One of the most effective ways to mitigate biases and keep investments aligned with long-term goals is through regular investment portfolio reviews and rebalancing.
But how often should you do this, and to what extent should you be rebalancing?
Well the answer comes down to a few different factors that will be individual to your own circumstances.
Investing is not just about selecting the right assets; it’s also about managing emotions and biases that can impact financial decision-making.
Whilst managing your finances has a technical basis, there is an element of emotional management you should be aware of also. Behavioural finance—the study of how psychological influences affect investor behaviour—highlights common biases that can lead to suboptimal investment decision making. By understanding these biases and implementing disciplined portfolio management, investors can enhance their long-term financial outcomes.
Ultimately we recommend a holistic approach to your investment portfolio. Your personal goals and needs will always differ from another person’s and therefore your strategy should be tailored uniquely. Regular reviews are recommended to keep your strategy aligned with your changing circumstances.
What can reviewing your investment portfolio do for you? 🔎
A well-structured investment portfolio is designed to align with an investor’s risk tolerance, financial objectives, and time horizon. However, market movements, economic conditions, and personal circumstances can change over time. This can potentially shift your portfolio’s risk exposure away from your intended allocation.
Regular portfolio reviews serve to:
- Ensure Alignment with Goals – Your financial goals may evolve due to life events such as retirement, having children, career changes, or major purchases. Reviewing your portfolio ensures it remains suited to these changing needs.
- Maintain Risk Tolerance – Market fluctuations can cause a portfolio’s asset allocation to drift. A portfolio that was initially balanced may become riskier if equities outperform bonds, or vice versa. Establishing your approach to risk is not a one-time exercise, it’s something you should continually review.
- Identify Underperformance – Regularly assessing your holdings allows you to identify and address underperforming assets before they significantly impact returns.
- Tax-Effective Portfolio Management – Reviewing your portfolio periodically can help in tax-related adjustments, reducing liabilities and improving overall returns.
What can rebalancing do for your investment portfolio? ⚖️
Rebalancing involves restoring a portfolio’s original asset allocation by buying or selling assets. For example, if equities have grown significantly and now make up a larger percentage of a portfolio than initially planned, rebalancing would involve selling some equities and reallocating to underrepresented asset classes, such as bonds or cash.
The benefits of rebalancing include:
- Risk Control – Prevents your portfolio from becoming too aggressive or too conservative due to market fluctuations.
- Systematic Decision-Making – Encourages disciplined investing by adhering to a predetermined strategy rather than reacting emotionally to market movements.
- Buying Low and Selling High – Rebalancing often involves selling high-performing assets and buying undervalued ones, which can improve long-term returns.
What are behavioural finance biases in investing? 🧠
Investors often fall prey to psychological biases that can lead to poor decision-making. Understanding these biases can help in maintaining a rational investment strategy.
Below are some biases you should be aware of, as well as how you can approach and overcome them.
The Bias ❌
The Solution ✅
Recency Bias: This occurs when investors give too much weight to recent market events while ignoring historical trends. For example, if the stock market has been rising for several years, investors may assume it will continue indefinitely and increase their equity exposure beyond their risk tolerance. Conversely, after a market downturn, they may panic and sell assets at a loss.
How to Overcome It: Regular reviews and rebalancing enforces a disciplined approach that prevents knee-jerk reactions to recent market movements. Maintaining a long-term perspective is key.
Viewing a longer timeline when looking at market movements can give you more context.
Loss Aversion: Investors tend to feel the pain of losses more acutely than the pleasure of gains. This can lead to holding onto losing investments for too long, hoping they will recover, or avoiding risk altogether.
How to Overcome It: Setting clear rebalancing guidelines initially removes emotional decision-making from the equation. Viewing market fluctuations as a normal part of investing can also help mitigate loss aversion. Reactionary decisions can often be made without proper technical consideration and therefore increasing the risk of pitfalls.
Confirmation Bias: Confirmation bias leads investors to seek out information that supports their existing beliefs while ignoring contradictory evidence. This can result in overconfidence in certain investments and resistance to adjusting strategies when needed. Social media can be a culprit in putting poorly thought out financial recommendations or information in front of you.
How to Overcome It: Engaging in objective portfolio reviews with a qualified and specialised financial advisor and using data-driven performance metrics can help challenge biases to encourage a more balanced perspective. For further advice on how to avoid falling victim to unreliable financial influencers, read our article here.
Herd Mentality: The fear of missing out (FOMO) can drive investors to follow the crowd, often leading to speculative bubbles or panic selling during market downturns.
How to Overcome It: Sticking to a long-term investment plan and avoiding emotional reactions to market trends helps prevent impulsive decision-making. If you’re being influenced by something you’ve seen online it is often worth questioning why you might be seeing this increased ‘hype’ for a particular stock or asset.
Overconfidence Bias: Some investors believe they can consistently outperform the market, leading to excessive trading and risk-taking.
How to Overcome It: Historical data shows that market timing is extremely difficult. Implementing a structured rebalancing approach enforces discipline and reduces unnecessary trading. For further information on how this works, read our article on ‘Time in the market vs timing the market’
How to stay disciplined when investing 💪🏽
To mitigate these biases and manage your portfolio performance, you can consider the following best practices:
- Set a Rebalancing Schedule – Whether quarterly, semi-annually, or annually, having a predefined schedule helps enforce discipline. This will also assist in avoiding reactionary decision making as a result of sudden market movements.
- Use Threshold-Based Rebalancing – Instead of rebalancing at fixed intervals, investors can rebalance when an asset class deviates beyond a set percentage (e.g., +/- 5% from the target allocation). This allows for some flexibility with your projections whilst still sticking to a carefully considered strategy.
- Work with a Financial Advisor – An objective professional can provide guidance, ensure accountability, and help investors stay on track. As mentioned previously, emotional decision making can bring complexity to your finances. Having an objective and qualified professional advise you can give you some clarity and perspective.
- Diversify Investments – Maintaining a well-diversified portfolio reduces the impact of market swings and prevents overexposure to any single asset class. Putting all your eggs in one basket can potentially make you more vulnerable to market swings.
The key takeaway for your investing strategy 📊
Regular portfolio reviews and disciplined rebalancing are essential to successful long-term investing. By understanding and managing common behavioural biases, investors can make more rational decisions, reduce unnecessary risks, and improve overall financial outcomes. The key to investment success is not attempting to predict short-term market movements but maintaining a well-diversified, balanced portfolio aligned with long-term goals.
Investors who commit to structured portfolio management are typically more likely to achieve sustained growth and financial security over the long run, regardless of market fluctuations.
If you’d like to meet with one of our specialised wealth consultants please click here for a free, no-obligation consultation. Our Private Wealth team are experts in providing financial support for medical professionals in Australia, financially empowering you throughout your career and beyond.
Disclaimer: * The information contained in this site is general and is not intended to serve as advice as your personal circumstances have not been considered. DPM Financial Services Group recommends you obtain personal advice concerning specific matters before making a decision.
