The old adage "sell in May and go away” has repeatedly been proved to have no scientific basis, but this doesn’t mean you can set up an investment portfolio then forget about it until you need the money; even one stuffed with the best funds will need to be rebalanced from time to time.
As such, Trustnet spoke to three market commentators about what investors should consider when examining their portfolios in the summer.
Darius McDermott, FundCalibre – “Don’t get caught up in short-term movements”
“It’s a good idea to check your portfolio a couple of times a year to see how you’re positioned and if anything has changed,” said FundCalibre’s managing director, Darius McDermott.
He posed the question that if an investor has 50 per cent in the US and it goes up 50 per cent, what should they do?
“In this situation you could do some natural profit-taking and rebalance, but it does mean you also don’t run your winners,” he said. “There can be an opportunity cost of rebalancing too often.”
McDermott added that a benefit to investing in funds is that these are continually being rebalanced themselves.
“The managers will have price targets and trim and reinvest in those stocks that may have underperformed but that they think will do well in the future,” he said.
He explained that for retail investors, it is more about asking: “I have a higher weighting to this investment now – am I comfortable with that? Does it still sit okay within my personal risk tolerances?”
McDermott also advised on ignoring the noise of short-term strategies that likely do more harm than good.
“Don’t get caught up in short-term movements and news about trading and people making quick profits or losses – that’s their investment strategy.
“For most people, the buy, hold and tweak strategy serves them just as well without all the short-term angst that can come with markets.”
Ben Yearsley, Fairview Investing – “Let ideas and themes play out over a longer period of time”
Ben Yearsley, co-founder and director at Fairview Investing, said the first thing to remember is to avoid looking at your portfolio too often.
“It’s easy to get sucked into being obsessive about portfolios, but if you have put the time in before you invested choosing your asset allocation and funds, then you shouldn’t need to watch it every minute of the day.”
He said that giving the portfolio time to play out is key.
“It is crucial knowing why you have bought specific funds and the role they are supposed to perform in a portfolio,” Yearsley added.
“There is no point being unhappy with Ninety One UK Special Situations underperforming Scottish Mortgage in a full-on growth-focused bull market, as clearly Scottish Mortgage should be outperforming.
“The key question for both would be, are they outperforming a relevant benchmark?”
In terms of rebalancing, the Fairview Investing co-founder said he would leave a portfolio for as long as possible and wouldn’t rebalance quarterly.
“I would rather let ideas and themes play out over a longer period of time – three months isn’t long enough,” he said.
“Just look at the aforementioned Scottish Mortgage last year, if you had profit-taken quarterly you would have missed a great return; obviously if that style had been in retreat, it would have been a better thing to do.”
He conceded that with rebalancing and profit-taking, the right approach only becomes apparent with hindsight.
“On that basis, decide your strategy at the start then stick to it regardless of what happens in markets,” said Yearsley.
“It’s the discipline which is important as that stops you getting carried away with short-term movements and noise.”
Rob Morgan, Charles Stanley Direct – “The benefits of diversification wear off with greater numbers”
Rob Morgan, pension and investment analyst at Charles Stanley Direct, said his main tip is not to have too many investments, otherwise rebalancing can become “really fiddly”.
While he said that there is no magic number for the number of funds you should hold, a very simple portfolio could arguably be found in having just one – a global equity tracker, for instance.
“Then it’s very easy, no rebalancing necessary,” he said. “But if you want a good spread and don’t mind being a little hands-on in terms of checking your portfolio a few times a year, then up to 20 to 25 should be fine.”
He added that if you have any more funds than this, it may be too challenging to keep tabs on them and make it more difficult to rebalance periodically.
“This is where you keep to intended asset allocation by selling a little of what has done well and topping up areas that have lagged,” said Morgan.
“Furthermore, the benefits of diversification wear off with greater numbers – if you already have the main areas covered, you are just adding more funds without any particular benefit.
“I think quarterly or half-yearly is about right for rebalancing.”