Is your investment portfolio due for some adjustments due to the pandemic? You might need to consider it. Here’s what you should know.
With the stock market experiencing extreme volatility recently, it’s natural for investors to want to place their money more securely. The duration of the COVID-19 pandemic and its lasting effects on the economy remain unclear.
In uncertain times, many feel compelled to sell stocks and hoard cash. However, this strategy often proves unwise over the long term and can lead to significant losses. The best approach is usually to maintain your investment path—yet, if your portfolio seems skewed, it's time to think about rebalancing.
“Rebalancing is crucial to ensure your investments reflect your financial objectives,” explains a financial expert. “Given the market’s fluctuations, your asset allocation may have strayed from your targets.”
ASSESS YOUR CURRENT RISK TOLERANCE
Before you embark on rebalancing, reassess how much risk you can comfortably take. The ongoing economic downturn and record-high unemployment rates could shift your risk appetite. You might find that your previous exposure to stocks feels less acceptable now.
Consider your stock, cash, and debt allocation. This mix should still align with your pre-pandemic investment strategy. For instance, if your target was 75% stocks and 25% cash and bonds, and your current allocation has deviated from that, it’s time to rebalance. While the thought of increasing stock investments may be daunting due to market unpredictability, there are ways to navigate this.
Instead of moving current holdings, consider directing all new contributions toward stocks until your allocation returns to where it was before the pandemic. Low-cost exchange-traded funds, mutual funds, and index funds can provide stock exposure without hefty fees.
Additionally, rebalancing can extend to the sectors within your portfolio. If you were fortunate enough to invest in a booming sector like tech, your exposure might now outweigh your comfort level, prompting a need to trim that sector. For knowledgeable investors, rebalancing can even take place at the individual stock level, though this can be challenging during such a volatile period.
PROCEED WITH CAUTION WHEN REBALANCING
Avoid making drastic changes to your portfolio all at once. Gradual adjustments tend to be more effective during market turmoil. “If you need to make changes, consider altering about 25% at a time,” advises a market strategist. With ongoing market instability, incremental adjustments might suffice to restore balance. If your portfolio still isn’t aligned after a couple of weeks, you can make another 25% adjustment. “Investors often mistakenly believe it’s an all-or-nothing situation,” the strategist notes. “Professional investors approach changes iteratively.” Taking it slow is especially crucial now, as historical precedents are few.
STAY FOCUSED ON YOUR STRATEGY
During turbulent times, it’s tempting to monitor your portfolio constantly, but rebalancing should follow a “set it and forget it” mentality. This doesn’t mean ignoring market conditions entirely, but after rebalancing, resist the urge to make further changes for at least a few months. If you use a digital investment platform, you’ll likely receive notifications when your portfolio falls out of alignment.
Ultimately, the key is to filter out the noise and stick with your investment strategy. Overreacting can lead to financial losses and unnecessary stress—both things to avoid. “Events like the pandemic highlight the importance of a long-term investment perspective,” a financial advisor emphasizes. “Don’t get swept up in the emotions of the moment.”
