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Portfolio drift

20 November 2015

Without regular reviews, investment portfolios can start to veer off course.

The idea of selling investments that have performed well to invest more money in those that have underperformed feels unnatural. However, that process – called ‘rebalancing’ – is an important part of managing your investment portfolio.

Over time, investments that have done well will account for a greater percentage of your portfolio, while those with lower returns will account for less. So your portfolio will be biased towards the better-performing investments. These shifts can make your portfolio riskier or more conservative than was intended. Of course, the fact that investments perform differently is the whole point of diversifying your portfolio in the first place.

To help keep on track to meet your objectives, it’s important to review your portfolio regularly and make adjustments if necessary.

The charts below illustrate how a portfolio divided equally between equities and bonds could become unbalanced as a result of market movements, and be poorly positioned to capture future performance.

Losing balance

Source: Natixis. The asset allocation shown is for illustrative purposes only. Equities are represented by the S&P 500 Index. Bonds are represented by the Barclays US Aggregate bond Index. Past performance is not indicative of future performance.

 

For any investor looking to the future, what matters even more than today’s returns are tomorrow’s objectives. It is easy to allow emotions to get in the way of good investment decisions, whether it’s a fear of losing out on future returns, a tendency to follow the herd by buying high and selling low, or simply too great a concern over the inevitable short-term market volatility.

Decisions about risk and return should be made on the basis of longer-term investment goals, not short-term performance or impulse. If your investment goals haven’t changed, then neither should the mix of your portfolio.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise.  You may get back less than the amount invested.

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