Portfolio Rebalancing in a Bear Market

A Balancing scale, a symbol of Voisard's portfolio rebalancing blog

During periods of economic uncertainty, it’s human nature to do the exact opposite of “buy low, sell high” because when markets plunge, it’s a common instinct to want to sell before things get any worse. Conversely, when stocks are on a bull run, that’s when it feels easy to put our money into the market.  A core value of Voisard Asset Management’s investment philosophy is taking an objective and disciplined approach to long-term investing.  This pertains to our investment selections, as well as maintaining the designated allocation within client accounts.

Portfolio management begins by establishing appropriate allocations to equity, fixed income, and cash, which is determined based on your financial goals, risk tolerance, time-horizon, and current & future demands on capital.   To stay within your designated allocation we periodically rebalance accounts as necessary. Portfolio rebalancing is buying and selling portions of your portfolio to set the weight of each asset class back to its original set allocation.  This is essential for balancing the risk you’re taking with the long-term return potential of your investments.

As the stock market fluctuates, the investment allocation within an account can move out of tolerance. Over time, the market value of each security within your portfolio earns a different return, resulting in a weighting change.  For example, all major asset classes posted strong positive returns in 2019, with U.S. stocks leading the way with a 32% return. These positive stock returns caused the individual’s allocation to stocks to creep up above the target level.  During these bull runs, we rebalanced, trading off some allocation to stocks and buying bonds to get back to the target allocation. Our investment strategy permits a variance of plus or minus 5% around each of the target allocations.  For example, if your target equity allocation is 50%, we manage within a range of 45% to 55% and will reallocate assets over time to stay within this range.

Just as we keep a keen eye on your accounts by not letting your stock allocation get too high in a bull market and leaving you more vulnerable to a subsequent downturn, we must do the same when stocks fall out of favor.  With the current and impending fears of the COVID-19 virus spreading throughout the world, the economy has slowed. It appears every industry, aside from “Virus Stocks” (Clorox, Campbell, etc…), has been impacted by the recent economic downturn. Everything from travel-related and entertainment companies, to product giants such as Apple (who is impacted by both their product demand dropping and facing shortages because of foreign production facilities) have reported recent losses that are factoring into this market plunge we are experiencing.  This downturn finally marks the end of the longest bull market run in history.  With this recent large divergence in stock and bond prices, we find it prudent to rebalance our clients back to their target allocations.  While this may not happen today or next, we will look for the right opportunity.

Another side to market volatility is the opportunities it presents. When prices drop, it presents a buying opportunity.  We believe in “time in the market” as opposed to “timing the market”, but as your portfolio passes the variance we allow for within specified allocations, we will maintain the course and rebalance accounts to keep your portfolios at your target levels.

As Jim Cramer stated, “A year from now, this coronavirus-inspired market drop could be viewed as a beautiful buying opportunity.” His sentiment is based on the theory of “buy low, sell high.” As we rebalance during these times, that is exactly what we will do; buying at a discount. If you have questions about your current portfolio rebalancing, whether it is managed by Voisard or not, we are happy to be a resource during this volatile time.

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