There is more to maintaining an optimised investment portfolio than adopting a simple buy-and-hold, "set and forget" approach. Even if you are investing with a long-term horizon and not intending to touch your money for some time, your portfolio will still need to be revisited on a regular basis to ensure that it is still appropriately positioned to deliver on your investment objectives.
Over time, it is more than likely that the various assets in your portfolio will deliver different returns, particularly as markets move and various holdings outperform and underperform others. This will inevitably see the composition of your portfolio drift away from its original optimal asset mix. It may also inadvertently result in an increase in your risk exposure, particularly if the mix becomes increasingly concentrated to higher risk (and potentially overpriced) asset classes (such as shares) and underexposed to the more conservative investments. For these reasons, we believe it is important that portfolios be periodically "rebalanced" back to its target asset mix.
There is a wealth of research studies which have shown the benefits of portfolio rebalancing. One respected paper by Burt Malkiel and Charles Ellis demonstrated that rebalanced portfolios generated an average of 0.4% more per annum over a ten year period (1996 and 2005) - and with less volatility - than portfolios that were allowed to drift. 7 Numerous other studies (e.g. Plaxco & Arnot 2002, Swenson 2005; Forbes 2011) have found similar results over different time periods.
At Six Park, we closely monitor the asset mix in your portfolio and undertake periodic rebalancing to ensure your funds are allocated in line with your original intended risk-return profile. Our rebalancing techniques seek to minimise unnecessary transaction costs and tax consequences wherever possible. We do this by systematically directing new cash inflows into underweight asset classes, by favouring overweight asset classes as a source for any withdrawals and by periodic rebalancing when a portfolio’s asset allocation has drifted from its targets by predetermined minimum thresholds.
Of course, it is not just changes in your portfolio mix which can trigger a need for rebalancing. Over time, changes in your personal circumstances can also alter your investment objectives and tolerance for risk, and this can necessitate adjustments to your asset allocation mix too. At Six Park, we undertake annual client reviews in which all clients are asked to review their personal circumstances, investment objectives and risk tolerance levels. Where appropriate, we require clients to re-take our risk assessment process to ensure that their investment plans remain relevant and appropriate. We also remind our clients to notify us of any other relevant changes in their circumstances as part of our regular reporting processes.
In addition to providing regular rebalancing and portfolio reviews, Six Park also provides its clients with an additional overlay of portfolio and risk management oversight under the guidance and stewardship of our world-class Advisory Board. Whilst still maintaining a focus on passive investment strategies, we use our Advisory Board’s deep experience and insights to help us (amongst other things):
Consistent with our passive investment focus, we use these insights to help position our portfolios for long-term growth - rather than to try to time the market and/or pick winners. In other words, we use of Advisory Board to help us "spot potholes" on the investment horizon and to help us navigate around these "potholes" by leaning into and/or out of long term asset allocations.
We view our Advisory Board as a key point of differentiation, complementing the delivery of our passive investment focus with a thoughtful and expertly framed approach to overall asset allocation and portfolio management.
7 Burton G. Malkiel, Charles D. Ellis, "Elements of Investing" 2012