Stableford Capital Insights

From the outside looking in, some investments may seem like a self-governing process. You put the money in, leave it be, then it grows. If investments are simply left alone, however, they can rapidly outgrow the plan they were first funded with. This is one reason putting a trusted financial expert in charge of your portfolio asset management is crucial to achieving your financial goals.

As investments take off in their own successful directions, portfolio managers react to these changes, making sure to balance them appropriately. They can immediately intervene if the changes place the entire portfolio in too much risk, thus preventing the dangers of portfolio drift.

Portfolio Asset Management and Investment Goals

With any investment portfolio, funds are spread across multiple categories such as stocks, bonds and mutual funds. Depending on your tolerable risk and how quickly you would like to see gains, your assets are allocated appropriately.

Good investing brings you risk-adjusted returns in a way that reaches your financial goals. Stableford can work with you to find the best allocation to meet both your risk tolerance and goal requirements.

What Is Portfolio Drift?

Portfolio drift occurs when one category of an investment portfolio outperforms the rest, sometimes due to varying intermittent rates of return. Because more value now rests in this section of your portfolio, your risk increases as this higher value section could then suffer losses, which are proportionately heavier due to the distribution in the portfolio.

Portfolio drift happens to all investment portfolios due to natural shifts in the market. That’s why it’s important to have a portfolio manager working with you who can identify this drift and correct it before your portfolio suffers heavy losses.

Prune Your Investments

Think of your investments like a flower garden; you start with half roses and half lilies. Midway through the season, the roses are so bountiful that they take over the garden, spreading outside of the flower bed and they rapidly out-number the lilies.

If a pest were to come through that wipes out only roses, suddenly two-thirds of your garden could be gone quickly. To prevent the garden from being overrun by roses, and to make sure you have a healthy risk level of possible loss across all flowers in the garden, you must trim back your roses.

It may feel wrong to cut back flowers that are growing so well, but it’s the only way to keep your earlier allocations of half roses and half lilies for the planned layout of your garden.

This same logic applies to pruning back high-performing investments that overweight your portfolio in one category.

Overweighted Investments

Initially, it can seem counterintuitive to sell off assets that are performing well. Instinct says to pursue high-performing investments.

However, investment is a long-term game, and over the long term all investments, even high-performers, falter. If the portfolio is too heavily concentrated in these high-performers, the entire portfolio is at risk and will falter when these investments inevitably come down.

Playing the long game means setting yourself up for success in a big-picture way. Invest for steady growth across the portfolio, rather than quick acceleration in one part of the portfolio.

Rebalancing Act

Rebalancing is the best way to make sure one part of the portfolio is not overweighted in favor of one type of investment. At least once a year a portfolio should be reviewed for potential portfolio drift and rebalanced to avoid the negative consequences of drift.

The benefit of rebalancing is more than just risk avoidance. You also profit off the sales of your high-performance investments and when you replace them with some lower-performance investments, you do so at a lower price. The profit made in this exchange simply expands your options for investment.

Types of Rebalancing for Portfolio Asset Management

There are several basic approaches to rebalancing. Stableford Capital works with your unique financial situation and investment needs to take the best approach for your funds.

Constant Proportion Portfolio Insurance is the best way to stay directly on top of changes in the market and respond to them to keep a portfolio balanced. Investment strategists calculate a target value for each category and change the level of rebalancing as needed.

Constant-mix rebalancing seeks to maintain a ratio of different asset categories and thus allows for some flexibility in the overall allocation of assets. If one category of assets fluctuates 10%, that 10% must be made up in another category. There are tolerance limits placed on the fluctuation of each category so that the shift is never too dramatic.

The least expensive but also the least responsive plan for rebalancing is to do so on a schedule set between the advisor and client, be it monthly, quarterly or yearly. The downside to this strategy is that large shifts could happen in between scheduled rebalances that the investor misses out on, or which leave their portfolio vulnerable due to portfolio drift.

While less is usually spent on buying new investments, this is a more passive approach and not one often taken by Stableford. As part of your portfolio asset management, we review and rebalance as necessary and remain in constant communication with clients to assess their risk tolerance.

How Stableford Can Help Portfolio Asset Management

When you have an advisor from Stableford Capital, you have the peace of mind that we respond to any changes in your portfolio to keep it focused on meeting your goals, including rebalancing to tackle portfolio drift.

Stableford starts from the beginning with appropriate asset allocation. The benefit of having a real person to manage your assets versus a robo-adviser is that your Stableford financial advisor can help assess your unique situation, drawing a road map to your goals. As the market changes, we work to respond to the shifts in your portfolio as quickly as possible to make gains and prevent vulnerability.

Talk to Stableford Capital today about portfolio asset management and how we can prevent portfolio drift from negatively affecting your investments. Our goal is to help you get risk-adjusted returns that move you toward your financial goals. Contact Stableford by calling 480.493.2300 or schedule a complimentary 15-minute consultation online.