Time to rebalance your portfolio


The new financial year marks an ideal time to rebalance your portfolio to ensure it matches your investment goals and tolerance for risk.

With a new year looming, it's the perfect time for investors to take stock of their investments. A simple but effective way to "spring clean" your investment portfolio is to consider your allocations and whether you might be overweight or underweight certain asset classes.

Even though your portfolio may have been well balanced when you first constructed it, it's important to consider that your weightings can change over time. For example, you might end up having a greater allocation to certain asset classes as a result of outperformance. Meanwhile, your circumstances can change, requiring a reassessment of your asset allocations.

rebalance your portfolio

The goal of rebalancing is to restore your portfolio to a mix that matches your investment goals, strategy and tolerance for risk. One asset class that has an important role to play in a well-balanced portfolio is fixed income. For investors with lower risk tolerance, such as those close to retirement, you might need a more defensive portfolio. Even if your risk tolerance is relatively high, there is a chance you may still benefit from de-risking your portfolio given the continued equity market volatility and the tendency for Australian investors to be underweight defensive assets.

The need for more defensive portfolios

Tax office data shows that as of September 2015, just 1% of the $590 billion worth of assets in Australian self-managed super funds was invested in fixed income, compared with 26% in cash and 29% in equities. This stands in contrast to the average allocation of Australia's 10 largest super funds, which have 22% of their portfolios in fixed income. If ATO data is anything to go by, there's a good chance you might be overweight in equities or cash.

Fixed income traditionally has much lower volatility than equities, offering capital stability plus regular income. A general rule of thumb is that a balanced investment portfolio should be made up of 30%-40% fixed income. Corporate bonds are worth a look

One of the reasons behind Australian investors' low allocation to fixed income has been the limited investment options. The introduction of XTBs (exchange traded bond units) on the ASX in 2015 means that SMSF and retail investors can now gain direct exposure to the returns of the corporate bond market in Australia. With term deposit rates tracking interest rates down to all-time lows and continued equity market volatility, there is a growing need for higher-yielding fixed-income investments, such as corporate bonds.

Compared with other types of fixed income, such as cash and term deposits, corporate bonds can potentially offer higher returns without the volatility of shares or hybrids. If you're looking to diversify your portfolios and bring more capital stability and regular income to your investments, they may be worth a closer look.

Top tips for creating a well-balanced portfolio

  • Review your investment goals regularly and consider your current and future risk tolerance.
  • Avoid over-exposing your portfolio to one particular asset class; ensure you are diversified across investments.
  • Create a schedule for reviewing your portfolio regularly - it might be every quarter, twice a year or just once a year. Depending on what works for you, just make sure it's locked in your diary.
  • Consider seeking professional advice if you want to make sure you're making smart investment decisions.

Richard Murphy is chief executive officer of Australian Corporate Bond Company.


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