Portfolio rebalancing

How do I know how I’m doing?

With all investing, the main thing to remember is that you’re taking on risk – that’s why you’re being rewarded with the potential for gains. So, it may be wise to compare the return on your investments (after fees) to what you could have got if you’d sunk all of your money into something with a near-zero risk of losses.

Professional investors call this the risk-free rate: they generally use 3-month US government bonds as a benchmark, as the American government (like the Lannisters) has never failed to honour its debts… yet. 👀

That’s not the only comparison available, however. You might want to compare your portfolio’s performance with that of a broad measure of the stock market. The MSCI World Index is a good proxy of global stocks in rich countries, for example, while the FTSE 100 and S&P 500 track the share price performance of the biggest companies in the UK and US. 📈

Try not to get too obsessed 😰 with comparing your portfolio to these indexes, though. Unless your portfolio is entirely in stocks, it’ll likely rise more slowly than the stock market. But you’re sacrificing those increased gains for lower risk: if the stock market falls, a diversified portfolio won’t be hit as badly.

Is there a way to take that into account?

There certainly is. Professional investors look at risk-adjusted returns. These aim to account for it being easier to win big if you take on lots of risk.

One common measure is the Sharpe ratio, which is basically returns divided by volatility (how much prices swung up and down). The ratio is helpful for tracking the performance of a balanced portfolio because it shows you if you could be doing better without taking on more risk.

You’ll need to do a bit of math to calculate this, but it could well be worth your while (plus, it’s a chance to remember your school days 🤓 ). As a general rule of thumb, a ratio below 0.5 is considered poor – anything above 0.5 is decent, above 1.0 is good, and if you’re getting above 2.0, please give our team a call and teach us how…

What if making money isn’t my only measure of success?

Good for you, Enlightened One. Investors are increasingly taking into account how much positive impact ♻️ their investments have on the world, whether they’re actively funding big renewable energy projects or just keeping their cash away from tobacco companies.

It can be hard to quantify just how much impact your investments are making, but there are ways of evaluating how much of your portfolio is made up of “good” 👍🏼 versus “bad” 👎🏼 investments.

You’ve now got a toolkit ⚒️ for fixing up your portfolio. We’ve walked you through how to choose an asset split that’s right for you, stick with it over time – tweaking where necessary to ensure you’re still on track – and talked about measuring your investments’ success to see if you should be doing anything differently.

In this learning guide, you’ve learned:

🔹 Building a diversified portfolio can be a good way to protect yourself from the lowest lows of the market.

🔹 Deciding how to split up your cash across investments is a question of how much risk you’re willing to bear.

🔹 Rebalancing is all about keeping your chosen strategy on track over time. 🎯

🔹 It’s arguable as to whether rebalancing will boost your gains, but it may stem your losses. 🛡️

🔹 Comparing your investments’ performance to others can be a good way of checking you’re on the right track.

And now that you’ve got the knowledge, we’ve got the tools! It’s down to you to take the time and try them out! 🔭

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Remember - when you invest your capital is at risk. This learning guide is for information purposes. Past performance is not a guarantee of future returns.