As we find ourselves in unsettling times following the Coronavirus outbreak, BOE rate cut and ongoing market volatility, we wanted to highlight one of the key elements that an advisor must consider when managing a client’s portfolio, which is when and how frequently to rebalance back to target weights.

The key element of a diversified portfolio is the fact that asset prices move in different directions, especially when allocating between negatively correlated assets such as equities and bonds. This aspect of capital markets can help reduce the volatility of a portfolio that is broadly spread across asset classes. But following sharp market moves, as we have seen in recent weeks, this can lead to a misalignment between the desired allocation and reality.

Rebalancing, or selling a portfolio’s best performers to buy the worst performers periodically, is one of the best ways to protect against market movements altering a portfolio’s risk profile.

Morningstar research indicates that during the past two bear markets a buy-and-hold portfolio lost more than a rebalanced portfolio and the rebalanced portfolio recovered faster after it troughed. In addition, given what research has shown about investor behaviour, investors struggle to hold on during severe drawdowns. They often sell out of their declining equity positions for safer havens, locking in losses, extending the recovery period, and consequently hampering overall performance.

The experience of a buy-and-hold portfolio can be tumultuous, but rebalancing can help smooth out the ride. Daily, monthly, or even quarterly rebalancing may be an unrealistic expectation, but a combination of annual rebalancing and periodic reviews for large fluctuations, such as the recent 5% plus deviations, should be within the realm of possibility. Morningstar research shows that doing so will lead to better outcomes over the long term relative to buy-and-hold investors.

In summary, it’s tough to predict where the market is headed, but we can control our portfolio’s risk exposure through prudent rebalancing, and history suggests that will lead to better results for investors.



In recent times we have witnessed volatile markets which have dramatically impacted the values of investments. Uncertainties over global events such as the Coronavirus can cause markets to behave in an extremely volatile manner. Naturally, our first thoughts are with those impacted by this illness. However, we also understand that volatility in investment markets can be unsettling for our clients.

By way of a reminder, our investment process is always geared towards the medium to long term. Above all else, financial markets dislike uncertainty. Yet markets are also prone to over-react to events that cloud the short-term outlook, both on the upside and downside. When markets are volatile, it can be tempting to exit the market or switch to cash in an attempt to reduce further expected losses. However, it is impossible to time these movements with any degree of certainty, so not only would you be potentially crystallising a loss but being out of the market by just a few days can have a devastating impact on the overall returns of a portfolio once markets start to recover. Historically investments of this nature have over the medium to long term outperformed less volatile forms of investment, such as cash.

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