to rebalance your investment and pension portfolios on a regular basis, where appropriate.

To rebalance a portfolio means to review and adjust the investments held within your portfolio. The aim is to bring it back into line with its stated objectives and to control the level of risk. Here is an example of how rebalancing works.

Let us consider an investor who has £200,000 to invest. In this example, for ease they will invest into two types of investments. The first is shares and the second is corporate bonds. Corporate bonds allow companies to raise money. The investor puts 50% into each type of investment.

Over the next year, the Shares portion increases in value by 20% and the Corporate Bond part falls in value by 10%.

At the end of this first year portfolio has increased by 5% and they now have:

Shares £120,000
Corporate Bonds £90,000
Total £210,000

The split of the investments has also changed. One part increased in value and the other has fallen. The investor now has 57% in Shares, and 43% in Corporate Bonds. This will increase the level of risk in the portfolio as the shares portion is bigger.

If they do nothing and the next year the Shares rise by 20% and the Corporate Bonds fall by 20%, now the position at end of year two is:

Shares £144,000
Corporate Bonds £72,000
Total £216,000

The portfolio overall is still going up, but the investment split is way out of line. Over two thirds of the portfolio is invested in shares.

If we rebalanced the investment portfolio after twelve months the following would happen. A rebalance would sell some of the shares and buy some of the corporate bonds. The split is now equal 50/50. At the start of year two £105,000 would be held in each investment. The process is repeated regularly so that the investment portfolio moves back to the recommended split.

This is only an example. In reality we would recommend more than two types of investments to be held in a portfolio. We might also include property, cash, overseas stocks and shares as well as overseas government and corporate bonds. We recommend clients rebalance their portfolios as it aims to:

  • Help control the level of risk within the portfolio.
  • Creates a more predictable return the longer the portfolio is held. This will help if you have specific goals and objectives, such as retirement.
  • Automatically take profits from good performing investments and creates a buy low sell high approach. Opposite to most investors.

Recent Posts

by Graham Bond 25 May, 2017

Personal Finance Portal (PFP) has evolved and can now give you access to your entire financial portfolio including all short, medium and long-term savings and investment information in one place 24/7 – anywhere, on any mobile or web device. It features redesigned screens and layouts which makes it much easier for you to use. There’s even a dedicated mobile phone app for iPhone and Android users coming soon.

As well as the great functionality you currently enjoy with PFP, you can also now get:

Additional access to PFP Premium

PFP Premium is an additional service that enables you to collate information on your short-term finances like bank account(s), credit cards, loans and mortgages together your advised products, giving you powerful insight into your total net worth. Plus, you’ll also be able to receive alerts and insights into spending and saving habits so you can keep track on how you’re progressing against the goals you’ve set. Why not give it a try?

Of course you can still view your fund information and financial portfolio at the click of a button. So whether you’re looking for an up-to-date valuation of your portfolio, want to assess how you’re progressing against your goals or simply wish to get in touch, PFP has it covered.

Secure messaging between us and you

With email and post increasingly open to being intercepted, we treat the security of the data you share with us with utmost importance. PFP provides you with a secure messaging service, so you can quickly get in touch with us and have the peace of mind of knowing that any information you share is encrypted and completely private.

A secure document vault

PFP provides you with a secure document vault, so you can house all your financial documents online where they are secure and fully backed up - much safer and more convenient than the bottom of the filing cabinet.

The new service will offer improved screens This upgrade will provide improved features for our clients. The link below give an overview of the new PFP

If you are not already using the PFP facility and would like to please contact us.

by Graham Bond 25 May, 2017

Capital Gains tax on shares and investments. When you sell shares, you will either make a profit or a loss. Profits made are classed as a capital gain.

There are some exemptions where capital gains tax (CGT) is not liable:

  • Individual savings accounts (Isa’s)
  • Venture Capital Trusts
  • Enterprise Investment schemes
  • Gifts to Charity
  • Government Securities
  • Corporate Bonds of a qualifying status
  • Transfers of shares between spouses or partners in a civil partnership
  • betting, lottery or pools winnings

Apart from the exemptions, sales or disposal of the shares will normally be classed as a potential capital gain.

Each person has an allowance each year they can use to reduce the amount of CGT they might pay. If your total gains for the tax year are below the “annual exempt allowance” you will not have to pay any tax.

If your gains are over the allowance then tax would be due on the balance. It might also be possible to offset any losses from previous tax years. If you do not use your annual exempt allowance for CGT in a tax year, then you lose it and you cannot carry it forward to another year. The CGT tax rate payable will depend on your total income and any gains made for the tax year in question.

The government changed the way Capital Gains were taxed from April 2015. The amount of tax due will depend whether you are a basic or higher rate taxpayer.

by Graham Bond 23 May, 2017

If you sell a property, you might have to pay tax. This tax is called capital gains tax. The amount you might have to pay will depend on the amount of profit you make.

If the property you are considering selling is your main residence then you would normally be entitled to “Principle private residence relief”. This relief normally allows you to you to sell your home without incurring capital gains tax (CGT).

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