Portfolio re-weighting is an essential risk management process that every investor should use
But what is portfolio re-weighting and why should you do it?
What is ‘portfolio weighting’?
Portfolio weighting describes the percentage of an investment in a portfolio – usually by asset class. For example, a typical balanced fund will have around a 60 per cent weighting in growth assets and 40 per cent weighting in defensive assets.
As time passes, portfolios change as different investments perform better or worse than others. These returns change your portfolio weightings which means your portfolio may no longer align to your chosen risk profile, potentially exposing you to more or less risk than you intended.
Re-weighting means your portfolio is shifted back to your original risk profile.
Another reason you may want to re-weight is that your risk profile has changed. As we get older and our circumstances change so does our tolerance for risk.
If you are 30 years old and planning 35 years ahead for retirement, you will probably be happy to accept greater risk, as short-term volatility can be tolerated in order to achieve your goals. On the other hand, if you are nearing retirement, you’ll probably not want to risk losing your money as you don’t have the luxury of time to recover from losses.