Why You Need To Know About Rebalancing Now

Why You Need To Know About Rebalancing Now
Underwater by Julian Cohen. Why?

Regularly rebalancing your investments is one of the world’s most commonly recommended strategies to protect your pension fund, yet surprisingly few people do it and often lose money as a result.

As Rebalancing Can Be One Of The Keys To Ensuring Your Pension Fund Lasts As Long As You Do, Follow The Insights Below To Put In Place The Best Rebalancing Strategy To Meet Your Needs

An Active Rebalancing Policy Can Deliver You Healthy Long Term Profits

For decades, rebalancing has been advocated across the globe as being a vital part of the investment process. 

It enables you to bank profits when your riskier assets have performed well, preventing you from losing an unexpectedly large part of your pension fund if, or more relevantly, when the market falls.

So it’s rather alarming to discover that very few people operate a regular rebalancing plan.

How Does Rebalancing Work?

Watch the short video below on rebalancing to see how it works in practice.

Spoiler Alert

Never try to time the market.  Have a discipline that keeps you buying when stocks are falling, and selling when stocks are rising.

Whether you actively manage your SIPP or SSAS, or whether you invest in passive funds, rebalancing resets your pension fund in line with your attitude to risk. 

We’ve looked at rebalancing before, in our article entitled What Is Rebalancing And Why You Need To Do It?

As you’ll see if you click the link above, there are many different ideas on when a rebalancing event should be triggered.

Some people choose to automatically rebalance their pension fund once or twice a year at a given point in time.  It’s arguably the simplest method of rebalancing, avoiding the risk of guessing the best time to sell some of your more profitable holdings.

Another method is to trigger rebalancing if your portfolio drifts an agreed percentage from your original allocation.

For example, if your riskier stockmarket assets have grown particularly well from their original allocation of say 50 per cent of your pension fund to be worth 65 per cent of your pension fund, it triggers a rebalancing event.

Essentially, you’ll be cashing in your stockmarket assets at a profit, which can protect against a downturn in their value.  And at the same time, you’ll be reducing the overall risk level of your pension fund.

A third, and arguably vital reason for rebalancing arises if you become more risk averse. 

Typically, that’s when you near retirement or you start drawing benefits from your SIPP or SSAS.  For at that point, the likelihood of you being able to top up your pension fund with further contributions, to compensate for a fall in your fund value, may well be limited, or indeed impossible.

The Problem With Rebalancing

It’s counter-intuitive!

If your riskier stockmarket assets have significantly grown in value, making you a lot of money (albeit on paper), and there’s no immediate sign the end of that growth is in sight, it’s a natural tendency to let your investments run a bit longer.

The trouble is that none of us has a crystal ball, and therefore, it’s absolutely impossible to know when the growth has reached the top and the next movement is downwards.

Banking a profit is never a bad thing, particularly if in the process, you’re resetting your pension fund in line with your view of risk.

How To Rebalance Your Pension Fund

The general consensus is that it doesn’t really matter what triggers your rebalancing event, as long as something does!

To help you get to grips with rebalancing in more detail, we have great pleasure in providing you with a series to links to some fabulous words of wisdom from Monevator.

If you only read one of these articles, pick the one we’ve placed first on the list below. 

It’s perfect for people with a SIPP or a SSAS, or any other form of ‘money purchase’ pension for that matter.

Getting older? Admit it when you rebalance your portfolio

Rebalancing asset allocations

How to rebalance your portfolio

When should you rebalance your portfolio?

Factors that may influence how and when you rebalance

Rebalance your portfolio for your benefit, not the tax man’s

The simplest way to rebalance your portfolio

Use threshold rebalancing to lower your portfolio’s risk

Rebalance with new contributions to save on grief and cost

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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets

That's our opinion.  Not just because AJ Bell was the first company to offer an online SIPP.  Nor that it's received many prestigious awards.  And not even because the wife of SIPPclub's Founder has an AJ Bell SIPP.  It's because it's one of the most competitive stockmarket SIPPs on the market. 

Over time, charges can wipe out a huge part of your fund.  We like AJ Bell because there are no set-up costs.  If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund.  And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).  However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.

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