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The following is a Guest Post by Annie Button.

If you have investments or are a personal finance geek, then you will definitely be familiar with the term ‘rebalancing your investment portfolio.’ However, if putting money into the stock market is a relatively new concept, you may want to know more about why, when and how you balance your investment portfolio.

Even if you are a risk-averse investor with a tendency to buy and hold, you should consider rebalancing your portfolio from time to time. The world of investment management is complex, but certain investment principles will hold you in good stead.

In this article, I’ll be looking at why you should, when is a good time to, and how you should rebalance your investments. First of all, let’s take a look at what rebalancing your portfolio means.

What does it mean to rebalance your investment portfolio?

Most investment portfolios are made up from a range of different types of investments, such as equities and bonds. As an investor, you are hopefully aware that stock performance can move more dramatically (up and down) than bonds.

Your investment portfolio should have a target allocation with a stock/bond split to match how risk averse you are. Rebalancing is the process of realigning the stock/bond split which can change according to how stocks perform.

Why rebalance your investment portfolio?

Investment portfolios are built for long-term growth and nothing wins forever. Reeves Financial, explains that successful investing is a lot like exercise (no pain, no gain), but requires commitment and the revisiting of investment goals at regular intervals to account for changes in assets, circumstances and investment priorities.

Investment strategies should include various fund types to obtain a diversified approach and ensure investment goals are achieved. Some flexibility is required to keep on track. Understanding your risk appetite is important and this can change so is another reason why you may wish to rebalance your portfolio from time to time.

Changes in the market over time, changes in investment goals and changes to personal risk appetite are the three main reasons why investment portfolios need to be rebalanced.

When should you rebalance your portfolio?

There isn’t a definitive time to rebalance your investment portfolio, but most financial advisers recommend reviewing investment portfolios annually. Timing should be guided by your individual risk tolerance. Remember, past performance is no guarantee of future performance and a more diversified portfolio should ultimately help to mitigate any losses.

How do you allocate assets?

Asset allocation simply refers to the way in which your portfolio breaks down into different investment types. So, how do you decide what to invest in? Do you want a socially responsible portfolio which only invests in socially responsible companies? Do you only want to invest in UK companies, emerging markets (higher risk), US equities, Japan equities or corporate bonds?

There are thousands of different types of investment funds. You’ve probably realised by now that allocating assets is a personal quest and should always reflect your risk appetite.

Let’s take a quick look at some investment jargon.

Stocks and shares: A unit ownership or a slice of a company (risky if you only invest in one, because if the business fails, you’ll lose all of your money).

Bonds: An IOU – the company borrows money from you and pays you back at an agreed date, as well as paying you interest in return.

Property assets: Homeowners make an investment by buying their own property, but investors can also choose to invest in commercial property through a property fund.

Commodities: Are not usually invested in over the long term as they can be very volatile. Commodities are things like wheat, oil, gas, wood and metals.

Funds or unit trusts:  Money is spread across several companies by way of shares and bonds. Fund managers pick companies they think will make the most money. Some funds are run by computers (tracker funds). Funds are open-ended, meaning more shares can be issued as long as buyers want them.

Investment trusts: Similar to funds, investment trusts are pooled investments. Unlike funds, investment trusts are companies in their own right listed on the stock exchange. Your investment will be in the investment trust company and a portfolio of other companies selected by the fund manager. Investment trusts are ‘closed ended’ meaning there will only ever be a set number of shares to buy, irrespective of demand.

No matter how much you think you know about the stock market and investments, it’s always a good idea to seek specialist help. Remember to consider the worst-case scenario when rebalancing your investment portfolio and don’t opt for something riskier than you are comfortable with.