Peter Sharratt - Money Matters

Auto Rebalancing

Q: I have an investment which I now have online access to. I am still finding my way around the website but noticed there is an option to switch funds. Out of interest, I had a look at this and there was a further option to select auto rebalancing. What is this?

A: When the investment was set up it will have been allocated to one or more investment funds. Please note; if you invest in one fund, auto rebalancing is not relevant.

The recommended funds would have been selected to give a portfolio that matches your attitude to risk.

Over time each fund will perform differently leading to a change in the portfolio, and this can be to the extent that it is no longer appropriate for your attitude to risk.

As an example, if you invested £100,000 in two funds; Fund A invests 100% in UK Equities and Fund B invests 100% in Corporate Bonds.

Fund A is higher risk than Fund B and it has been determined that investing 50% (£50,000) in each gives you a portfolio compatible with your attitude to risk.

Over the next 5 years I will assume that UK Equities have done well and Fund A has increased by 55%. Corporate Bonds have not done as well and so Fund B has only increased by 5%.

Fund A has increased (ignoring charges) from £50,000 to £77,500 and Fund B has increased from £50,000 to £52,500.

The total value 5 years later is £130,000 and the split between the 2 funds has changed from 50/50 to being nearly 60% in Fund A and 40% in Fund B.

This change means that the risk of the investment has increased as Fund A is higher risk and now accounts for more of the portfolio and Fund B which is lower risk now accounts for less of the portfolio.

The portfolio may no longer be compatible with your attitude to risk. Automatic rebalancing aims to avoid this situation by restoring the balance of the portfolio.

In the above example the extra 10% in Fund A is sold and used to buy an extra 10% in Fund B restoring the balance to 50/50. I have used 5 years but in reality automatic rebalancing is typically done annually.

It aims to keep the portfolio within your attitude to risk and it can be good especially if you do not review your investments regularly. It is however automatic and does not consider market conditions which may suggest that rebalancing should not be done at that point.

Alternatively, a regular review with a Financial Adviser means the balance of the portfolio can be assessed and changed taking into account market conditions, giving greater control over the process.


Send your queries to Peter Sharratt, Kirk Rice LLP, The Courtyard, High Street, Ascot, Berkshire SL5 7HP.
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.