Why investors should relook their portfolio allocations at the start of the year

One of the recommended ways to manage your investments is through portfolio allocation. Portfolio allocation is your decision to distribute your fund among different asset classes such as equities, bonds, commodities, etc.

The idea behind portfolio allocation is to diversify your investments to offset risks and enhance returns. This ensures that when one investment type isn’t doing well, you don’t feel the pinch as much because other investments are thriving.

Typically, portfolio allocation depends on investors’ risk appetite and financial goals. For instance, those who are conservative or have been saving for a particular short-term financial goal, often go with 20% stocks and 80% bonds. This allocation strategy shows they prefer stable returns over risky higher returns.

Similarly, for moderate investors with a mid-to-long-term horizon, a medium-risk portfolio with a 40:60 ratio between stocks and bonds is ideal. Growth-oriented investors with a longer time horizon typically have 70% or more funds allocated for stocks.

However, smart investors rebalance their portfolios periodically to align with their evolving needs and market conditions.

What is Portfolio Rebalancing?

Portfolio rebalancing means shuffling the composition of your investments in different asset classes. When and how you rebalance your portfolio depends on the change in market conditions and your financial goals. 

You can either rebalance your portfolio at specific time intervals, such as quarterly, semiannually, or annually, or when your portfolio becomes obviously unbalanced.

However, revisiting your portfolio allocation too often is also not advisable, as this could induce a trading mentality. The trading costs could add up if you rebalance your portfolio too frequently.

Rebalancing a portfolio requires you to set your target allocation for each asset class, and divert funds accordingly from one asset class by selling it and investing in another asset.

Why Portfolio Rebalancing Should be a Second Nature to Investors

As an investor, it’s a healthy practice to keep an eye on how your investments are performing. Chances are that the allocation to a particular asset class would require re-evaluation every six months or so.

There are various reasons why you should rebalance your portfolio.

  • Shift in lifestyle or financial goals: It is quite common for investors to feel that their financial goal has changed by the end of a year and that their portfolio requires rebalancing. This happens due to various factors such as:
    • Growth vs dividend focus: Suppose your financial goal was inclined towards having an additional monthly income. So you allocated 30% of your fund towards stocks that gave dividends. By the end of the year, you get a promotion with a substantial hike in salary. Now instead of having an additional monthly income, you might feel inclined to grow long-term wealth for your retirement. Keeping this in mind, you might want to rebalance your portfolio and divert funds from dividend stocks to growth stocks.
    • Risk appetite: A substantial hike in salary means you can take more risk in the hope of higher returns. With a higher risk appetite, you can consider rebalancing your portfolio so that you give higher weightage to equities and reduce your allocation to cash holdings.
  • Risk Management: Over time, the market changes can cause your portfolio to drift away from its target asset allocation. For example, if certain assets perform well, they might become a larger portion of your portfolio, potentially making it riskier or more conservative than you initially planned. Rebalancing helps in realigning your portfolio with your risk tolerance and overall investment strategy, ensuring that you don’t take on more risk than you’re comfortable with or potentially miss out on growth opportunities.
  • Taking Advantage of Market Conditions: Rebalancing forces you to buy low and sell high. For instance, if a particular asset class like stocks has done exceptionally well, rebalancing might involve selling some of those stocks (while their prices are high) and buying more of an underperforming asset like bonds at a lower price. This disciplined approach can help in optimising the return of your portfolio over time. 
  • Practising Discipline: The schedule and conditions of portfolio rebalancing is normally planned out beforehand. This can help reduce compulsive investment decisions driven by fear or greed. 
  • Risk associated with cash allocation: While liquidity is essential for emergencies or short-term needs, keeping an excessive amount of cash can be detrimental to your financial goals. With inflation eroding your cash’s worth, you should check if your returns match the inflation’s pace. You also have to be cognisant of variations in interest rates, to optimise your returns. For instance, if you have too much cash invested in instruments like fixed deposits, you might be on the losing end if interest rates go down. In that case, you might want to allocate some of your cash to other instruments with higher returns.

Automatic Portfolio Rebalancing With Syfe

While portfolio rebalancing is a must for an investor, it is not always easy to follow the market and come up with a rebalancing plan.

If you don’t have time or experience to rebalance your portfolio, you can consider investing in Syfe’s Managed Portfolios.

Investing in Syfe’s Managed Portfolios means you don’t have to worry about rebalancing as it is done by the investment team. Portfolio rebalancing by Syfe ensures that your new investment portfolio is aligned with your long-term strategy.

To help you further diversify your investments, Syfe offers different types of portfolios keeping all components of your investment in mind.

  • Core Portfolios: Core Portfolios, Syfe’s flagship offering, are fully-managed and globally diversified. We offer four Core portfolios, designed to address some of the most important customer goals in life, from purchasing their first home to retiring comfortably. Core Portfolios’ investors get two automatic portfolio rebalancing a year.
  • Income+: Income+ portfolios are designed for diversified income with PIMCO’s best-in-class active funds. Currently, Income+ portfolios offer monthly dividend payouts of 4% to 6% per annum. We periodically rebalance your portfolio.
  • REIT+: REIT+ is an optimised portfolio of the 20 most well-known Singapore REITs. The portfolios are rebalanced twice a year. 
  • Brokerage: With Syfe Brokerage you can choose to allocate funds to specific stocks or industries. You can make fractional investments and choose to invest in the US or Singapore markets.
  • Cash Management: Syfe’s Cash Management offering exposes you to asset classes that let your idle cash grow at 3.7% to 5.4% per annum, and at the same time enjoy the freedom of no lock-in period.

Previous articleWeekly Kick Start | 13 January 2024
Next articleWeekly Kick Start | 20 January 2024