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Portfolio Rebalancing

April 22, 2020

The asset allocation or the investment mix of a portfolio is designed to meet an appropriate risk profile of an investor and typically consists of Global Equities and Global Bonds.

Rebalancing a portfolio is the process of bringing the current asset allocation back into line with the original or intended asset allocation.

Over time, asset prices move at different rates and these changes cause the portfolio to naturally come out of allocation and we want to try to maintain the intended, or as reasonably close to, the intended allocation to maintain the desired risk profile.

During bull markets Global Equities increase their value and become a higher allocation, relative to the Global Bonds. During bear markets, Global Equities may fall and become a smaller allocation relative to the Global Bonds.

A 60/40 Global Equities/Global Bonds allocation is only 60/40 on day one after which is changes occur, small changes are tolerable, but larger changes could cause the portfolio to become a 70/30 portfolio, and therefore carry an unexpected or desired increased risk.

We rebalance clients’ portfolios periodically, this typically is annually, or occasionally during market extremes interim rebalances are carried out.

In the current market conditions, arguably market prices of one asset class, Global Equities, have become depressed, relative to Global Bonds. Prices are discounted because of the uncertainty of future company profits.

At the same time, the Global Bond (fixed interest securities – basically loans that can be traded) have risen as money ‘flies to safety’.