Managing Your Portfolio

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One can start investing early if you are planning for a financial outlay (say, a lump-sum educational expense). You don’t have to wait till you are near retirement to start investing.

In fact, people very far from retirement can invest heavily for capital appreciation while people much closer to or in retirement would be investing mainly for income-generation. Say, you have chosen a desired asset allocation plan comprising of a certain percentage of shares, bonds, and cash. What happens after that?


After building your initial portfolio, you have to do is to perform rebalancing on your portfolio of shares, bonds, and cash. Simply put, rebalancing is the act of restoring the percentage of shares, bonds, and cash according to your initial plans after the percentage that these asset classes represent in your portfolio have changed due to market conditions.

In a simple example, assume you have chosen an asset allocation plan that comprises of 50% in shares and 50% in bonds in a $10,000 portfolio. After one year, your shares have appreciated by 20% while your bonds have remained stagnant and so your portfolio would now be worth $11,000 with $6,000 in shares and $5,000 in bonds. The percentage of shares and bonds in your current portfolio would now be 54.5% and 45.5% respectively.

To rebalance, you have two options; 1) sell off $500 worth of shares to purchase $500 worth of bonds, such that your portfolio now contains $5500 worth of shares and $5500 worth of bonds to bring the percentages back to the initial plan; or 2) buy $1000 worth of bonds with new capital such that you now have a $12,000 portfolio with $6,000 in shares and $6,000 in bonds to bring the percentage of shares and bonds back to 50% each.

An asset allocation plan works because the plan is supposed to be providing you with a certain amount of capital appreciation, down-side protection, and income according to your needs. As such, if the percentage of allocation for the asset classes becomes out of whack, your portfolio might not be able to provide you with the financial needs you require from it. 

Studies have shown that rebalancing reduces risk. That is why you have to rebalance your portfolio whenever the percentage of shares, bonds, and cash changes drastically from your initial plan. However, it is also important to recognize that rebalancing might not necessarily bring in higher returns compared to a never-rebalanced portfolio.

While rebalancing your portfolio is important to meet your financial needs, the transaction costs involved as well as the effort needed to do so are important points to consider in the grand scheme of things. In that regard, a simple rule of thumb could simply be to; 1) rebalance annually; or 2) rebalance annually only if the percentage that each asset class represents in the portfolio has changed over a certain threshold from your initial plan (a useful threshold could be +/- 5%).

Choosing the Right Investment Instruments

Lastly, it is also important to keep track of the kind of instruments you purchase as part of your asset allocation plan. For example, if you choose to purchase unit trusts or index funds to make up the portion corresponding to shares for your portfolio, you should take a look at the fund’s mandate to make sure that it fits your investment needs. There might also be unit trusts or mutual funds that invest in both shares and bonds. If so, the mandate would inform you on the percentage of shares relative to bonds that the fund is allowed to invest in. In such a situation, you should also factor in the share of your investment dollars in the unit trust or mutual fund that goes toward bonds and shares in the final make-up of the various asset classes in your asset allocation plan.

Invest and Reap the Rewards

Having a properly defined asset allocation plan can allow you to invest profitably with less risk and prepare for that comfortable retirement you have been looking forward to. Don’t wait too long to get started on coming up with your own asset allocation plans!

The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. 

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