Over the last few weeks we’ve been discussing bull markets. Particularly, how different investors react to them and why it is so hard to predict when they will end. The market has been on a pretty good run over the last 8 or so years. We know this has to end, but we don’t know when. So how should we invest in these uncertain times? Of course this largely depends on your personal financial situation and risk tolerance, but there is some advice that makes sense for everyone: opportunistic rebalancing.
What is opportunistic rebalancing?
Opportunistic rebalancing involves looking at your portfolio and how the current weightings of your investments differ from their targets. To give a simple example, let’s say your portfolio is 50 percent high quality bonds (our “safe” asset class) and 50 percent equities (our “riskier” asset class). Opportunistic rebalancing involves setting a threshold of when we will return our investment weightings to their target percentages with trades. For this example, let’s set our threshold at a 20% increase or decrease in stocks (in other words, if equities reach 60 percent of our overall portfolio, we will sell enough equities and buy enough bonds to return our weights to 50-50).
Why is it a good way to invest?
This approach works well because it takes emotions and guessing out of the equation. In a bull market, we simply sell equities that have increased in value (selling high), and buy assets that have decreased in value, at least relative to your overall portfolio value. This approach works beautifully by locking in gains from recent market increases, and returning your portfolio to weightings that make more sense for your personal financial situation. We know the market will go up sometimes, and that it will go down sometimes. By implementing an opportunistic rebalancing strategy, we are simply taking advantage of those market swings.
At Windward, we use opportunistic rebalancing to lock in gains and take advantage of opportunities for our clients. This method takes constant monitoring of your portfolio to work best, and that is one of the many services we provide our clients. If you are interested in implementing an opportunistic rebalancing strategy, and getting a second opinion on your portfolio, we are here to help! Schedule an appointment today!
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