The Right Balance

June 2010

It’s human nature to try and avoid losses rather than securing gains, which is why volatile financial markets make us feel so anxious.

Good advice can help take these natural emotions out of the equation and identify what we can and can’t control.

Although we can't control the ups and downs of financial markets, we can control the risk in our portfolios through broad diversification, astute asset allocation and regular rebalancing.

Good advice also stresses the virtues of discipline and patience.

Having a detailed plan designed for our own risk appetites, lifestyle needs and long-term goals goes a long way to removing the anxiety from the investment process.

In volatile markets, knowing that we have a diversified portfolio helps us manage our personal tolerance for risk.

Portfolio rebalancing is also an important part of good advice. It gives investors control over the risk by adjusting portfolios back to agreed benchmarks to support their long-term goals.

Frequent rebalancing can bring high administration costs though, which is why Stewart Group rebalances client portfolios on a six-monthly basis.

Another way to reduce rebalance costs is to use cashflow from regular contributions made. Investing funds on a regular basis allows your entry into the market to be “averaged” and secures long-term market returns. It also avoids investing only when markets are performing well (or buying at the peak) and essentially paying more for those assets.

We know that markets are unpredictable. We can't change that, but we can build an asset allocation that successfully builds a bridge between our own tolerance for volatility and our long-term investment goals.

With occasional rebalancing to ensure the asset allocation continues to match our risk profiles, we can all sleep better at night.