Is it time to rebalance how your super is invested?

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Is it time to rebalance how your super is invested?

The best way to keep your superannuation fund investments on track is to rebalance them. Rebalancing is a clever way to keep your superannuation fund investments in order. 

After the market shifts in zigzagging ratios, you will have your asset allocation reset to the ratio you prefer. You might miss out on the market when it springs back if you do not rebalance and you don't let your asset allocation drift.

As a general rule, superannuation fund members invest in a variety of investments. For example, they might invest 70% in growth assets, such as real estate, local and overseas stocks, while the other 30% might be invested in defensive assets, such as bonds and cash. During periods of bear market, your superannuation investments have fewer growth assets when shares fall, and the ratio of shares falls.

In most superannuation funds, members are not required to do their own rebalancing when their investments are out of balance. Most superannuation fund members are usually in the default balanced fund unless they have deliberately chosen something else. Basically, your superannuation fund is doing the heavy lifting and rebalancing for you, which means that your superannuation fund is doing all the work for you.

As an alternative investment to traditional superannuation funds, a balanced, diversified superannuation fund is invested across major asset classes such as equities, property, infrastructure, bonds, as well as alternative investment opportunities, such as private equity. The fund discloses how much is invested in each asset class based on a stated percentage weight range for each option.

Generally referred to as "asset allocation" and sometimes as "strategic asset allocation", this is a fund management technique that prevents all the money in the fund from being allocated to one or two assets at the same time.

Because your fund's asset allocation doesn't change very much, you might think that it's doing little because it rarely changes it. However, it is actually working hard to maintain this allocation. The ratio of shares decreases when the equity market goes down. Your fund rebalances by buying equities to rebalance its equity weighting to its target and increase its exposure to growth assets. This discipline is referred to as constant-mix rebalancing.

It is important to keep asset allocation in a solid place even during troughs and peaks of the market whilst letting your money go down the drain with the market. This will yield better results over time than simply letting your asset allocation drift as the market fluctuates.

You will have to rebalance your investments if you would like to stick to your asset allocation plan if you have your own self-managed superannuation fund or if you have been given the option of using your superannuation fund's individual asset classes so that you can build your own portfolio.

Whenever market movements change the asset allocation model, you are faced with the dilemma of what to do about it. But timing involves courage and discipline on your part. When is the right time to cut your losses and let your profits rise?

It can be hard mentally, trying to time the market. As you sell shares when the price rises, you are enjoying the price rises, but it is also hard psychologically to time the market. It is very regrettable if the share prices keep going up and you wish that you had held on rather than selling too soon, and then giving yourself a hard time for doing so.

The flip side of the coin is that when shares are falling, you should buy, but it can be nerve-wracking when there is a bear market. As a result, one way is to follow how superannuation funds conduct rebalancing, something that they do on a regular basis.

A study conducted by Vanguard, the manager of index-based exchange-traded funds, found that rebalancing your investments more frequently will ensure a more accurate asset allocation tracking.

The downside is that the rebalancing process should not take place on a daily or weekly basis because it could lead to lower returns, increased turnover, and a heavier tax burden during the current period. Usually, it is best for superannuation fund members to leave the rebalancing of their investments in the hands of the experts.


Important information: This document contains general advice. It does not take account of your objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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