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Highlights
The Australian and US share markets have shed nearly 7% and 18% respectively since 1 January 2022.
So, every investment portfolio is expected to shift from its allocation settings as values of investments rise and fall.
Rebalancing is said to be effective following a steep fall in the markets.
Investors periodically and analyse and rebalance their investment portfolios since changes to share prices with time can have an impact on the latter. Rebalancing is also advised by investors so that investors can re-assess their financial situations, risk appetite and future needs and adjust their portfolios accordingly.
So, investors should carefully determine which positions of their portfolios are overweighted and underweighted. In addition, it is critical carry out diversification throughout the portfolio building process. All these measures can help investors to withstand challenging times.
Here we discuss how investors can rebalance their portfolios to handle turbulent times:
The Australian and US share markets have shed nearly 7% and 18% respectively since 1 January 2022. The rising consumer prices has further cast a shadow over the next 12 months at least. In such a scenario, every investment portfolio is expected to shift from its allocation settings as values of investments surge and decline, implying a slow drift in the risk profile of investors.
Importance of rebalancing a portfolio
Rebalancing refers to selling some stocks and buying some bonds, or vice versa. It is done by investors with an aim to match their portfolios’ asset allocation with the level of returns they are seeking to attain and the risk they are comfortable taking.
Why should you rebalance your portfolio?
As already discussed, the overall return from a portfolio may change with time. So, rebalancing provides a way to stay on track with target asset allocation i.e. the percentage of your portfolio held in different investments, such as 80% stocks and 20% bonds.
It is the percentage that investor wants to hold in each investment so that he is comfortable with the magnitude of risk taken. His portfolio should also be able to earn in the investment returns he needs to meet his goals, such as being able to retire by age 65.
The portfolio would be more volatile if it holds a larger number of stocks. Its value will change more with the swings in the market. But stocks tend to outperform bonds significantly over the long run. This is the reason why more investors rely more on equities than on bonds to reach their targets.
The Bottom Line
Rebalancing is said to be effective following a steep fall in the markets. There are instances in the history which support the same. While the COVID-9 concerns were high in the markets during April 2020, several investors booked profits from bonds and allocated the same to stocks, having suffered sharp losses in March. It ultimately did well for most of them.
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