Investor behaviour can play a significant role in returns on investment. It’s important that an investment plan is created – and followed – to help you keep a level head and not make emotionally-charged decisions that could devastate your portfolio.

The balancing act in investing

Portfolio and risk profile

Your portfolio is a collection of financial assets and the allocation of these assets should meet your financial objectives as well as risk profile, which is essentially an evaluation of your willingness and ability to take risks with investments.

Willingness: This refers to whether an individual has a high or low willingness to take on risk.

For example, should an investor not want to see the value of an account decline and is prepared to sacrifice capital gains to achieve this goal, they have a low willingness to take risk.

On the other hand, should an investor want to try and achieve the highest possible returns and doesn’t mind value fluctuation over the long term, they have a high willingness for risk.

Ability: An investor’s ability to take on risk is assessed by a review of their assets versus their liabilities.

Many assets and few liabilities mean that the investor has a high ability. Conversely, an investor with few assets and high liabilities will have a low ability to take risk.

If you find this to be a daunting task, it’s best to enlist the services of a financial advisor who will be able to use their expertise to help you find the combination of asset classes (cash, bonds, equities and other assets) that suit your goals. It also may be worthwhile choosing to assign these decisions to a fund manager; he/she will supervise everything.

The performance of the assets will influence weightings in your portfolio, which in turn should be based on your risk profile. Portfolios that are not rebalanced, may dramatically change form over a period of time.

Investing strategy

Find your balance

Portfolios that are not rebalanced may change form over time. If the investment environment changes you need to evaluate whether or not your portfolio fulfills your needs.

When asset classes become more expensive, it’s time to rebalance your portfolio by looking at the underlying unit trust prices and purchasing less expensive assets.

The simplest strategy is to rebalance your portfolio after a specific time period or to impose a fluctuation range on your portfolio before rebalancing – different balancing strategies have different outcomes.

Are there any alternatives?

Another option you have other than evaluating and rebalancing your portfolio is investing in unit trusts such as a balanced fund. The reason for this is that the investment manager has to follow the fund’s mandate and will therefore decide which assets could give you the optimum returns over the long term.

Your investment process requires a plan. It is the most important aspect of the process. Rebalancing references your plan and is a fundamental part of retaining a consistent investment approach.

If you are feeling panic starting to set in, rather speak to a financial advisor instead of making a hasty decision. The saying, ‘patience is a virtue’ is appropriate in this case.