What is it?
It is adjusting the weightings of the different asset classes in your portfolio, usually by buying and selling holdings to bring the overall allocation of assets back in line with your risk profile and goals.
Why is it important?
A well-diversified portfolio that is effectively rebalanced has a role to play in mitigating market volatility and ultimately risk. If you do not rebalance, you could expose yourself to too much risk which you might not be comfortable with or cannot afford to take. Conversely, you might not be taking enough risk to achieve the returns you are expecting or limiting your portfolio’s growth potential.
We are in a period of market unrest and over the past year we have seen the US stock market and US Treasuries, usually uncorrelated sectors, fall in unison. This is something that we have only seen happen 5 months in 50 years, 2 of those months being April and June 2022. Likewise, certain market sectors have unexpectedly over/underperformed e.g. the US tech sector has seen astonishing returns over the pandemic (48% in 2019, 42% in 2020 and 33% in 2021) only to be down 27% in US dollar terms by June 2022.
We all know we should sell high and buy low, but the markets are notoriously difficult to time - even the professionals get it wrong, but regular rebalancing can be a highly effective mechanism to manage the highs and lows of markets.
From the tech example above, you can see how easy it is for portfolios to fall out of balance relatively quickly. If your portfolio has 10% invested in tech and this grew to 20% during the pandemic, it would be prudent to rebalance this sector back to 10%. Allowing it to grow leaves the portfolio poorly diversified, potentially increasing risk and volatility, and in this example, you would be highly exposed to the future downturn in 2022 – a potentially short-term loss that you may not have the stomach or the capacity to experience.
This is a personal decision. You can take a time-based approach by doing it quarterly, biannually or annually, or you can choose to rebalance once your portfolio weighting reaches a certain tipping point e.g. once equities exceed 60%.
Having said this, you should not overdo it as it may be counterproductive e.g. if there are costs/taxes involved and the portfolio has only shifted minimally. Conversely, not doing it regularly enough may mean you go a year with an asset allocation that does not align with your risk approach or goals.
Benefits of professional advice
There is a certain discipline required when investing which somewhat goes against our natural human instinct and many investors allow their emotions to guide their actions.
This might be clinging onto investments in the hope that they will ‘go back up’ to a previous high, holding on to strong performing stock believing that growth will be indefinite, or panicking and pulling out of the market completely, only to miss out on an eventual upturn.
It is important to have a clear long-term plan for your portfolio, rather than to worry about the daily ups and downs. We believe that having an independent professional adviser on your side can help take out the emotion, provide clarity during difficult periods and enforce a rational approach to your investments during all market conditions.
If you would like to discuss your investments or how best to build your own portfolio, please get in touch.
Debrah Broadfield and Mark Quinn are Chartered Financial Planners with the Chartered Insurance Institute and Tax Advisers, qualifying with the Association of Tax Technicians. Contact Debrah and Mark at: +351 289 355 316 or firstname.lastname@example.orgemail@example.com
Is now the right time to be rebalancing?
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